What The Heck is QSBS

Every once in a while, the Congress comes up with a crazy idea that they want to reward with tax breaks in order to encourage certain behavior.  In this case, Congress wants to see more folks go out and start small businesses.  Currently, small businesses make up almost exactly half of the US economy.  For once, I agree with Congress in their efforts to encourage the creation of more small businesses.

This particular tax break, the QSBS (which stands for Qualified Small Business Stock) creates a really nice incentive to go out there, start a new business, wait for up to 5 years before selling it and just about completely eliminate the tax on the gain on sale of that business.

Here’s how it works.  A founder, early employee, or investors in a qualifying small C corporation gets to exclude up to 100% of the gain from the sale of that small C corporation stock.

There is a tier of percent of gains excluded.  If you hold the stock for three but fewer than four years, you get a 50% exclusion; four but fewer than five years produces a 75% exclusion; five or more years produces the full 100% exclusion.  Note: The unexcluded portion of the gain on stock sale held for three or four years is taxed at 28%, not the standard 15% or 20% long-term capital gain tax rates.

The OBBBA (One Big Beautiful Bill Act) raised the per-taxpayer gain exclusion cap from the greater of $10 million or 10 times adjusted basis, to the greater of $15 million or 10 times adjusted basis.

There is a gross asset threshold as well.  Formerly $50 million, now $75 million.  In other words, if the gross assets of the small C corporation at startup is $75 million or less, then it qualifies as “small C corporation” stock for the QSBS tax break.  (This gross asset limitation is set at the beginning of the small business, not limited at the time of sale of the stock.)

But wait, the OBBBA changes only apply to stock issued after July 4, 2025.  Investors who acquired QSBS before that date must still hold for more than five years and the $10 million cap applies.

One last caution.  The Core eligibility requirements remain strict.  The issuing corporation must be a domestic C corporation actively conducting a qualified trade or business.  Many service industries, such as Law, Finance, Health, Consulting, Accounting, etc. are explicitly excluded.  The stock must be acquired at original issuance, not purchased from a person who got the original issuance.

So, now you know something.  You can brag at a business networking event that you know what a QSBS is.  If you happen to have enough money to go out there are start up a new business, keep the QSBS option in mind. 

Have you heard?  Genesis 19:19a says, “See now, your servant has found favor in your sight, and you have magnified your loving kindness…”

Kelly Bullis is a Certified Public Accountant in Carson City.  Contact him at 775-882-4459.  As well as on our website at BullisAndCo.com. You can also find us on LinkedIn and Facebook.