News & Insights

One Big, Beautiful Bill Act

Donald Trump recently signed into law the One Big, Beautiful Bill Act (OBBBA) — a budget reconciliation bill that extends the tax cuts originally enacted under the 2017 Tax Cuts and Jobs Act — introducing a range of new tax incentives and implementing significant spending reductions.

Among its many tax-focused provisions, OBBBA includes a significant incentive for venture capital funds, angel investors, and other participants in the start-up ecosystem.

Specifically, the legislation enhances the tax advantages tied to Qualified Small Business Stock (QSBS) — typically a stock held by a non-corporate taxpayer for at least five years and acquired at original issuance in exchange for property or services — potentially reshaping how companies attract and retain investment.

The provision expands benefits provided under Section 1202 of the Internal Revenue Code which governs tax exclusions for gains and certain businesses engaged in professional services such as health, law, accounting, leasing, farming, metal extraction and hotel and restaurant services are excluded.

Under the new law, there are three significant changes to the QSBS rules — all designed to increase investor participation and broaden access to the benefits:

Tiered exclusion schedule based on holding period

Prior to the enactment of OBBBA, QSBS holders were required to retain shares for at least five years to qualify for capital gains exclusions – ranging from 50% to 100%, depending on when the stock was acquired.

Now, the required holding period has been shortened so that shares held for more than three years (but less than four years) get a 50% exclusion; shares held four years (but less than five years) get a 75% exclusion; and shares held at least five years a 100% exclusion. This graduated structure is expected to make QSBS more attractive to investors with shorter investment horizons, while still rewarding long-term holders with full exclusions.

Increased gross assets limitation

To qualify as a “qualified small business,” a company must be a C corporation with gross assets under a specified threshold at the time of stock issuance. The size limit of the busines s eligible to issue QSBS has been increased from $50 million of gross asset value to $75 million of gross asset value. The gross asset value limitation is applied at both issuance and at all times prior to the issuance of the QSBS.

Increased capital gains cap

In another major change, after Jan. 4, 2025, the amount of gain that can be excluded is increased from $10 to $15 million — or 10 times the adjusted base of the taxpayer’s basis in the QSBS stock. OBBBA does not change the definition of ineligible businesses or make any changes under California law which does not conform to the QSBS rules.

State law considerations

While these changes are a substantial boon at the federal level, it’s important to remember that California does not conform to the federal QSBS provisions. This means that gains from QSBS remain fully taxable under California law, regardless of holding period or federal exclusions. Ineligible businesses — such as those engaged in professional services (law, health, accounting), hospitality, farming, leasing, and certain extraction industries — continue to be excluded from QSBS eligibility.

Conclusion

The expanded QSBS provisions under OBBBA may encourage increased use of “stacking” and gifting strategies, particularly among founders and early employees. It’s not uncommon for shares to be gifted to family members or placed into trusts when their value is low, with the goal of maximizing tax exclusions after the applicable holding period. With higher caps and a shorter path to partial exclusion, such strategies are expected to become more prevalent.

These recent enhancements to QSBS represent a major win for start-ups and their investors. By lowering barriers to entry, increasing potential tax savings, and broadening eligibility criteria, these changes potentially unlock new sources of capital for emerging businesses. However, careful planning — especially in light of state non-conformity — is essential to fully realize the benefits.

The article was published in The Daily Transcript and Los Angelos Daily Journal (subscriber only).