Authored By: Patrick Lowry
Business owners and investors looking to maximize the capital gains tax benefits available under Section 1202 of the Internal Revenue Code (IRC) just received meaningful improvements. In July, the passage of the One Big Beautiful Bill Act (OBBBA) expanded several provisions tied to the Qualified Small Business Stock (QSBS) exclusion, making this already powerful tax incentive even more valuable.
Below is a breakdown of the key updates and expanded eligibility requirements for claiming the Section 1202 capital gains exclusion:
Key QSBS Benefits Updated Under the OBBBA
1. Shorter Holding Periods
QSBS may now qualify for a 50% exclusion after a three-year holding period and a 75% exclusion after four years—a significant reduction from the previous five-year requirement. This change accelerates the timeline for investors seeking earlier access to Section 1202 tax benefits.
2. Higher Exclusion Limits
The maximum capital gains exclusion has increased to $15 million or 10x the investor’s basis, whichever is greater. Before the OBBBA, the exclusion was capped at $10 million. This enhancement substantially increases potential tax savings for qualifying exits.
3. Expanded Eligibility Thresholds
A company must now have aggregate gross assets of no more than $75 million at any point before or immediately after issuing QSBS. Pre-OBBBA, this threshold was $50 million. The higher ceiling expands access for growing companies that might have previously been excluded.
For many founders, shareholders, and early-stage investors, these updates can create significant opportunities for tax planning and long-term value creation.
Why a Credible Business Valuation Is Essential
Successfully claiming the QSBS exclusion involves navigating complex tax, valuation, and compliance requirements. One of the most critical early steps is establishing a defensible basis through a well-supported business valuation.
A qualified valuation should be performed by an accredited professional—ideally an Accredited Senior Appraiser (ASA)—with deep knowledge of valuation standards, tax-related engagements, and appropriate methodologies. Accurate valuations are essential not only for QSBS planning, but also for:
- Shareholder transactions
- IRS audits
- Litigation support
- M&A planning and due diligence
Planning for a Section 1202 Election
If you’re considering a future sale involving Qualified Small Business Stock, it’s important to engage your tax advisors, valuation specialists, and M&A professionals early. Proactive planning helps ensure compliance and maximizes the potential benefits available under Section 1202. Connect with us to start the conversation today!
