OBBBA Enhances IRC 1202 — More Favorable Rules for Exclusions on Gains of QSBS But Does Your Stock Qualify?

Home » Insights » OBBBA Enhances IRC 1202 — More Favorable Rules for Exclusions on Gains of QSBS But Does Your Stock Qualify?

It has been over 30 years since Internal Revenue Code (IRC) Section 1202 was first introduced, which allows taxpayers to claim an exclusion from gains on certain qualified small business stock (QSBS).  

While there have been several modifications to IRC 1202/QSBS rules over the years, the latest round of changes resulting from the passage of the One Big Beautiful Bill Act (OBBBA) on July 4, 2025, now makes it even more attractive. Stock gains allowed for exclusion will increase from $10 million to $15 million or ten times cost basis — if certain qualifying criteria are met.

Below, we first outline the IRC 1202/QSBS criteria to help you understand what stock qualifies for the exclusion (based on the activities and structure of its underlying small business). We detail the latest enhancements to the code provided by OBBBA. And last, we call out one nuance of IRC 1202 that can help you maximize its tax benefits.  

First: What Qualifies for the QSB Stock-Gain Exclusion?

Before we go down the QSBS road, you must first determine if the underlying small business that issued the stock qualifies. The activities and structure of the business must both be evaluated.

Activities: IRC Section 1202 specifically excludes a variety of businesses. Stock from any trade or business in the following fields would not qualify for the gain exclusion:

• Professional Services
  • e.g., health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics
• Financial and Brokerage Services
  • e.g., banking, insurance, financing, leasing, investing (or similar)
• Farming or the production or extraction of natural resources
• Hospitality and Food Services
  • e.g., hotel, motel, restaurant (or similar)

Structure: Assuming the business activities qualify for QSBS gain exclusion, you must then consider choice of entity. The stock being sold must be issued by a C corporation.

• If QSBS is something that fits into a client organizational structure, then you will need to form a C corporation.
• Also note that the C corporation will need to maintain certain documentation that validates qualification throughout the holding period of the stock, even though the stockholder/taxpayer will actually claim the exclusion on their tax return.
  • As the stockholder, you should work together with the small business to ensure the QSBS status is maintained during the holding period.

OBBBA Enhancements to IRC 1202

There are several new, favorable modifications for taxpayers regarding QSB stock issued after July 4, 2025. This includes exclusions for holding periods less than five years, as well as increased gain and asset-limitation amounts.

Exclusion Levels and Holding Periods: While QSB stock previously must have been held for a full five-year period prior to sale, the enhancements provide for the following more favorable timelines:

• Three years qualifies for a 50% gain exclusion
• Four years qualifies for a 75% gain exclusion
• Five years continues to qualify for 100% gain exclusion (unchanged)

Gain Amount for Exclusion: As a result of OBBBA, exclusion amounts increased from $10 million to $15 million, or ten times the taxpayer’s cost basis, and will be indexed annually for inflation beginning in 2026.

Asset Limitation: The gross asset limitation for defining a Section 1202 small business was increased from $50 million to $75 million, which will also be indexed for inflation beginning in 2026.

An Important Nuance: Per-Issuer/Per-Taxpayer

One nuance of IRC 1202 is important to understand for you to maximize its tax benefits. QSBS gain exclusion is applied on a per-issuer/per-taxpayer basis. The issuer is the company and, generally, the taxpayer is the individual or non-grantor trust selling the stock. To help you understand, assume the following scenario: 

• You’re a taxpayer who has owned qualifying stock in company A since 2011 and company B since 2019. If you sell your QSB stock in both company A and company B, you could exclude up to $10 million of gain in each company.

We Can Help

There are a multitude of other nuances and rules under IRC Section 1202 beyond the scope of this article (maximum real estate holdings, royalty earnings, treatment of passthrough entities, company stock buy-backs, holding stock in other corporations, certain tax-free transfers, reorganizations, etc.).  All must be carefully reviewed and applied to your specific situation.

And while it’s exciting to see such favorable modifications to the QSBS rules for taxpayers, there are also several tax planning techniques that should be holistically evaluated.  We can help. Please contact your PKF O’Connor Davies team lead to explore how IRC 1202/QSBS may benefit you.

Additional Helpful Resources

Because many other tax rules and provisions have also been impacted by the recent passage of OBBBA, we invite you to read another recent article by PKF O’Connor Davies for additional helpful information: Key Provisions of the One Big Beautiful Bill Act.

We also encourage you to frequently visit the Insights page of our PKF O’Connor Davies website for access to all our current articles across the tax topics where we provide support. 

Contact Us

For assistance or any questions, please reach out to your client service team or:

Laura K. Barooshian, CPA, MST, AEP, CAP
Partner
lbarooshian@pkfod.com | 781.937.5332