February 16, 2025

By Newburg | CPA Staff

The 2025 legislative updates to Qualified Small Business Stock (QSBS) introduced several changes that may enhance planning opportunities for founders, early employees, and investors. The updates broaden eligibility, increase the potential for tax‑favored gains, and provide additional flexibility for individuals preparing for a future exit

Before reviewing the recent updates, it is useful to recall the foundational requirements for Qualified Small Business Stock under IRC Section 1202. To qualify, stock must generally:

  • Be issued by a domestic C Corporation;
  • Be acquired at original issuance (not purchased from another shareholder);
  • Be issued when the corporation’s aggregate gross assets were $50 million or less (now increased—see below);
  • Be held for more than five years (with new phased options described below); and
  • Be stock in a corporation engaged in an active trade or business, subject to specific exclusions (e.g., some industries/activities not eligible include; financial services, professional services, hospitality, etc.).

The 2025 legislative updates modify several of these parameters and expand planning opportunities for eligible shareholders.

Higher Company Eligibility Threshold

The asset threshold for a corporation to qualify as a “qualified small business” has increased from $50 million to $75 million. This change broadens eligibility, allowing more growth‑stage companies—particularly those in technology, life sciences, and other capital‑intensive industries—to issue QSBS. As a result, individuals who were previously ineligible may now meet the criteria under the updated rules.

New 3‑4‑5 Year Phased Exclusion Structure

For QSBS acquired after July 2025, a phased holding‑period exclusion replaces the prior five‑year cliff rule. Shareholders may now benefit from a partial exclusion earlier in the holding period:

  • 50% exclusion after 3 years
  • 75% exclusion after 4 years
  • 100% exclusion after 5 years

This new structure provides increased flexibility, particularly for shareholders considering earlier liquidity or acquisition opportunities.

Increased Per‑Issuer Gain Exclusion Limit

The lifetime per‑issuer QSBS gain exclusion has been raised from $10 million to $15 million. This enhancement increases the potential tax benefit available upon a qualifying exit, particularly for individuals with substantial equity positions or those anticipating multiple liquidity events.

Key Planning Considerations

Review Current and Future Equity Holdings

With the expanded $75 million asset threshold, companies that previously did not qualify may now meet QSBS requirements. This is an appropriate time to review outstanding and planned equity issuances, incentive stock grants, and capitalization strategies.

Revisit Exit Timing

The new phased exclusion options may make earlier transactions more tax‑efficient. These rules could influence both individual planning decisions and broader corporate transaction strategy.

Maintain Thorough Documentation

QSBS eligibility remains highly technical. Accurate and complete documentation including proof of original issuance, asset and valuation records, and evidence of the active business requirement remains essential.

Newburg | CPA can help you navigate QSBS eligibility and ensure proper compliance as part of pre‑transaction planning. Visit us at www.newburg.com