The 2025 One Big Beautiful Bill Act (P.L. 119-21, sec. 70431) rewrote parts of QSBS, the section 1202 exclusion that keeps a large share of certain shareholders' gain out of federal income tax. The headline numbers hold up: 50% excluded at three years, 75% at four, 100% at five, a per-issuer cap lifted from $10M to $15M, a gross-asset ceiling lifted from $50M to $75M. Most summaries then get two things wrong. The three changes do not share one cutoff test. And many fast-growing companies cannot use section 1202 at all.
Section 1202 covers stock in a domestic C corporation (sec. 1202(c)(1), (d)(1)) held by a taxpayer other than a corporation (sec. 1202(a)(1)). What follows is federal law only, cited to the statute so your advisor can check the text.
Start here: many companies are not eligible at all
Most explainers skip this, and it decides everything downstream. Section 1202(e)(1) requires that during substantially all of the holding period, at least 80% of the corporation's assets by value be used in the active conduct of a qualified trade or business. Section 1202(e)(3) defines what is not qualified, and OBBBA amended neither:
- Services in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage, plus any business whose principal asset is the reputation or skill of its employees
- Banking, insurance, financing, leasing, investing, or similar businesses
- Farming, including raising or harvesting trees
- Production or extraction of products eligible for percentage depletion, covering oil, gas, and mining
- Operating a hotel, motel, restaurant, or similar business
A consultancy, an agency, a professional services firm, a lender, a leasing business, or a restaurant group can grow fast, incorporate as a C corporation, and never produce QSBS-eligible stock. Whether a given business sits inside sec. 1202(e)(3) is often a real judgment call, worth settling before anyone models exclusion tiers.
Acquired or issued? The changes do not share one cutoff
Nearly every write-up says the new rules apply to stock issued after July 4, 2025. That is right for one change out of three. The tiers and the three-year gate turn on stock acquired after that date (sec. 1202(a)(1)(B), (a)(5)), as does the $15M cap (sec. 1202(b)(4)(B)). Only the $75M ceiling turns on issuance (sec. 70431(c)(3)).
| Rule | Cutoff test for the new version | Old | New |
|---|---|---|---|
| Holding period before any exclusion | Acquired after Jul 4, 2025 (sec. 1202(a)(1)(B)) | More than 5 years, all or nothing | At least 3 years, then tiered |
| Exclusion at 3 / 4 / 5 years | Acquired after Jul 4, 2025 (sec. 1202(a)(5)) | 0% / 0% / 100%, and 100% needs more than 5 years | 50% / 75% / 100%, and 100% vests at 5 years or more |
| Per-issuer gain cap | Acquired after Jul 4, 2025 (sec. 1202(b)(4)(B)) | Greater of $10M or 10x basis (sec. 1202(b)(4)(A)) | Greater of $15M or 10x basis; $15M indexed for tax years beginning after 2026, 2025 base (sec. 1202(b)(5)(A)) |
| Gross-asset ceiling, both prongs of sec. 1202(d)(1) | Issued after Jul 4, 2025 (sec. 70431(c)(3)) | $50M | $75M |
| Federal rate on non-excluded gain | Unchanged by OBBBA | Max 28% on sec. 1202 gain (sec. 1(h)(7), 1(h)(4)(A)(ii)) | Same, sec. 1(h) not amended |
Acquired is not a synonym for issued, and the gap cuts against the usual summary. Section 1202(a)(6)(B) fixes the acquisition date by reference to sec. 1223, the general tacking rule. Where tacking applies, stock reaching your hands after July 4, 2025 can still count as acquired on the transferor's earlier date, leaving it under the old $10M cap and more-than-five-year rule. Gifts (sec. 1202(h)(2)), transfers at death, sec. 1045 rollovers, and sec. 351 or 368 exchanges all raise this. Receiving shares after the cutoff does not by itself buy the new regime.
You will also see gifting to family members or non-grantor trusts promoted as a way to multiply the per-issuer cap. Section 1202 does not authorize that, no Treasury or IRS guidance blesses it, and such structures are exposed to the grantor trust rules, the assignment of income doctrine, and the step transaction doctrine. The point that does follow cleanly from sec. 1202(h)(2) is narrower: stock gifted from a transferor who acquired on or before July 4, 2025 tacks that earlier date and keeps the old $10M cap.
The tiers are three cliffs, not a ramp
Section 1202(a)(5) is a step function. Below three years the exclusion is zero, and at two years and 364 days it is still zero. Nothing prorates between the steps. The old rule had one cliff at more than five years (sec. 1202(a)(1)(A)); the new rule has three, at three, four, and five. One real difference at the top: the new 100% tier reads 5 years or more, while the old rule requires more than 5 years, so the new tier vests exactly at five and the old one does not.
So on stock acquired after July 4, 2025 with a $6M gain, a sale at exactly three years excludes $3M and leaves $3M as section 1202 gain. At four years, $4.5M. At five, all $6M, subject to the cap. At two years and eleven months, nothing.
The leftover is often quoted at a flat 28%. It is a maximum, not a flat rate: non-excluded gain is section 1202 gain under sec. 1(h)(7), taxed at a rate not exceeding 28% under sec. 1(h)(4)(A)(ii), and sec. 1(h) was not amended. Where the 3.8% net investment income tax applies, the combined federal figure is commonly modeled at 31.8%. States are separate, and several including California do not conform, so gain excluded federally can still be fully taxable at home. Every figure here is federal.
The $75M ceiling is two tests, and one is permanent
Section 1202(d)(1) has two prongs and sec. 70431(c)(1) raised the number in both. Prong (A): gross assets must never have exceeded $75M at any time on or after August 10, 1993 and before the issuance. Prong (B): gross assets immediately after the issuance must not exceed $75M. Most summaries mention only (B). Prong (A) is the one that bites. A company that ever crossed the ceiling before an issuance fails permanently, for that issuance and every later one, even if assets later fall back below the line. If a company raised big, spent it down, and now wants to issue eligible stock, the historical high-water mark decides it, not the current balance sheet.
The $15M cap, and what it does not change
Section 1202(b)(1) caps the exclusion at the greater of two amounts, per issuing corporation: the flat cap under (b)(1)(A), reduced by gain already excluded from that issuer, or 10 times the aggregate adjusted basis of the qualified stock disposed of that year under (b)(1)(B). The flat figure is $15M for stock acquired after July 4, 2025 and stays $10M otherwise (sec. 1202(b)(4)(A), (B)), indexed for tax years beginning after 2026 off a 2025 base (sec. 1202(b)(5)(A)). The 10x-basis prong is unchanged, so shareholders with real basis were never confined to the flat number. It is holders with near-zero basis, most founders, for whom it decides the outcome.
A quiet improvement: no AMT preference on the partial tiers
Partial section 1202 exclusions in earlier eras carried an alternative minimum tax preference item under sec. 57(a)(7) that ate into the benefit. Section 70431(a)(4)(A) amends sec. 57(a)(7) so gain excluded under the new 50% and 75% tiers is not a preference item, and sec. 70431(a)(6)(B) applies that to dispositions after 2010.
When a buyer's tax counsel reviews a section 1202 claim, the date on a certificate is one input among many. The review generally covers original issuance from the corporation (sec. 1202(c)(1)(B)), domestic C-corp status during substantially all of the holding period (sec. 1202(c)(1), (d)(1)), the 80% active-business test (sec. 1202(e)(1)), excluded-field status (sec. 1202(e)(3)), redemptions around the issuance (sec. 1202(c)(3)), and both gross-asset prongs (sec. 1202(d)(1)(A) and (B)).
The mechanics are not fully settled
Treasury and the IRS list section 1202 guidance as an open project at item 26 of the 2025-2026 Priority Guidance Plan, and nothing has been published under sec. 70431. How tacking interacts with the acquisition-date tests, and how the two gross-asset prongs apply to layered issuances, are exactly what guidance would address. Any confident answer today, this post included, is provisional.
Questions worth taking to your own advisor
- Is the business in a field excluded by sec. 1202(e)(3), and does it meet the 80% test in sec. 1202(e)(1)?
- Is the issuer a domestic C corporation, and was it one during substantially all of the holding period?
- For each block of stock, what is the acquisition date under sec. 1202(a)(6)(B) and sec. 1223, and does tacking apply?
- Did gross assets ever exceed the ceiling before the issuance, and what were they immediately after?
- Were there redemptions near the issuance that could disqualify the stock under sec. 1202(c)(3)?
- For restricted stock, how does an 83(b) election affect when the holding period starts?
- Does the relevant state conform to section 1202?
QSBS turns on decisions made years before anyone is thinking about an exit, and OBBBA raised what is on the table for companies that qualify. It did not make qualifying easier to demonstrate. To work through entity structure, issuance records, and the questions above against your own facts, our tax team works on this with fast-growing companies across a range of industries. For the wider bill, see what the 2025 One Big Beautiful Bill Act changes for your company's taxes.
Disclaimer: this post is educational and describes federal law as enacted in P.L. 119-21. It is not tax, legal, or investment advice, it does not create a client relationship, and it does not account for your facts or your state's rules. Section 1202 outcomes depend on details specific to each company and each block of stock, and no guidance has been published under sec. 70431. Consult a qualified tax advisor before acting.