QSBS Optimization

The OBBBA significantly modified IRC §1202 for stock acquired after July 4, 2025. The per-issuer exclusion cap increased from $10M to $15M (or 15× adjusted basis, whichever is greater). The gross assets threshold for qualifying corporations rose from $50M to $75M. Most notably, OBBBA introduced a tiered holding period structure replacing the previous flat 5-year requirement. This allows partial exclusion for shorter holding periods, reducing the risk of losing all benefits in a pre-5-year exit.

• Exclusion cap: $15M per issuer (or 15× adjusted basis)
• Gross assets test: ≤$75M at time of issuance
• Tiered holding: 50% at 3yr, 75% at 4yr, 100% at 5yr
• Must be C corporation stock acquired at original issuance
• Active business requirement: ≥80% of assets in qualified trade/business
• Excludes professional services, banking, farming, hospitality, mining, oil/gas

Stock acquired before July 4, 2025 remains governed by the original §1202 framework. There is no tiered holding — the full 5-year holding period is required for the 100% exclusion. The per-issuer cap is $10M (or 10× adjusted basis), and the gross assets threshold is $50M. Founders with pre-OBBBA stock who are approaching a liquidity event should carefully evaluate whether waiting for the full 5-year mark is feasible. No partial exclusion is available for pre-OBBBA shares.

• Exclusion cap: $10M per issuer (or 10× adjusted basis)
• Gross assets test: ≤$50M at time of issuance
• No tiered holding — must hold full 5 years for 100% exclusion
• Stock issued before July 4, 2025 is permanently under legacy rules
• Cannot convert legacy stock to post-OBBBA treatment

Each "taxpayer" gets a separate $10M/$15M exclusion per issuer. By gifting QSBS to non-grantor trusts (each treated as a separate taxpayer), a founder can multiply the available exclusion. A founder who gifts shares to 5 separate non-grantor trusts could potentially exclude up to $90M (founder's $15M + 5 trusts × $15M each). Critical limitation: IRC §643(f) is an anti-abuse provision that allows the IRS to treat multiple trusts with substantially the same grantors and beneficiaries as a single trust. Each stacking trust must have meaningfully different beneficiaries to survive IRS scrutiny.

• Each non-grantor trust = separate taxpayer with its own exclusion
• Trusts must have meaningfully different beneficiaries (§643(f) anti-abuse)
• Gift must occur before the stock meets QSBS holding period for best results
• Assignment-of-income doctrine risk if gifted after binding sale agreement
• Grantor trusts do NOT get separate exclusion — only non-grantor trusts work
• Professional guidance critical — IRS actively scrutinizes aggressive stacking

QSBS eligibility is fact-intensive and must be established at the time of stock issuance. The corporation must be a domestic C corporation with gross assets not exceeding the applicable threshold ($50M pre-OBBBA, $75M post-OBBBA) at all times before and immediately after issuance. The stock must be acquired at original issuance (not secondary market). The corporation must use at least 80% of its assets in the active conduct of a qualified trade or business during substantially all of the taxpayer's holding period.

• Domestic C corporation only (S corps, LLCs, partnerships do not qualify)
• Acquired at original issuance for money, property, or services
• Gross assets test is cumulative — measured at all times before and immediately after issuance
• 80% active business test throughout holding period
• Excluded industries: health, law, engineering, architecture, accounting, actuarial, performing arts, consulting, athletics, financial services, brokerage, banking, insurance, leasing, farming, mining, hospitality
• Stock received via conversion of convertible debt qualifies