July 21, 2025

One Big Beautiful Bill Act Updates Section 1202

On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) became law, changing several areas of the federal tax code. One of those changes affects Section 1202, which has offered tax benefits for small business investors for more than thirty years. The provision allows qualifying gains from the sale of certain stock to be excluded from federal income tax. It has been adjusted several times since it was introduced, and this latest revision adds new ways for taxpayers to benefit.

The new rules apply to Qualified Small Business Stock (QSBS) acquired on or after the date of enactment. For the first time, taxpayers may qualify for a partial exclusion after holding the stock for three or four years. Previously, gains exclusion had been available only after five years. The law also raises the lifetime cap on eligible gains and increases the asset threshold for issuing corporations. These changes may be relevant to founders, early-stage investors, and business owners. To help clients, prospects, and others, Wilson Lewis has summarized the key details below.

Understanding QSBS

Qualified Small Business Stock, or QSBS, refers to stock issued by certain domestic C corporations that meet specific requirements under Section 1202 of the tax code. This provision allows eligible taxpayers to exclude part or all of the gain from the sale of qualifying stock from federal income tax, provided the stock is held for a required period and certain conditions are met.

To qualify, the stock must be acquired directly from the corporation at original issue and must be held by a noncorporate taxpayer. The issuing company must be a C corporation with total gross assets that do not exceed a specified limit at the time the stock is issued. In addition, the business must be actively engaged in a qualified trade or business. Certain industries are excluded from eligibility, including law, engineering, accounting, consulting, financial services, and other fields where the value of the business is primarily tied to the skills or reputation of its owners or employees.

Before OBBBA, the rules allowed taxpayers to exclude up to 100% of the gain on QSBS held for more than five years. That exclusion was subject to two key limits. The first was a lifetime cap per company equal to the greater of $10 million or 10 times the taxpayer’s original investment. The second required that the issuing company’s gross assets did not exceed $50 million before or immediately after the issuance. These rules still apply to stock acquired before July 4, 2025.

What Changed Under OBBBA?

For QSBS acquired on or after July 4, 2025, OBBBA introduces three key updates to Section 1202.

• Tiered Exclusion Based on Holding Period — Under prior law, taxpayers needed to hold QSBS for more than five years to receive any tax exclusion. Now, the rules under OBBBA state that a 50% exclusion applies if the stock is held for at least three years, increasing to 75% after four years. A full 100% exclusion remains available for stock held at least five years.
• Increased Lifetime Cap on Exclusion — The OBBBA increases the lifetime gain exclusion cap for QSBS acquired after July 4, 2025, from $10 million to $15 million. This cap will be adjusted annually for inflation. The alternative cap, based on 10 times the taxpayer’s basis in the stock, continues to apply. However, taxpayers will want to note that exceeding the $15 million cap in a single year eliminates the ability to claim additional exclusions for that issuer in future years.
• Higher Asset Threshold for Issuing Corporations — The law also raises the asset threshold for qualified small businesses from $50 million to $75 million. This change means that larger startups, especially those that need a lot of upfront investment, like companies in tech, life sciences, or manufacturing, may now be eligible. When measuring total assets, the company must consider all cash and property it owns right before and right after the stock is issued; this is generally referred to as aggregate gross assets. 
• Considerations for Investors and Business Owners – Although the new rules expand access to the QSBS exclusion, many of the original requirements still apply. To review, the stock must be issued by a U.S. C corporation, and the company’s total assets must fall within the updated limits at the time of issuance. The stock must be acquired directly from the company, not purchased from another shareholder, and it must be held for the minimum required period to receive any exclusion. The business must also be engaged in a qualifying trade or business.

Given the complex rules and the importance of proper documentation, it is worth reviewing these details with a tax advisor before making any decisions.

Contact Us

The recent changes to Section 1202 could open the door to new tax savings, but only if the right conditions are met. A conversation with a qualified tax advisor can help clarify whether these benefits apply and how to plan going forward. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.