At a Glance
The OBBBA significantly enhanced Section 1202 benefits for stock issued after July 4, 2025, expanding a tax break that already costs the Treasury an estimated $2-3 billion annually. With the median disclosed VC-backed acquisition price at $54 million in 2023 according to NVCA/PitchBook data, most startup exits fall squarely in QSBS territory where savvy founders can shield up to $15 million from federal tax.
Most startup exits fall squarely in QSBS territory, yet founders routinely forfeit millions in tax savings through early missteps. The difference between proper QSBS planning and hoping for the best? Often $3-5 million on a typical exit.
The Qualified Small Business Stock exclusion can now shield up to $15 million from federal capital gains tax for stock issued after July 4, 2025. The One Big Beautiful Bill Act didn’t just increase limits. It fundamentally changed the economics of startup equity by introducing partial exclusions after just three years and raising the gross assets threshold to $75 million.
Consider a SaaS founder who sells for $30 million after four years. With pre-OBBBA stock, they’d owe $7.14 million in federal tax (no exclusion available). With post-OBBBA stock, they’d exclude $22.5 million (75% of $30 million), owing just $2.31 million on the remaining $7.5 million. That single timing difference saves nearly $5 million.
Only stock issued by a domestic C corporation can qualify for QSBS treatment. This includes LLCs that elect to be treated as C corporations for tax purposes, but excludes partnerships and S corporations entirely. This threshold requirement determines whether one of the tax code’s most powerful benefits is available to you.
The real complexity emerges when founders try to fix suboptimal structures later. If your LLC elected C corporation tax treatment from day one, you’re fine—your QSBS holding period has been running. But most founders miss this option, leading to conversions that restart the clock entirely.
Take a marketplace founder who operated as an LLC from 2022 to 2025, then converted for a Series A. Despite three years building the business, their QSBS holding period starts fresh in 2025. To access even the 50% exclusion, they must wait until 2028. The $50,000 saved in LLC pass-through benefits during bootstrapping becomes meaningless against millions in lost QSBS exclusion.
Savvy founders increasingly recognize that C corporation formation from inception is a modest upfront cost that can preserve millions in future exclusions.
The OBBBA created two different tax universes for startup equity. Stock issued on or before July 4, 2025 remains subject to the original rules: $50 million gross assets ceiling, $10 million exclusion cap, and an all-or-nothing five-year holding requirement. Stock issued after July 4, 2025 enters a dramatically more favorable regime.
This timing divide creates previously impossible scenarios. A fintech company with $60 million in gross assets can now grant qualifying stock options to key hires. Even more compelling: as noted by Columbia Law Review research, a company valued at billions could conceivably satisfy the gross-assets test if structured properly, since the test focuses on adjusted tax basis rather than fair market value.
The new tiered holding periods fundamentally change exit dynamics. Hold for three years, exclude 50% of your gain. Four years, 75% exclusion. Five years, the full 100%. Under partial exclusions, only the non-excluded portion faces taxation at a 28% capital gains rate (the special QSBS rate) rather than the standard 20%, plus applicable net investment income tax. For shareholders selling before the five-year mark, Section 1045 rollovers offer another option: reinvest proceeds into new QSBS within 60 days to defer gain while potentially accessing future exclusions.
Case In Point – The $3 Million Impact of Timing
Two AI startup founders each own stock worth $20 million at a 2029 exit after four years. Their only difference: incorporation timing.
Founder A (June 2025 incorporation):
Founder B (August 2025 incorporation):
Two months. $3.17 million saved. This is why incorporation timing matters.
Obtaining QSBS is just the beginning. The gross assets test applies at each stock issuance and immediately after. Once crossed, the company can never issue new QSBS again, though existing qualified stock maintains its status.
A Series B that pushes gross assets from $70 million to $80 million permanently closes the QSBS window. Every option grant, every advisor share after that point fails to qualify. Savvy CFOs now model gross asset trajectories before major financings, sometimes splitting rounds or accelerating grants to maximize qualifying issuances.
The active business requirement demands that at least 80% of corporate assets be used in qualified trades or businesses during substantially all of the holding period. While large fundraising rounds increase cash balances, the tax code provides a crucial working capital safe harbor: cash held for reasonable business needs and expected to be deployed within two years generally qualifies. Most venture financings fall comfortably within this exception. Note that for companies more than two years old, only 50% of assets may qualify under the working capital exception.
Certain businesses are specifically excluded from QSBS qualification. Professional services (health, law, engineering, consulting), financial services, and hospitality businesses don’t qualify. The key test: does your value come from software/product or from human expertise?
A pure SaaS platform qualifies. But if 40% of revenue comes from implementation consulting using that software, you might have morphed into an excluded professional services business. Document your business model carefully—the distinction between product and service revenue can make or break qualification.
Two overlapping redemption tests apply, and failing either disqualifies newly issued stock. Stock buybacks can accidentally destroy QSBS benefits through these separate tests. First, if the corporation buys back more than 2% (or $10,000) from a QSBS shareholder, that shareholder’s QSBS issued in the surrounding four-year window loses its status, while stock issued to other investors typically remains unaffected. Second, if total company buybacks exceed 5% during the two years around any stock issuance, all shares issued in that period fail to qualify.
Common triggers? Buying out a departing co-founder can disqualify employee options granted around the same time. Tender offers for early liquidity create similar risks. Even routine repurchases of unvested shares from terminated employees add up. Forward-thinking companies track both tests religiously and structure buybacks carefully to avoid these traps.
QSBS documentation requires contemporaneous records at each critical juncture. Companies must maintain incorporation records, board authorizations, capitalization tracking, gross assets calculations, and active business compliance evidence. Shareholders need purchase documentation, 83(b) election confirmations, and continuous ownership records.
For restricted stock recipients, filing the 83(b) election within 30 days starts the QSBS holding period at grant rather than vesting. Missing this deadline can add years to the required hold, potentially missing exit opportunities.
While federal QSBS treatment is uniform, state approaches vary dramatically. California offers zero QSBS exclusion: that $15 million federal exclusion still faces 13.3% state tax. Pennsylvania, Alabama, and Mississippi similarly refuse to conform. But New Jersey just joined the QSBS party (effective for tax years beginning after December 31, 2025) in June 2025, adding up to 10.75% in savings.
This creates powerful planning opportunities. A founder moving from San Francisco to Austin before their exit saves $2 million on a $15 million exclusion. Even a move to newly conforming New Jersey saves $1.6 million versus staying in California. Geographic arbitrage is becoming a standard pre-exit strategy.
For wealth transfer, grantor trusts work beautifully since the founder remains the tax owner. This allows shifting future appreciation to family members without disrupting QSBS. Combined with the ability for each beneficiary to claim their own $15 million cap, sophisticated planning can multiply benefits across generations.
Successful QSBS planning requires embedding qualification requirements from day one. Issue founder stock when assets are minimal to maximize the 10x basis alternative. Time equity grants before financing rounds. Deploy raised capital promptly to maintain active business compliance. Track gross assets religiously.
For companies with mixed pre- and post-OBBBA stock, different shares have different exclusion caps and holding requirements. Sophisticated cap table management prevents confusion and maximizes aggregate benefits.
Exit planning starts years before buyer interest. Model after-tax proceeds under different holding periods. Understand which structures preserve QSBS treatment. For shareholders approaching but not meeting five-year holds, Section 1045 rollovers can defer gain while accessing future exclusions.
The QSBS exclusion already costs the Treasury $2-3 billion annually because sophisticated taxpayers maximize its value. With combined federal and state rates approaching 40% in high-tax jurisdictions, proper QSBS planning isn’t optional—it’s the difference between keeping or forfeiting millions at exit.
The OBBBA enhancements make the stakes even higher. Partial exclusions after three years eliminate the liquidity trap. The $75 million gross assets threshold opens doors for later-stage companies. The $15 million cap finally aligns with modern exit values. But these improvements create complexity that demands expertise from day one.
We see the pattern monthly: brilliant founders who built valuable companies, negotiated great exits, then discovered catastrophic tax bills from preventable mistakes. A wrong entity choice in year one. A missed 83(b) election. An overlooked redemption. Each error measured in millions.
The post-OBBBA world rewards founders who treat QSBS as core strategy, not afterthought. Those who embed these requirements into their company’s DNA capture benefits. Those who wait until exit discussions lose before they begin.
Sapowith Tax Advisory helps founders navigate QSBS complexity from formation through exit. We combine deep Section 1202 expertise with practical startup experience to protect the value you’re building.
The difference between comprehensive QSBS planning and hoping for the best? Usually $3-5 million, sometimes more. Ready to ensure your success translates into wealth preservation? Contact us today.
Next Steps
For founders concerned about maintaining QSBS compliance through rapid growth, Sapowith Tax Advisory offers comprehensive reviews that identify risks before they become disqualifications. Contact our team to discuss how strategic QSBS planning can protect the value you’re building.
This article is for general information only; it is not tax, legal, or accounting advice. Reading it does not create a client relationship with Sapowith Tax Advisory. Consult your own qualified advisers before acting on any information contained here. Sapowith Tax Advisory disclaims all liability for actions taken, or not taken, based on this content.