QSBS Explained: A CPA’s Guide to the 2025 Expansion and Why It Matters

For founders, early employees, and startup investors, Qualified Small Business Stock (QSBS) remains one of the most powerful tax benefits in the Internal Revenue Code. With the passage of H.R. 1 (often referred to as the OBBB Act), Congress quietly made QSBS broader, more flexible, and more valuable starting in 2025. If equity is a meaningful part of your compensation or investment strategy, this change deserves attention well before an exit is on the table.

Let’s start with the basics, then walk through what changed—and how to quickly assess whether QSBS may apply to you.

What Is QSBS, in Plain English?

QSBS refers to certain stock issued by qualified U.S. small businesses, governed by IRC Section 1202. When the rules are met, a taxpayer can exclude some or all of the capital gain when that stock is sold.

In the best-case scenario—still very much available after 2025—you could sell startup stock and pay zero federal capital gains tax on up to $15 million of gain per company. This is not a deduction or deferral. It is a true exclusion!

The Foundation: What Still Has to Be True

QSBS has always been technical, and that hasn’t changed. At a high level, four pillars must be in place:

• First, the company must be a C corporation. QSBS does not apply to LLCs or S corporations, even if they later convert—unless the stock itself is issued after the conversion.

• Second, the stock must be acquired at original issuance, meaning you received it directly from the company (for example, as a founder, early employee, or investor). Buying shares from another shareholder generally does not qualify.

• Third, the company must be engaged in an active qualified trade or business. Certain industries—such as professional services, finance, real estate, and hospitality—are specifically excluded.

• Finally, the company must meet the gross asset test at the time the stock is issued. This is one of the most important areas where the law changed in 2025.

What Changed in 2025—and Why It’s a Big Deal

Larger Companies Can Now Issue QSBS

Before 2025, a company generally lost QSBS eligibility once its gross assets exceeded $50 million. That threshold often disqualified fast-growing startups before meaningful equity was issued.

Under OBBB, for stock issued after July 4, 2025, the asset threshold increases to $75 million. This single change brings many later-stage startups—and their founders and employees—back into QSBS territory.

Partial Exclusions Are Now Allowed

Historically, QSBS was all-or-nothing: hold the stock for five years, or get nothing. That rigidity is gone. For QSBS acquired after July 4, 2025, Congress introduced tiered exclusions based on holding period:

• After 3 years: 50% of the gain may be excluded

• After 4 years: 75% may be excluded

• After 5 years: 100% may be excluded

This is especially important in today’s acquisition-driven startup landscape, where exits often happen earlier than the five-year mark.

The Gain Cap Increased

The per-issuer gain exclusion increased from $10 million to $15 million for stock acquired after July 4, 2025 (subject to statutory adjustments). For founders or early employees with concentrated equity, this can materially change post-tax outcomes.

AMT Risk Is Largely Gone for Modern QSBS

Older QSBS rules included an Alternative Minimum Tax addback, which surprised many taxpayers after a successful exit. Under the updated rules, the 7% AMT addback only applies to stock acquired on or before September 27, 2010. Most modern QSBS holders no longer face this issue.

What Hasn’t Changed

Despite the expansion, QSBS is not automatic:

• The five-year holding period is still required for a full exclusion

• Net Investment Income Tax (NIIT) may still apply to any taxable portion of gain

• State conformity varies—California, for example, does not recognize QSBS

Most QSBS failures I see happen not at exit, but years earlier—when stock is issued under the wrong entity, at the wrong time, or after asset thresholds are already exceeded.

Final CPA Perspective

QSBS has quietly evolved from a niche tax benefit into a core planning tool for founders and startup investors. The 2025 changes make it more forgiving, more accessible, and more aligned with how companies actually grow and exit today.

The key takeaway is simple: QSBS planning must start at issuance, not at exit. Once stock is issued incorrectly, no amount of structuring later can fix it. If liquidity is even a remote possibility in the next few years, QSBS deserves a seat at the planning table now—not later. Whether you’re issuing stock, planning a conversion, or approaching liquidity, early planning can make a seven-figure difference.

If you’d like a second set of eyes on your situation, we’re happy to help you

assess eligibility and design a strategy that fits your long-term goals.

Schedule a consultation with LightUp Tax to explore your QSBS planning options.

Schedule a Discovery Call