Investing in Qualified Small Business Stock: New Opportunities Under the OBBBA
- Steve Julal
- Sep 23
- 2 min read
Investing in specific small businesses can serve as an effective means of portfolio diversification while offering distinct tax advantages. With the implementation of the One Big Beautiful Bill Act (OBBBA), the tax benefits associated with Qualified Small Business (QSB) stock have become increasingly advantageous.
What Counts as a QSB?
A Qualified Small Business is generally a U.S. C corporation that meets two main requirements:
Active Trade or Business Test
The small business must be engaged in an active trade or business, which generally includes most industries except for:
Professional service fields such as health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services
Banking, insurance, financing, leasing, investing and similar businesses
Farming operations
Certain oil, gas, and mining businesses
Operators of hotels, motels, restaurants, or similar establishments
In addition, at least 80% of the company’s assets (by value) must be used in qualified business activities, and no more than 10% can be held as nonbusiness real estate.
Asset Ceiling Test
Before the OBBBA, a company could not exceed $50 million in gross assets to qualify as a QSB. For stock issued after July 4, 2025, that ceiling increases to $75 million (with inflation adjustments beginning in 2027). Subsidiary assets are counted toward this limit, though a company won’t lose its QSB status if its assets grow beyond the threshold after stock issuance.
The Power of Gain Exclusions
QSB stock has long offered valuable capital gain exclusions:
50% exclusion for stock acquired before February 18, 2009
75% exclusion for stock acquired between February 18, 2009, and September 27, 2010
100% exclusion for stock acquired on or after September 28, 2010 (if held at least five years)
The OBBBA introduces new, shorter-term opportunities:
75% exclusion for stock held at least four years
50% exclusion for stock held at least three years
These changes apply to QSB stock acquired after July 4, 2025. Importantly, holding periods transfer when stock is gifted or inherited.
Key Rules to Keep in Mind
Original Issuance Requirement
Generally, you must buy QSB stock directly from the corporation (or an underwriter) in exchange for cash, property (other than stock), or as compensation for services. Some exceptions apply, such as for gifted or inherited stock.
Annual Exclusion Limits
The gain you may exclude from a single issuer in a tax year is capped at the greater of $10 million or 10 times your basis in the stock sold.
State-level Taxes
Not all states follow federal QSB exclusion rules, so you may still owe state taxes on gains.
Rollover Opportunities
If you sell QSB stock and reinvest the proceeds into other QSB stock within 60 days, you can defer the gain. The deferred gain reduces your basis in the new stock, and your holding period carries over. Similar rules apply if QSB stock is converted into a different class of stock within the same corporation.
Final Thoughts
QSB stock can be a powerful investment tool, offering both diversification and significant tax advantages. But as with any investment, taxes are only part of the picture. Be sure to evaluate your overall financial goals, time horizon, and risk tolerance before investing.
If you’re considering investing in Qualified Small Business stock or want to understand how the new OBBBA rules affect you, we can help. Reach out to learn more.
