Blog · 15 October 2026

Qualified Small Business Stock (§1202) After OBBBA: New 3/4/5-Year Exclusion Tiers, $15M Cap and $75M Gross-Assets Test for US CPA Firms

By Keshav Bansal, CA

Qualified Small Business Stock (QSBS) under IRC section 1202 got its biggest rewrite in more than a decade when the One Big Beautiful Bill Act (OBBBA, P.L. 119-21) was signed on July 4, 2025. For stock acquired after that date, the exclusion can begin at three years (50%), rise to 75% at four years, and reach 100% at five years—with a higher per-issuer dollar cap and a higher issuer gross-assets threshold. Bricker Graydon Wyatt (Oct. 9, 2026, via JDSupra) walks through the same post-OBBBA map. For US CPA firms, the work is acquisition-date testing, holding-period tiers, cap math, and documentation—not a single “QSBS or not” checkbox.

What still has to be true for QSBS

Section 1202 still applies only to taxpayers other than corporations. The stock must be original-issue stock of a domestic C corporation (generally after Aug. 10, 1993), acquired for money, other property (not stock), or services—not a secondary market purchase from another shareholder, subject to limited gift, death, and pass-through exceptions. During substantially all of the holding period the issuer must remain a C corporation and meet the active-business test: at least 80% of assets used in a qualified trade or business. Section 1202(e)(3) still excludes service businesses (health, law, accounting, consulting, financial services, and similar fields), banking, insurance, financing, leasing, investing, farming, certain natural-resource businesses, and hotels, motels, restaurants, and similar businesses. Redemption anti-abuse rules around issuance also still apply. Secondary purchases usually do not qualify; gift and inheritance transfers can carry over the transferor’s status under §1202(h).

Acquisition date is the fork in the road

OBBBA did not rewrite the old rules for stock already outstanding. Under §1202(a)(6), the “applicable date” is July 4, 2025. Stock acquired on or before that date still needs a holding period of more than five years. For that older cohort acquired after Sept. 27, 2010 (and on or before the applicable date), §1202(a)(4) still generally allows a 100% exclusion after that five-year hold. Stock acquired after July 4, 2025 uses the new tiered table in §1202(a)(5). Cooley’s July 11, 2025 alert and the IRS Instructions for Schedule D (Form 1040) (2025) both emphasize separating the two regimes. Tacking under §1223 can affect the deemed acquisition date, so a reorganization or carryover-basis exchange after July 4 does not automatically “upgrade” pre-applicable-date stock into the new tiers.

New holding-period tiers for post–July 4, 2025 stock

For QSBS acquired after the applicable date and held at least three years, §1202(a)(1)(B) and (a)(5) set the applicable percentage:

• 3 years: 50% exclusion
• 4 years: 75% exclusion
• 5 years or more: 100% exclusion

A sale in year three can therefore exclude half the eligible gain even though the classic five-year clock has not run. The portion that remains taxable under a 50% or 75% exclusion is generally taxed under the section 1202 / §1(h) 28% rate framework rather than the ordinary 20% long-term capital-gains rate—Cooley notes effective federal rates of roughly 14% and 7% on those included slices before considering the 3.8% net investment income tax on the included gain.

Higher caps and a higher gross-assets screen

The per-issuer limitation in §1202(b) is the greater of the applicable dollar limit or 10 times the aggregate adjusted bases of QSBS of that issuer disposed of during the year (basis measured without post-issuance additions). For stock acquired after the applicable date, the dollar limit is $15 million (half for married filing separately), reduced by prior eligible gain from that issuer. For stock acquired on or before the applicable date, the dollar limit remains $10 million ($5 million MFS). The $15 million figure is indexed for taxable years beginning after 2026. Aggregate gross assets of the issuer must not exceed $75 million before and immediately after the issuance for stock issued after July 4, 2025; the prior $50 million ceiling still matters for earlier issuances. Both the $15 million and $75 million amounts are subject to cost-of-living adjustments for taxable years beginning after 2026 (often summarized as indexing from 2027).

NIIT, Form 8949, and client files

Gain excluded under §1202 is excluded from gross income, so it is not “taken into account in computing taxable income” for net investment income under §1411(c)(1)(A)(iii). The Instructions for Form 8960 treat chapter 1 exclusions as excluded income. Included (non-excluded) QSBS gain can still enter the NII base—see our NIIT and Form 8960 guide. On the return, the Instructions for Form 8949 say to report the sale as usual, enter code Q in column (f), and put the excluded amount as a negative adjustment in column (g).

Ask clients for stock-purchase agreements, board consents, capitalization tables, contemporaneous gross-asset snapshots at issuance, and evidence the business stayed outside §1202(e)(3). Pass-through holders need the entity’s acquisition date and continuous ownership under §1202(g). Entity choice still matters: QSBS is a C-corporation original-issue benefit, which is a different planning lane from the pass-through QBI deduction under §199A. Stock received in certain §351 exchanges can raise separate timing and qualification questions—see our section 351 / Notice 2026-62 note for adjacent corporate-stock issues.

What US CPA firms should tell clients

• Date-stamp every share block. After July 4, 2025 vs on or before drives tiers, the dollar cap, and (for new issuances) the $75 million gross-assets test.
• Model the year of sale. Three-, four-, and five-year exits produce different exclusion percentages and different 28%-rate slices.
• Apply the per-issuer ceiling as the greater of the applicable dollar limit or 10× basis, and track prior exclusions from the same issuer.
• Confirm original issue and active business—service, finance, and hospitality businesses are still out.
• Report with Form 8949 code Q and keep issuance-date asset and activity files with the workpapers.

A short firm checklist

1. Inventory client QSBS candidates by acquisition date and issuer.
2. Test original-issue, C-corp, gross-assets, and §1202(e)(3) business status.
3. Compute holding period against the correct regime (five-year legacy vs 3/4/5 tiers).
4. Apply the $10M/$15M (or 10×) per-issuer limit and MFS half-rules.
5. Prepare Form 8949 code Q entries and document NIIT treatment of excluded vs included gain.

Where this fits for Tax Brew readers

Post-OBBBA QSBS work is acquisition-date triage and filing support for firms advising founders and early investors in eligible C corporations. If your firm needs capacity, outsourced tax prep and bookkeeping support for US CPA firms can help. Email info@taxbrewglobal.com.

Sources: IRC §1202 as amended by P.L. 119-21 §70431 (Cornell LII / U.S. Code); Cooley, “The One Big Beautiful Bill Act Expands QSBS Benefits” (July 11, 2025); IRS Instructions for Form 8949 (2025) and Schedule D (Form 1040) (2025); IRC §1411(c)(1)(A)(iii); Instructions for Form 8960 (2025); Bricker Graydon Wyatt LLP, “More Companies, Bigger Exclusions, Faster Benefits: QSBS After the OBBBA” (JDSupra, Oct. 9, 2026). General information, not tax or legal advice. Sources as of 15 October 2026.