Small Business

Innovative Solutions for Small Businesses

By Steven A. Holt On Feb 9, 2026

The gain exclusion primarily applies to Qualified Small Business Stock (QSBS) that is either originally issued to the taxpayer or has been gifted by the original taxpayer. Notably, several states have established similar exclusions to incentivize local businesses.

One pivotal legislative change, known as the One Big Beautiful Bill Act (OBBBA), brought substantial modifications to Section 1202 of the Internal Revenue Code. These changes are exclusively relevant for QSBS issued after the OBBBA’s adoption date of July 4, 2025. As a direct consequence, taxpayers acquiring QSBS before this cutoff date will encounter a different set of regulations compared to those who acquire it afterward.

This exclusion is subject to a dollar cap that varies depending on whether the QSBS was acquired before or after the adoption date of the OBBBA. For instance, after that date, the OBBBA caps the exclusion at $10 million per taxpayer for each issuing corporation, a figure that is subject to percentage reductions based on the holding duration of the taxpayer’s investment.

For QSBS acquired prior to the OBBBA, the exclusion is determined by the greater of either $10 million or 10% of the taxpayer’s basis in the QSBS held, presenting a unique opportunity for those who planned effectively.

Defining a Qualified Small Business (QSB)

• The business must operate as a domestic C corporation.
• At least 80% of the assets of the QSB should be actively utilized in a trade or business, specifically excluding passive service or investment activities.
• The collective value of the QSB’s gross assets must not exceed $50 million at any time following its formation ($75 million if the QSBS was issued by a QSB post-OBBBA adoption).

Identifying Eligible Taxpayers

• Must be an individual taxpayer, including select pass-through entity owners.
• Should have maintained ownership of the QSBS for a specified holding period, which is typically 5 years for grandfathered QSBS.
• The OBBBA introduces a tiered structure whereby different exclusion percentages apply based on the holding period for QSBS issued after the adoption date:
  • 50% of gain excluded if held for at least 3 years but less than 4 years
  • 75% of gain excluded if held for at least 4 years but less than 5 years
  • 100% of gain excluded if held for over 5 years

Practical Insights and Strategic Planning

Business owners keen on leveraging this exclusion must be prepared for potential liquidity events involving the sale of their QSB stock. It’s crucial to note that many prospective business buyers often prefer to acquire the assets of a company instead of its stock. Hence, the selling eligible taxpayer might need to advocate for a stock sale to fully exploit these tax benefits, a stance that might discourage some interested buyers.

Additionally, founders must critically assess whether to operate their businesses as C corporations as opposed to pass-through entities. While C corporations might seem less attractive due to double taxation, the long-term gains associated with the benefits of Section 1202 could outweigh this initial disadvantage.

How AI legalese decoder Can Assist

Navigating these complex regulations can be a daunting task for small business owners and taxpayers. This is where AI legalese decoder can significantly help. This innovative tool simplifies legal jargon, translating intricate legal terms into understandable language, thus allowing entrepreneurs to comprehend their tax responsibilities and the nuances of the One Big Beautiful Bill Act.

With the ability to break down complicated agreements and tax provisions, the AI legalese decoder ensures that business owners can make informed decisions when it comes to their tax strategy and financial planning. By clarifying the implications of holding periods, total asset values, and eligibility requirements, this tool acts as a vital resource for any small business owner looking to maximize their benefits under the updated tax laws.

About the Author: Steven A. Holt is the chair of the tax, trusts, and estates practice group at Mandelbaum Barret PC in Roseland.

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