Legislative changes to the US Qualified Small Business Stock rules haven't necessarily gotten much attention outside of specialists, but they are important. The authors consider the issues.

This article examines a feature of the One Big Beautiful Bill Act that might have gotten obscured by the (totally understandable) focus on estate taxes, at least as far as financial advisors to ultra-HNW people are concerned. (See articles here and here.) However, we pride ourselves at Family Wealth Report on delving deep into the details that might affect our readers, and their clients – this article is no exception. It examines a change to Qualified Small Business Stock rules. 

The authors, from Wealthspire Advisors, are Michael Delgass, advisor, managing director; Kevin J Brady, advisor, senior vice president; and Elizabeth Summers, SVP, director of wealth strategy, family wealth.

The editors are pleased to share these insights; the usual editorial disclaimers apply to views of guest writers. To comment, email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

One change to Qualified Small Business Stock (QSBS) rules has completely flown under the radar as a part of the family wealth toolkit.

For years, QSBS under Section 1202 of the Internal Revenue Code allowed investors in eligible companies to exclude taxation of $10 million or 10 times their basis in stock gains, whichever is greater…if they met a five-year holding period, and other strict requirements.

The One Big Beautiful Bill Act cut down the holding period for newly-issued stock. Shares sold after three years now qualify for a 50 per cent exclusion and, after four years, for a 75 per cent exclusion, while the full 100 per cent exclusion still applies after five years. Additional changes also include increases to the per-issuer limit from $10 million to $15 million and the qualified business asset ceiling, which was lifted from $50 million to $75 million, indexed for inflation beginning in 2027. All changes only apply to stock issued after July 4, 2025.

Why does this matter? It turns out, that the five-year holding period can be a huge psychological barrier for owners and stakeholders of family businesses. For a lot of good reasons, it was a tough sell to ask owners to wait half a decade to realize liquidity for theoretical QSBS benefits, especially given the potential cost of switching to C-Corp status.

What changed? Why does it matter?
The business world doesn’t wait. A lot can change in five years. Imagine a retail business that raised capital in 2021 for an exit in 2026. Depending on where the main operations of the business are located, foot traffic might not have completely rebounded from the early pandemic trough. Inflation and interest rates have also changed the math on operating the business, and customers’ willingness to make purchases.

With the recent QSBS changes, families can plan for sales on a three-year horizon if needed, a more practical fit for how exit timelines usually unfold. Much can still change in three years too, but we hear from investment bankers that the time passes quickly when a company makes itself more attractive to buyers, completes quality of earnings reviews and otherwise prepares for a sale.

Trimming the time horizon down to three years lifts the psychological barrier for families who might have otherwise deferred their retirement and succession plans. But that is not to say it is a smooth process.

The statute contains multiple traps. Investors must acquire shares at original issuance rather than on the secondary market. The issuing company must be (or correctly “convert” to) a domestic C-corporation and remain under the $50 million or $75 million gross asset threshold depending on the timing. At least 80 per cent of corporate assets must be used in the active conduct of a qualified trade or business. Trust structuring introduces another layer of complexity: only certain types of trusts qualify as separate taxpayers, which is essential for multiplying the exclusion.

Incomplete non-grantor trusts (INGs), for example, can generate an additional $10 to $15 million exclusion, while intentionally defective grantor trusts (IDGTs) cannot.

State tax conformity is another blind spot. Most states follow the federal treatment or have no capital gains tax, but several, including California, Pennsylvania, and New Jersey, do not conform at all. Hawaii allows only a 50 per cent exclusion. An owner counting on QSBS who lives in a nonconforming state could face a substantial unexpected liability without proper planning.

When business legacy becomes a wealth legacy
When families work with advisors and structure their plans carefully, QSBS exclusions have the potential to make a huge difference in after-tax wealth. For example, a founder might sell shares with a $10,000 basis and realize $15 million in tax-free gain, exhausting the lifetime cap. Later, they sell other shares with a higher $2 million basis, qualifying for another $20 million exclusion under the annual 10x rule.

Strategies like “stacking,” which involves gifting shares to another taxpayer, often a non-grantor trust, can multiply the allowable $15 million exclusion and further expand the benefit. There are a number of ways to get multiple “bites” at the QSBS apple, but again, QSBS is not an easy button answer for all business exits. Sophisticated planning can multiply exclusions, but poor structuring can just as easily collapse them.

The biggest change here is not the raw savings that QSBS could unlock, but what happens after it is able to reduce or remove the tax burden. It’s hard to find a client who is not worried about tax exposure in one form or another. When those considerations are addressed, families can focus on what they want to do. For example, honing in on philanthropic intent or improving family governance, rather than solely checking boxes to shield from tax exposure.

If nothing else, financial advisors should be absolutely familiar with the QSBS rules and changes to jump start difficult family conversations about retirement. The owners and operators of family businesses need to take a hard look at the succession paths, and the next generation’s willingness to take the baton if it is passed to them. In some cases, it might be better to shift the source of prosperity away from business profits and to the wise management of a sum of wealth over generations.

Anything that allows families to start hard conversations about business succession and retirement is positive. The change to QSBS rules might have eliminated more of a psychological barrier than a financial one, but it can still lead to tangible family wealth outcomes and healthier legacies.
 

The authors
 

Michael Delgass

Kevin J Brady

Elizabeth Summers