Tax Benefits for Startup Founders and Investors Significantly Improved by One Big Beautiful Bill Act
The One Big Beautiful Bill Act (OBBB) expands the tax benefits for qualified small business stock (QSBS). The QSBS federal tax code tax exemption allows founders and investors in certain emerging growth companies to exclude U.S. federal capital gains tax incurred when selling its stock, subject to certain conditions.
The OBBB introduces three major changes to the QSBS rules. First, the minimum holding period to qualify for QSBS tax benefits has been reduced from five years to three years, with a tiered exclusion for stock held between three and five years. Second, the eligibility threshold for a startup’s stock to qualify as QSBS has increased from $50 million to $75 million in company gross assets, with future inflation-based adjustments. Third, the per-issuer cap on tax-free capital gains has risen from $10 million to $15 million, also indexed for inflation. The alternative cap -- based on 10 times the investor’s basis in the stock -- remains unchanged.
Generally the QSBS tax exemption applies to startups with businesses outside of the following fields:
health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees,
any banking, insurance, financing, leasing, investing, or similar business, any farming business, or any business of operating a hotel, motel, restaurant, or similar business.
The QSBS tax exemption changes significantly enhance the appeal of investing in eligible startups. If you have any questions about QSBS, please contact grIP Law PPLC partners Jed Weiner jweiner@gripventure.com or Melinda Wang melinda@gripventure.com.
The information provided above is for general education and should not be relied on as legal or tax advice.
