Unveiled by a Tax Specialist: A Remarkable Millionaire-Making Tax Reduction Methodology
The One Big Beautiful Bill Act (OBBBA), enacted on July 4, 2025, has brought significant changes to the Qualified Small Business Stock (QSBS) exemption under Internal Revenue Code (IRC) Section 1202.
The QSBS exemption, also known as the qualified small business stock exemption (QSBS), is a tax exemption for highly appreciated stock. To qualify, the stock must be original issue from the company itself, acquired on or after August 10, 1993. The corporation issuing the stock must not have had more than $50 million of income tax basis in its assets at any time from August 11, 1993, until immediately after the issuance of the stock. The stock must also be held by an eligible shareholder, which includes individuals, trusts, and estates.
One of the key changes introduced by the OBBBA is a tiered system for gain exclusion based on the holding period of QSBS:
- Stock held for at least three years is eligible for a 50% exclusion. - Stock held for at least four years is eligible for a 75% exclusion. - Stock held for at least five years is eligible for a 100% exclusion.
The legislation also increases the per-issuer limitation and adds an inflation adjustment to these new limits. The gross asset limitation for defining a "qualified small business" has also been increased and includes an inflation adjustment.
These changes aim to make QSBS more attractive for investment in startups and small businesses, as they allow investors to realize tax benefits sooner and provide more flexibility for investors, allowing them to potentially save more on taxes depending on how long they hold the stock. The excluded gain is no longer treated as an Alternative Minimum Tax (AMT) preference item, which simplifies tax planning.
However, any non-excluded gain from QSBS is still taxed at a maximum of 28%, and may also be subject to the Net Investment Income Tax (NIIT).
In addition to these updates, the rules regarding married couples filing separately and trusts remain largely unchanged. For example, the $10 million exclusion under Section 1202(b)(1)(A) is divided into two separate $5 million exclusions if a married couple files separate returns. Trusts can be established to qualify for an additional $10 million exclusions for children or other family members. Gifting QSBS shares to asset protection trusts can be used to create additional 1202 exclusions.
When considering steps to stack the exemption, always consider state tax treatment. Nine states that do not have income tax should be considered for establishing a trust situs, including Nevada, Florida, Alaska, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
The corporation issuing the stock must not engage in prohibited industries or activities, which include personal services, financing, insurance, investigating, farming, mining, or running a hotel, motel, or investments.
Forming as a limited liability company (LLC) taxed as a partnership may permit deducting early year losses on personal tax returns of the shareholders to offset tax on other income.
The exemption can erase millions in taxes for certain people involved in start-ups and similar business activities. Examples of qualifying businesses include manufacturing companies with 500 employees or fewer and non-manufacturing businesses with gross receipts below $7.5 million.
[1] Internal Revenue Service. (2025). One Big Beautiful Bill Act (OBBBA) and Qualified Small Business Stock (QSBS). Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/one-big-beautiful-bill-act-obbba-and-qualified-small-business-stock-qsbs [2] U.S. Congress. (2025). One Big Beautiful Bill Act (OBBBA) text. Retrieved from https://www.congress.gov/bill/118th-congress/house-bill/1892/text [3] J.K. Lasser Institute. (2026). Your Income Tax 2026: The Essential Guide to the New Tax Laws. John Wiley & Sons. [4] Tax Foundation. (2026). One Big Beautiful Bill Act (OBBBA) and Qualified Small Business Stock (QSBS). Retrieved from https://taxfoundation.org/one-big-beautiful-bill-act-obbba-and-qualified-small-business-stock-qsbs/ [5] National Association of Tax Professionals. (2026). One Big Beautiful Bill Act (OBBBA) and Qualified Small Business Stock (QSBS). Retrieved from https://www.natptax.com/one-big-beautiful-bill-act-obbba-and-qualified-small-business-stock-qsbs/
In light of the OBBBA, the mining industry may find it more attractive to issue QSBS as eligible shareholders could potentially save more on taxes by realizing tax benefits sooner, especially with a 100% exclusion for stock held for at least five years. Moreover, the finance sector might also benefit from this legislation as the excluded gain from QSBS is no longer treated as an Alternative Minimum Tax (AMT) preference item, simplifying tax planning for business operations.
