What Investors Need to Know About the New Section 1202 Changes: More Flexibility, Bigger Tax Savings

The One Big Beautiful Bill Act, passed on July 4, 2025, introduces impactful changes to Section 1202 Qualified Small Business Stock (QSBS) gain exclusions—opening the door to more flexible investment strategies, larger tax savings, and expanded eligibility for startups and mid-range corporations. If you’re a business owner, investor, or entrepreneur, these changes present new planning opportunities you won’t want to miss. Here's a breakdown of what’s new, who benefits, and how you can leverage these updates with guidance from Froehling Anderson.

What Changed in Section 1202 Under the OBBBA?

Effective July 5, 2025, the revised law updates three key areas:

Shorter Holding Periods for Exclusions
Under the new law, gains on sales of Qualified Small Business Stock acquired after July 4, 2025, qualifies for tiered gain exclusions:

50% exclusion for QSBS held 3 years
75% exclusion for QSBS held 4 years
100% exclusion for QSBS held 5 or more years

Old Rule: Investors had to wait at least 5 years for any gain exclusion.

Increased Cap on Gain Exclusions
Taxpayers can now exclude the greater of:

$15 million, or
10× the taxpayer’s adjusted basis in the stock

Old Rule: The exclusion cap was $10 million or 10× the basis.

Expanded Eligibility for Startups
The limit on a corporation’s assets at the time of QSBS issuance increased from:

$50 million → $75 million

This means more emerging companies now qualify for QSBS treatment—broadening investment opportunities.

What This Means for You

Whether you’re a business owner, investor, or entrepreneur, these changes offer a few advantages:

More Tax-Smart Exit Strategies
With shorter holding periods and larger exclusions, planning your exit just got easier—and potentially more profitable.
Broader Investment Pool
The increased $75 million asset threshold allows more growing businesses to attract QSBS-eligible funding.
Increased Liquidity Options
Larger gain exclusions and faster qualification timelines enable quicker liquidity events and reinvestment potential.

What Should Taxpayers Watch Out For?

Joint Filers Uncertainty: It’s unclear whether joint filers can each claim $15 million (total $30M) or share a $15 million cap.
Inflation Adjustment: The cap will be indexed starting in 2027.
State Conformity: Not all states follow federal QSBS rules—consult your accountant for local guidance.
Complex Scenarios: SAFEs, business conversions, or unclear “qualified trades” may impact eligibility—professional advice is key.

Recordkeeping & Compliance

While no new forms are required, documentation remains critical:

Confirm eligibility with a corporate attestation or memorandum
Track acquisition dates, holding periods, and adjusted basis carefully—especially for stock acquired before and after July 4, 2025

Strategic Planning Starts Now

The Section 1202 updates could dramatically reshape how taxpayers approach startup investments, equity compensation, and exit planning. With increased limits, shorter holding periods, and broader company eligibility, it’s a win for innovation and long-term tax strategy.

Looking to take advantage of the new QSBS rules? Our experienced Minneapolis and St. Cloud based CPAs are here to help you build a proactive, tax-efficient investment plan.

Reach out to our trusted advisors to start planning smarter!

Sources

The information provided here is accurate at the time of publication but may change as laws and regulations evolve. While Froehling Anderson aims to share accurate, timely information, we encourage you to reach out to your relationship manager for guidance on your specific situation.