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QSBS under OBBBA: §1202's tiered exclusion, $15M cap, $75M threshold

OBBBA replaced the uniform 100% §1202 exclusion with a tiered 50/75/100% system at 3/4/5 years, raised the per-issuer cap to $15M, and lifted the aggregate-asset threshold to $75M — for stock issued after July 4, 2025.

AI Tax Practitioner Editorial

Published ·16 min read ·Last reviewed

The lede in one paragraph: §1202 has been the most generous gain exclusion in the Code for almost a decade — uniform 100% gain exclusion on up to $10M (or 10× basis) of qualified small business stock held five years. OBBBA didn’t kill it. It expanded the cap, raised the issuer-size ceiling, and — most consequentially for the practitioner’s planning conversation — introduced a holding-period ladder that pays out partial exclusion at three and four years. The change is post-July-4-2025-prospective for the new framework, so practitioners now run two parallel rule sets depending on when the stock was issued. This piece is the working-practitioner read of what changed, who it applies to, the planning angles the old uniform regime obscured, and the AI-tool currency problem that means most automated answers on §1202 are wrong right now.

The 30-second answer

Six facts a practitioner needs in order to brief a founder, early employee, or pre-exit HNW client carrying §1202-eligible stock:

  • The rewrite sits in OBBBA §70431. It amended IRC §1202(a), §1202(b), and §1202(d) with effect for stock acquired (and issued) after July 4, 2025. Stock acquired on or before that date continues under the legacy regime.
  • The new exclusion ladder is tiered. 50% gain exclusion at a 3-year hold; 75% at a 4-year hold; 100% at a 5-year hold. The legacy uniform 100%-at-5-years rule applied to all post-September-27-2010 stock through July 4, 2025. (Pub. L. 119-21, govinfo.gov.)
  • The per-issuer cap rose to $15M. Replacing the long-standing $10M cap. The alternative “10× adjusted basis of stock issued by the corporation” prong survives. The $15M figure indexes for inflation in years beginning after December 31, 2026. The cap remains per-issuer, per-taxpayer.
  • The “qualified small business” gross-asset ceiling rose to $75M. Up from $50M. The corporation must have aggregate gross assets (cash + adjusted basis of other property) below the ceiling at all times from August 10, 1993 through the moment immediately after issuance. The $75M figure also indexes after 2026.
  • The 50% and 75% tiers do not carry an AMT preference. OBBBA §70431 amended IRC §57(a)(7) to restrict the preference to stock acquired on or before September 27, 2010 — expressly excluding all post-enactment QSBS from AMT preference treatment. The new 50%, 75%, and 100% tiers are all AMT-free and §1411-free for stock issued after July 4, 2025.
  • State conformity is mixed and material. California still does not conform to §1202 at all. Pennsylvania conforms but with its own basis rules. Other states adopt federal §1202 by reference and will pick up the OBBBA changes automatically unless they decouple. The exit picture for a California-resident founder did not improve under OBBBA at the state level. (Cornell LII, §1202; IRS Pub. 550, Investment Income and Expenses.)

The pre-OBBBA §1202 framework — what’s still in force for legacy stock

For any client whose stock was acquired at original issuance on or before July 4, 2025, the legacy §1202 rules continue to apply. The shape worth holding in working memory:

  • Uniform 100% exclusion on qualified gain from stock acquired after September 27, 2010 and held more than five years. (Stock acquired between February 18, 2009 and September 27, 2010 got 75%; stock acquired August 11, 1993 through February 17, 2009 and again briefly in 2009 got 50%. Those vintages still produce different exclusion percentages on sale today.)
  • Per-issuer cap of the greater of $10M (lifetime per taxpayer per issuer) or 10× the aggregate adjusted basis of QSBS issued by that corporation and disposed of in the year.
  • Aggregate gross-asset ceiling of $50M, measured at all times from August 10, 1993 through the moment immediately after issuance.
  • Original-issuance requirement. Stock has to be acquired by the taxpayer at its original issue (directly or through an underwriter) from the corporation in exchange for money, other property (not stock), or as compensation for services. Stock purchased on the secondary market is not QSBS in the buyer’s hands. The §1202(h) tacking rules permit holding-period inheritance in limited transfers (gift, death, partnership distribution).
  • Active business requirement. At least 80% of the corporation’s assets (by value) must be used in the active conduct of one or more qualified trades or businesses throughout substantially all of the taxpayer’s holding period. Health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, banking, insurance, financing, leasing, investing, farming, and certain extraction and hospitality businesses are not qualified trades under §1202(e)(3). The qualified-trade list is the most frequent disqualification trap.
  • Redemption rules at §1202(c)(3). The corporation cannot redeem more than de minimis amounts of its stock from the taxpayer (or a related party) within a four-year window around the issuance. Significant redemptions kill QSBS treatment retroactively. Founder-redemption traps and option-cashout patterns regularly trip this.
  • §1045 rollover available to defer recognition on a sale before five years, by rolling proceeds into replacement QSBS within 60 days. The replacement stock inherits the original holding period for §1202 purposes.

The framework rewards patience: hold five years past original issuance, satisfy the active-business and redemption tests throughout, and exclude up to the cap at exit. Where §1202 broke down under the legacy regime was the binary nature of the holding period — four years and 364 days got the client nothing; five years got the full exclusion. That binary is what OBBBA softened.

What §70431 actually changed — the tiered ladder, the bigger caps, the dates

The OBBBA amendments to §1202 reshape three load-bearing parameters at once. The summary table below is the working reference; the dates and figures derive from the Pub. L. 119-21 text and the practitioner-firm syntheses that converged on the same numbers (Nance, “QSBS gets a makeover,” Tax Adviser, Nov. 2025; “Tax provisions in the One Big Beautiful Bill Act,” Journal of Accountancy, Jul. 2025).

§1202 parameters — pre-OBBBA stock vs post-OBBBA stock
ParameterStock issued through July 4, 2025Stock issued after July 4, 2025
Exclusion at 3-year hold0%50%
Exclusion at 4-year hold0%75%
Exclusion at 5-year hold100% (post-9/27/2010 vintage)100%
Per-issuer / per-taxpayer capgreater of $10M or 10× basisgreater of $15M or 10× basis; inflation-indexed after 2026
Aggregate gross-asset ceiling$50M$75M; inflation-indexed after 2026
AMT preference on partial exclusion§57(a)(7) preference applied to 50% / 75% vintagesNo AMT preference on new 50% / 75% tiers — OBBBA §70431 amended §57(a)(7) to exclude all post-July-4-2025 QSBS from AMT preference
§1411 NIITExcluded gain is also outside NIITSame — excluded gain stays outside NIIT
Active-business / qualified-trade tests§1202(e) unchanged§1202(e) unchanged
Original-issuance requirement§1202(c)(1)(B) unchangedUnchanged
Redemption rules§1202(c)(3) unchangedUnchanged
§1045 rolloveravailableavailable; tacking rules continue

Three observations worth holding before drafting any client memo on this.

First, the tiered ladder is the structural change founders and early employees will feel most. The legacy regime made the five-year date a cliff. The new regime makes it a curve. A founder with post-July-4-2025 stock who hits an acquisition exit at three years and one day excludes 50% of qualified gain up to the cap — a partial benefit that was simply unavailable under the legacy uniform regime. Acquirer-driven exits that historically forced the awkward “can we please wait six months for §1202” conversation now have a graduated answer. The 3-to-5-year window becomes the planning surface.

Second, the cap and threshold increases are smaller than they look in nominal terms but matter at the margin. The $10M-to-$15M cap raise applies per issuer per taxpayer. A founder with $50M of qualified gain who was previously capping out at $10M now caps at $15M — recovering $5M of exclusion. The $50M-to-$75M asset ceiling expands the universe of corporations that can issue QSBS in the first place, which matters most for capital-intensive Series-A / Series-B companies that were brushing up against the $50M threshold during the funding round in which equity was being granted. Both figures index for inflation after 2026, which compounds the structural effect over the next decade.

Third, the post-July-4-2025 effective date creates a permanent two-track regime for the next several years. A practitioner reviewing a client’s QSBS schedule has to date-stamp every issuance and run the correct rule set against it. Stock issued through July 4, 2025 stays on the legacy framework forever — five-year cliff, $10M cap, $50M ceiling, with the legacy partial-exclusion vintages still surfacing for pre-2010 issuances. Stock issued after July 4, 2025 sits on the new framework. A founder with multiple grants spanning the cutover — common in early-stage companies that issued additional shares during 2024-2025 fundraising — owns two parallel §1202 positions that compute differently. Workpapers have to reflect that.

Who qualifies under the new framework — the tests that didn’t change

OBBBA expanded the parameters but did not loosen the eligibility tests. For practitioners running the qualification analysis on a new issuance, every test that mattered under the legacy regime still matters. The qualified-small-business test now uses the $75M ceiling; everything else is unchanged.

The corporation must be a domestic C corporation. S corporations, partnerships, and LLCs taxed as partnerships cannot issue QSBS. A pass-through entity that converts to C-corp status can issue QSBS post-conversion, but the conversion itself does not retroactively qualify the pre-conversion equity. The C-corp conversion conversation gets a different answer in 2026 than it did in 2024 — the $75M ceiling and the tiered ladder make the math more favorable in the 1-to-3-year window between conversion and a potential exit.

Aggregate gross assets must stay below the ceiling. At all times from August 10, 1993 through the moment immediately after issuance, the corporation’s aggregate gross assets — cash plus the adjusted basis of other property — must be at or below $75M (for post-OBBBA stock; $50M for legacy stock). Receipts from the issuance itself count. The “immediately after issuance” test is the gating rule on the threshold — a corporation can exceed the ceiling later without retroactively disqualifying the prior QSBS, but issuances made when the corporation is over the ceiling never qualify.

Active business throughout the holding period. At least 80% of the corporation’s assets (by value) must be used in the active conduct of one or more qualified trades or businesses for substantially all of the taxpayer’s holding period. The qualified-trade exclusion list at §1202(e)(3) is unchanged — health, law, accounting, consulting, financial services, banking, insurance, leasing, investing, farming, hospitality (excluding hotels and restaurants generally), and certain extraction businesses remain non-qualifying. The single most-litigated disqualification under §1202 is the active-trade test; pre-revenue companies, holding companies, and businesses with substantial investment portfolios all face working-capital nuance that practitioners regularly under-analyze.

Original-issuance requirement at §1202(c)(1)(B). The taxpayer must acquire the stock at original issue, in exchange for money, other property (not stock), or as compensation for services to the corporation. Secondary-market purchases never qualify in the buyer’s hands. The §1202(h) tacking rules permit holding-period inheritance in a limited set of transfers — gift, death, and partnership distribution to a partner who held the partnership interest when the QSBS was acquired by the partnership. These tacking transfers preserve QSBS status; sales and most other transfers do not.

Redemption test at §1202(c)(3). The corporation cannot redeem more than de minimis amounts of its stock from the taxpayer (or related parties) within a 2-year window before, and a 2-year window after, the issuance. Significant redemptions retroactively disqualify the QSBS. This is the trap that catches founder-redemption deals, secondary-tender programs that overlap with new grants, and option-cashout windows during fundraising. The 2-year-bracket math is precise; document the timing carefully.

For pass-through clients — S-corps, partnerships, sole proprietorships — with material founder-stock-equivalent equity, the §1202 conversation is a structural conversion question. Conversion locks in the active-trade test at the conversion date for purposes of the holding period that starts running for newly-issued C-corp stock. There is no path to retroactively QSBS-qualify pre-conversion equity. The OBBBA changes do not affect this analysis; they make the post-conversion math more favorable but do not soften the original-issuance gate.

Planning angles the old uniform regime obscured

The legacy 100%-at-5-years regime was easy to model and easy to advise on — wait five years, claim the full exclusion, mind the cap. The new tiered ladder opens planning surfaces that the old binary regime suppressed.

Partial-exclusion timing decisions in the 3-to-5-year window. A client offered a strategic acquisition at the four-year mark previously had a binary choice — sell now for ordinary capital-gains treatment, or hold for the §1202 five-year benefit. Under the new framework, four years and one day yields a 75% exclusion. Five years yields the full 100%. The marginal benefit of waiting the extra year is now 25% of qualified gain, not 100%. For acquirers with deal-timing pressure, the calculus shifts; the client may rationally take the 75% exclusion at four years rather than risk the deal at five. Practitioners running scenario models should sweep the 3-year, 4-year, and 5-year exit dates as separate cases.

Stacking across multiple issuers. The $15M cap is per-issuer, per-taxpayer. A client with QSBS in three separate qualifying corporations can — in principle — stack three $15M caps. The legacy $10M cap stacking strategy survives at the higher cap level. Where this matters in practice is the serial founder, the early employee at multiple startups, and the angel investor who has accumulated qualified positions across a portfolio. The stacking is a per-issuer test; document each issuer separately on the workpapers.

Gift-tax planning with intra-family QSBS transfers. §1202(h)(1) tacks the holding period and preserves QSBS status on gifts. A founder approaching the cap can gift QSBS to family members (subject to gift-tax considerations) and each donee receives their own per-issuer cap. The legacy cap-stacking literature developed extensive guidance on these structures; the OBBBA cap increase makes the math more favorable but the technique is unchanged. The §2503 annual-exclusion and lifetime-exemption interaction has to be modeled separately.

State non-conformity continues to be the constraint that bites hardest. California (Cal. Rev. & Tax Code §18152.5 was repealed prospectively, and the state does not conform to federal §1202) treats QSBS gain as ordinary California-source gain regardless of federal exclusion. For California-resident founders, the OBBBA cap increase is a federal-only benefit; the California liability on a $50M exit is roughly the same in 2026 as it was in 2024. Practitioners modeling the after-state-tax exit for a California client should not assume parallel state benefit. Pennsylvania, Massachusetts, New Jersey, and New York each have their own conformity quirks; check before signing the planning memo.

The §1045 rollover surface widens at the partial-exclusion tiers. A client at the three-year mark facing an exit can either claim the 50% exclusion on sale, or roll the proceeds into replacement QSBS under §1045 within 60 days and inherit the original holding period. If the replacement QSBS itself qualifies for the 100% exclusion on a later five-year hold, the rollover converts a 50% partial benefit into a deferred-and-then-fully-excluded benefit. The election decision is fact-specific — replacement-QSBS availability, the client’s near-term liquidity needs, the acquirer’s deal structure — but the planning surface is wider than under the legacy regime.

AI tax-planning tools and the new §1202

This is the section practitioner readers landed on this article to find. The honest answer in May 2026: every AI tax-research and tax-planning tool a US practitioner realistically uses is, as of this writing, structurally exposed to the same currency problem on §1202 — and the failure modes are the same shape as on the FDII → FDDEI rewrite.

The structural problem. Cornell LII’s text of 26 USC §1202 now reflects the OBBBA amendments. But IRS Pub. 550, which covers QSBS treatment for the §1202 exclusion in its investment-income discussion, was last revised before the OBBBA effective date and still describes the uniform 100%-at-5-years regime with a $10M cap and $50M issuer threshold. Any AI tool that retrieves across both the current Cornell LII statutory text and the pre-OBBBA IRS publication corpus will surface conflicting parameters. Generation layers downstream of that retrieval have to choose, and many choose poorly.

The knowledge-cutoff overlay. Frontier general models in active practitioner use have training cutoffs that span the OBBBA enactment date. With web search disabled, a model trained before July 4, 2025 has zero pre-training awareness of the §1202 rewrite. A model trained through late 2025 has some awareness but its corpus is dominated by pre-rewrite content describing the legacy uniform regime. Consumer LLMs — ChatGPT, Claude, Perplexity, Gemini, Copilot — have a documented record of returning stale post-OBBBA answers on adjacent provisions; the CBS News piece quoting American University’s Caroline Bruckner makes the point on OBBBA generally, and §1202 sits squarely in the same currency lane.

Where the named tax-AI tools sit in May 2026. Blue J is statute-anchored, which makes it structurally best-positioned to return the correctly-updated §1202 parameters — the Cornell-LII-equivalent statutory layer it indexes is current. CoCounsel runs over Checkpoint, whose editorial layer is updated proactively; post-OBBBA §1202 coverage is generally current at the editorial tier, with mixed-corpus blending the residual risk. Bloomberg Tax AI Assistant and CCH AnswerConnect have both retitled their §1202 reference content to reflect the OBBBA tiered framework. Hive Tax and TaxGPT are more variable in their §1202 currency; both lean on IRS-publication-level content that has not been re-issued for OBBBA, which structurally exposes them to surfacing the pre-rewrite parameters on a §1202 query.

The practitioner workflow implication. AI-tool output on the new §1202 should be treated as a first-draft pointer, not a citable answer. The verification step against the current Cornell LII text of §1202 and the OBBBA §70431 statutory amendments is non-optional. If the tool returns “100% exclusion after 5 years, $10M cap, $50M threshold” on a post-July-4-2025 issuance question, it has just told the practitioner the legacy regime. The same caveat applies to scenario calculators built on top of LLMs — verify the parameters the calculator is operating on before relying on its output.

§10.22 due-diligence under the rename

Circular 230 §10.22 requires the practitioner to exercise due-diligence in preparing and signing returns, and in advising on positions that materially affect a return. The proposed Circular 230 modernization adds an explicit technological-competency requirement at proposed §10.35. (Federal Register, December 26, 2024 Notice of Proposed Rulemaking.) For §1202 work specifically, due-diligence in the post-OBBBA environment means:

  • Date-stamp every issuance. The cutover date — July 4, 2025 — is the operative line for which rule set applies. Stock issued on or before that date is legacy regime; stock issued after is the new tiered regime. Document the issuance date for every QSBS lot on the workpapers, every year, until the disposition is reported.
  • Verify the qualified-trade test for the holding period. A corporation that drifts out of the §1202(e)(3) qualified-trade list during the holding period can disqualify the stock retroactively. Annual confirmation of active-business compliance is the discipline that survives audit.
  • Run the redemption check. Founders, early employees, and existing shareholders who participate in tender offers, secondary sales, or stock buybacks during the 2-year-bracket window around an issuance can trip the §1202(c)(3) redemption rule. The 2-year math is precise and frequently mis-papered.
  • Verify AI-tool output against statute. Any AI-tool answer that gives uniform 100%-at-5-years parameters on a post-July-4-2025 issuance is wrong on the new framework. Any answer that gives 50/75/100% tiered parameters on a pre-cutover issuance is wrong on the legacy framework. The practitioner who signs the return owns the answer regardless of which tool produced it.
  • State-conformity check before signing. California, in particular, does not conform to §1202. Multi-state founders and HNW exit-planners should have a state-by-state schedule attached to the federal §1202 workpaper.

The §7216 consent discipline applies to §1202 work to the same degree it applies to any other return position assisted by AI. Pasting a client’s QSBS schedule into a public LLM almost certainly counts as a §7216 disclosure under Treas. Reg. §301.7216-1(b)(5), regardless of vendor privacy promises. The defensible path remains a signed §7216 consent in the engagement letter plus a vendor with a DPA, no-training clause, and SOC 2 Type II.

Frequently asked questions

Does OBBBA’s new §1202 apply to stock I already owned?

No. The new framework — tiered 50/75/100% exclusion, $15M cap, $75M ceiling — applies only to QSBS acquired (and issued) after July 4, 2025. Stock acquired on or before that date stays under the legacy regime. A client holding both pre-cutover and post-cutover QSBS in the same corporation has two parallel positions to track.

Is the new 50% / 75% tier subject to AMT?

The legacy §57(a)(7) AMT preference applied to the pre-September-27-2010 partial-exclusion vintages. OBBBA §70431 amended §57(a)(7) to limit the preference to stock acquired on or before September 27, 2010, expressly excluding the new 50% and 75% tiers from AMT preference treatment. All three tiers (50%, 75%, 100%) on post-July-4-2025 QSBS are AMT-free and §1411 NIIT-free.

What about state conformity?

State-by-state. California does not conform to §1202 in any vintage and will treat the gain as fully taxable at the state level. Pennsylvania conforms but with its own basis rules. New Jersey and Massachusetts have specific quirks. Most rolling-conformity states pick up the OBBBA changes automatically; static-conformity states may not. For any multi-state client, run the state-conformity question separately from the federal computation.

Does the $15M cap stack across multiple issuers?

Yes. The cap is per-taxpayer, per-issuer. A client with QSBS in three separate qualifying corporations can claim up to three separate caps. Gift-tax-bracket transfers to family members can multiply the per-taxpayer cap further, subject to gift-tax considerations and the §1202(h)(1) tacking rules.

Is the §1045 rollover still available under the new framework?

Yes. §1045 was not amended by OBBBA. The 60-day rollover into replacement QSBS continues to be available, and the tacking rule continues to inherit the original holding period. The rollover surface widens under the tiered framework because a client at the three- or four-year mark facing an exit can roll into replacement QSBS, hold five years, and convert a partial exclusion into a deferred-and-then-fully-excluded benefit.

Can I rely on Blue J, CoCounsel, or TaxGPT for §1202 research right now?

Treat their output as a first-draft pointer that requires verification against the current Cornell LII text of §1202 and the OBBBA §70431 amendments. Blue J is structurally best-positioned because its retrieval is statute-anchored. Bloomberg Tax AI Assistant and CCH AnswerConnect have updated their §1202 editorial content. Consumer LLMs without primary-source verification should not be relied on for §1202 planning work.

Sources and citations

All URLs verified live as of 2026-05-13. The article was assembled from primary statutory and regulatory sources, IRS publications, and post-OBBBA practitioner-canonical commentary.

Statutory text:

IRS guidance:

Practitioner-canonical post-OBBBA commentary:

Regulatory framework:

Trade press and AI-tool currency:

State conformity: