The One Big Beautiful Bill Act raised the §1202 qualified small business stock exclusion cap from $10 million to $15 million for stock acquired after July 4, 2025. For founders with large exits, the number that actually controls the tax bill is not $15 million. It’s 10 — and it has been sitting in the statute since 1993.
What the OBBBA changed in §1202
Three expansions matter at the planning stage.
The dollar cap went from $10M to $15M for stock acquired after July 4, 2025, indexed for inflation after 2026. For a founder with a $12 million gain, that alone is the story. For a founder with a $60 million gain, it’s a footnote.
The gross-assets ceiling went from $50M to $75M, also indexed. This is the change that opens §1202 to later-stage companies. Under prior law, a company that ever raised a Series B or C at meaningful valuation had almost certainly blown through $50 million in gross assets and lost QSBS status permanently. At $75 million, more growth-stage companies stay inside the window.
New partial exclusion tiers apply to stock acquired after July 4, 2025 — 50% at three years, 75% at four, 100% at five. One number on those partial tiers that surprises people: the gain that isn’t excluded at the 50% and 75% levels is taxed at a 28% federal maximum rate, not 20%. Add the 3.8% net investment income tax on the included portion and effective federal rates are roughly 15.9% at three years and 7.95% at four. Still well below 23.8% on an ordinary long-term sale — but the math is not what clients assume when they hear “partial exclusion.”
The 10-times-basis alternative limit was not changed by the OBBBA. It is still there, unchanged, and for a large exit it is the only number that matters.
The scenario most advisors aren’t modeling
A founder owns QSBS with near-zero basis. A buyer has offered a price that produces a $110 million gain. Her §1202 dollar cap is $10 million, so the standard analysis shows she excludes $10 million and pays about $23.8 million in federal tax on the remaining $100 million.
Before the sale closes, the corporation issues her $11 million of newly minted shares at fair market value in exchange for cash. Gross assets were below the ceiling before the issuance and remain below it after. The new shares qualify. She sells both blocks in the same transaction: the original shares for $110 million of gain and the new shares for $11 million, producing no gain. Under §1202(b)(1)(B), her exclusion limit for the year is 10 times the aggregate adjusted bases of QSBS she disposed of — 10 times $11 million.
| Without basis purchase | With basis purchase | |
|---|---|---|
| Gain on original shares | $110M | $110M |
| Gain on new shares | — | $0 |
| Exclusion limit (greater of dollar cap or 10× basis) | $10M | $110M |
| Gain excluded | $10M | $110M |
| Taxable gain | $100M | $0 |
| Federal tax at 23.8% | $23.8M | $0 |
She put $11 million into the company for a few days and received it back through the purchase price. The additional federal saving is $23.8 million.
The four rules that determine whether this works
New shares, not added basis. The statute is explicit: any increase in the basis of existing shares after original issuance is disregarded for the 10-times calculation. A capital contribution to outstanding shares does nothing. The founder must receive a new certificate of shares in exchange for her cash. The distinction is formal and non-negotiable.
Gross-assets timing. The $75 million ceiling is measured on a company-history basis — if gross assets have ever exceeded the limit, the shares cannot be QSBS regardless of where the balance sheet stands today. The issuance also has to leave the company inside the ceiling immediately afterward. The cash goes in as a gross asset and the test is applied on the spot, before the buyer closes.
Same tax year. A December subscription and a January closing produce nothing. Both the share purchase and the sale of all blocks must occur in the same taxable year. If a deal is expected to close in Q1, the entire window may already be closed. This is the constraint that makes advance planning the only planning.
Active business by value. At least 80% of the company’s assets by value must be deployed in a qualified active business immediately after the new shares are issued. Cash counts only to the extent it is reasonably required working capital. With a closing days away, the balance sheet composition is essentially fixed — the test has to be run before the cash is wired, not after.
One more reality: the economic substance doctrine, the step-transaction rules, and §1202’s own anti-avoidance authority are all available to the IRS. None of these positions has been tested in a ruling or a completed court case. A written legal analysis, contemporaneous documentation, and a considered disclosure decision are not optional at these dollar amounts.
California is a separate calculation
None of this reduces California tax. California does not conform to §1202 or §1045. A California resident with $110 million of qualifying federal gain owes California tax on every dollar of it at rates up to 13.3%, regardless of what happens at the federal level. State conformity shifted in 2026 for several states in both directions — confirm the current rules for your state before closing, and update that research close to the transaction date.
The federal analysis and the California analysis run in parallel. Neither cancels the other.
Get this modeled before you sign the term sheet
The strategy requires new shares to be subscribed and paid for before a binding purchase agreement exists. Once a price is set, the gross-assets arithmetic changes and the deal structure has to accommodate a simultaneous cash round. That is not a negotiation to have the week before signing — it requires time to run the gross-assets test, structure the issuance, and coordinate with the buyer.
For any founder with a significant QSBS position and a deal in motion, the time to model both limits — the dollar cap and the 10-times-basis alternative — is now. Get this modeled before you sign the term sheet. We can run the numbers.
David Meyer, CPA, is a Partner at Laléa & Black and leads the firm’s tax practice for founders, entertainment clients, and high-net-worth individuals in California and nationwide.