Everything in Fashion this week

It’s been several months since the One Big Beautiful Bill Act (OBBBA) was signed into law, but much of its impact is being felt right now. A good example of this is three changes made to Section 1202 of the Internal Revenue Code. These fundamentally expand the Qualified Small Business Stock (QSBS) exclusion, a key area of concern for founders and early-stage investors.  

1. The gross asset cap jumped from $50 million to $75 million. 

Before the OBBBA, there was a $50 million cap on qualified small business stock (QSBS) issued by a C-corporation. That limit is now $75 million, meaning there will be a larger pool of tax-advantaged stock for founders and early-stage investors. It also impacts growth-stage companies that were previously disqualified, so check your numbers carefully.  

2. The per-issuer exclusion cap rose from $10 million to $15 million. 

Noncorporate taxpayers also receive a benefit in the modified Section 1202. Before July 4th, 2025, they were able to exclude the greater of $10 million or ten times their basis in qualified stock. The OBBBA raised that first number to $15 million per taxpayer per issuer, inflation-adjusted after 2027. For married couples, it’s now $30 million.  

3. A new tiered holding period allows partial exclusions before five years. 

Staying on the topic of QSBS, the OBBBA also replaced the 5-year exclusion period on gains with a graduated structure for stock acquired after July 4, 2025. If you hold your QSBS for three years, you can exclude 50% of any realized gain; four years gets 75%; five years still gives you the full 100%. This is good news for anyone working on M&A deals or secondary sales. 

This is the fun part. Increasing the noncorporate taxpayer exclusion limit to $15 million opens the door for significant tax savings. That $15 million is per taxpayer entity. A founder who gifts QSBS at original issue to a spouse or children’s trust can add each of their exclusions to a joint tax filing. Grantor trusts also qualify, upping the total possible exclusion to $60 million.   

Be careful with the mechanics. It’s best to have a qualified CPA check the acquisition and issuance dates of your small business stock before you exclude any realized gains. Additionally, the company issuing the QSBS must have at least 80% of its assets in qualified domestic trade or business, and the shares must be gifted correctly.

State revenue departments are not required to conform to IRS exclusions, so don’t expect the same level of tax savings when you file your state return. For instance, California (big surprise) does not recognize QSBS exclusions. Founders and early adopters in “The Golden State” are paying 13.3% in state taxes on realized gains that are fully excluded at the federal level.   

New Jersey has a different scenario. The state started conforming to federal tax guidelines in January 2026. That creates a path to tax savings if you’re planning an exit this year, so it’s best to model both federal and state outcomes. The IRS still needs to add business activity requirements to Section 1202, so issuance documentation is non-negotiable.   

The OBBBA changed Section 1202 from a strong tax benefit into a powerful capital gains exclusion that more founders and early-stage investors can take advantage of. The larger cap means more gain is sheltered, and the tiered holdings periods open up opportunities for earlier exits. If you’re forming a C-corp in 2026, this should be a key discussion point.