Investing in qualified small business (QSB) stock can help diversify your portfolio while offering valuable tax benefits. These benefits just got even better with the One Big Beautiful Bill Act (OBBBA) signed in July.
What Makes a Business Qualify?
A QSB is a U.S. C corporation that meets two key requirements:
1. Active Business Requirement
The company must run an active trade or business. This excludes most service businesses (like law, accounting, consulting), banking, insurance, farming, oil and gas, and hospitality businesses.
The company must use at least 80% of its assets for qualified business activities. No more than 10% can be nonbusiness real estate.
2. Asset Limit
Before OBBBA: Companies couldn't have more than $50 million in assets.
After OBBBA: The limit increases to $75 million for stock issued after July 4, 2025.
Tax Benefits You Can't Ignore
Here's where QSB stock really shines:
Hold for 5+ years: Exclude 100% of your capital gains (for stock acquired after September 2010)
New shorter holding periods (effective for stock acquired after July 4, 2025):
- Hold for 4 years: Exclude 75% of gains
- Hold for 3 years: Exclude 50% of gains
Important Rules to Remember
- You must buy stock directly from the company (not from another investor)
- Annual exclusion is capped at $10 million or 10 times your basis, whichever is greater
- Some states don't offer these exclusions, so state taxes may still apply
- You can defer taxes by rolling proceeds into another QSB within 60 days
The Bottom Line
QSB stock offers serious tax advantages, but consider your overall investment goals, risk tolerance, and time horizon before making any decisions.
SECURITIES AND ADVISORY DISCLOSURE:
Securities offered through Valmark Securities, Inc. Member FINRA, SIPC. Fee based planning offered through SDM Advisors, LLC. Third party money management offered through Valmark Advisers, Inc a SEC registered investment advisor. 130 Springside Drive, Suite 300, Akron, Ohio 44333-2431. 1-800-765-5201. SDM Advisors, LLC is a separate entity from Valmark Securities Inc. and Valmark Advisers, Inc. Form CRS Link
DISCLAIMER:
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The services of an appropriate professional should be sought regarding your individual situation.
HYPOTHETICAL DISCLOSURE:
The examples given are hypothetical and for illustrative purposes only.
