Expanded Tax Benefits for Investing in Small Business

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.