QSBS After the 2025 Legislation: The Section 1202 Holding Period Tiers, the $15 Million Cap and the $75 Million Asset Test

Section 70431 of Public Law 119-21, approved July 4, 2025, rewrote three parts of the qualified small business stock exclusion in section 1202: how long a shareholder must hold the stock, how much gain can be excluded per issuer, and how large the corporation can be when it issues the stock. Each change has its own effective date, and the old rules still govern stock acquired on or before enactment. A founder or investor can therefore hold two classes of QSBS in the same company, each with different math. This article walks through the statute text and the records a tax practice needs to keep the two apart.

What is the "applicable date"?

The amended section 1202(a)(6) defines the applicable date as the date of enactment of that paragraph, which is July 4, 2025. Most of the new rules turn on whether stock was acquired on or before that date or after it.

The acquisition date rule matters. Under section 1202(a)(6)(B), the acquisition date is the first day the taxpayer held the stock, determined after applying section 1223. Where holding periods tack (for example, stock received in certain exchanges for older stock), the share keeps the earlier date. A share issued in 2026 in a tacking exchange for 2024 stock is treated as pre-enactment stock, with the pre-enactment holding period and cap.

How do the new holding period tiers work?

For stock acquired on or before the applicable date, nothing changes: the exclusion still requires a holding period of more than 5 years, and the percentage depends on when the stock was acquired under the existing rules in section 1202(a)(3) and (4).

For stock acquired after the applicable date, the amended section 1202(a)(1)(B) excludes an "applicable percentage" of gain from stock held for at least 3 years. The table in new section 1202(a)(5) reads:

The act made matching changes to the definition of eligible gain in section 1202(b)(2), the pass-through rule in section 1202(g)(2)(A) and the offsetting short position rule in section 1202(j)(1)(A). Each now reads "at least 3 years (more than 5 years in the case of stock acquired on or before the applicable date)."

Two practical points follow. First, the old test is "more than 5 years" and the new test is "at least" a number of years, so the day count differs between the two classes. Second, the earliest possible 3 year exit for post-enactment stock is in mid-2028, so few clients will report a partial exclusion before then. The planning work happens now, at issuance and at any exchange or recapitalization.

What happened to the alternative minimum tax preference?

Section 57(a)(7) now treats the excluded amount as a preference item only for stock acquired on or before the enactment of the Creating Small Business Jobs Act of 2010. The act made this change effective as if included in that 2010 law. In practice, the 50 percent and 75 percent exclusions for post-enactment stock do not create an AMT preference under section 57(a)(7). The taxable portion of section 1202 gain still has its own rate treatment under section 1(h), so model the regular tax on any partial exclusion rather than assuming the normal long-term capital gain rate.

How did the per-issuer limitation change?

Before the act, section 1202(b)(1) capped excluded gain per issuer at the greater of $10 million (reduced by gain excluded in prior years for that issuer) or 10 times the aggregate adjusted basis of the stock sold in the year. The act rewrote only the dollar prong. The 10 times basis prong is unchanged.

New section 1202(b)(4) sets the "applicable dollar limit":

• Stock acquired on or before the applicable date: $10,000,000, reduced by eligible gain the taxpayer excluded in prior years from that issuer's stock, whenever acquired.
• Stock acquired after the applicable date: $15,000,000, reduced by (i) eligible gain excluded in prior years from that issuer's stock, whenever acquired, plus (ii) eligible gain excluded in the current year from that issuer's pre-enactment stock.

The ordering in (ii) means that gain on old stock sold in the same year uses up the new cap first. A client who sells both classes in one year should run the computation with both pools before signing a purchase agreement.

Section 1202(b)(5) indexes the $15 million amount for taxable years beginning after 2026, with increases rounded to the nearest $10,000. There is a catch: if eligible gain on post-enactment stock of an issuer exceeds the applicable dollar limit in any year, the limit for that issuer is zero in later years, regardless of inflation increases. For married individuals filing separately, the limits become $5,000,000 for old stock and half the indexed amount for new stock.

These per-issuer changes apply to taxable years beginning after the date of enactment.

What is the new aggregate gross assets test?

Section 1202(d)(1) defines a qualified small business by reference to aggregate gross assets, meaning cash plus the adjusted basis of other property, tested both before and immediately after issuance. The act raised the ceiling in both tests from $50,000,000 to $75,000,000. The increase applies to stock issued after the date of enactment, so stock issued on or before July 4, 2025 is still tested against $50 million.

The act also indexes the $75 million figure for taxable years beginning after 2026, rounded to the nearest $10,000. The statute adds this adjustment as a new paragraph (4) of section 1202(b), even though the dollar amounts sit in section 1202(d). Read the code section as amended and watch for technical corrections before relying on an indexed figure.

Because the test uses tax basis, a company with appreciated intangibles may stay under the ceiling while its valuation is far higher. Contributed property is the exception: section 1202(d)(2)(B) values it at fair market value at contribution. Keep a gross assets schedule as of each issuance date.

What did not change?

The core qualification rules in section 1202(c), (d) and (e) carry forward:

• The issuer must be a domestic C corporation.
• The stock must be acquired at original issue for money, property other than stock, or services.
• The corporation must meet the active business requirement during substantially all of the holding period.
• The redemption rules in section 1202(c)(3) still apply. A purchase from the taxpayer or a related person in the 4-year window beginning 2 years before issuance, or significant redemptions above 5 percent of value in the 2-year window beginning 1 year before issuance, can taint new shares.

For entity choice, an LLC taxed as a partnership or an S corporation cannot issue QSBS. See S corporation vs LLC for the broader comparison.

What should the tax file hold?

1. Cap table by acquisition date. Tag every lot as pre-enactment or post-enactment, applying section 1223 tacking.
2. Issuance certificates. For each issuance, a gross assets computation and a statement on the active business test, signed by the company.
3. Redemption log. Every repurchase by the issuer, with dates and values, tested against both redemption windows.
4. Per-issuer cap tracker. Excluded gain by year and by class, so the reduction rules and the zero-limit rule in section 1202(b)(5)(B) can be applied.
5. Exit modeling. For post-enactment stock, compare a sale at 3, 4 and 5 years, including the taxable portion and state treatment.
6. Deal structure. On a sale, asset and stock structures produce different results for QSBS holders. See asset vs stock purchase.

Common errors

• Applying the 3 year tier to stock acquired before July 5, 2025.
• Ignoring tacked holding periods after a conversion or exchange.
• Testing new issuances against $75 million when the stock was issued on or before enactment.
• Overlooking the same-year ordering rule that charges old-stock gain against the $15 million cap.
• Treating QSBS planning in isolation from other 2025 changes. See the 2026 client meeting checklist.

CORAA prepares ready-to-review audit files for US CPA firms; see /us.

Sources

• U.S. Government Publishing Office, Public Law 119-21 (139 Stat. 72), section 70431: https://www.govinfo.gov/content/pkg/PLAW-119publ21/html/PLAW-119publ21.htm
• U.S. Government Publishing Office, 26 U.S.C. 1202 (2022 edition, pre-amendment text): https://www.govinfo.gov/content/pkg/USCODE-2022-title26/html/USCODE-2022-title26-subtitleA-chap1-subchapP-partI-sec1202.htm

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