C-Corporations Back in Vogue: The section 1202 Small Business Stock Exit Strategy

Section 1202 QSBS After the One Big Beautiful Bill Act: Bigger Capital Gains Exclusions!

If you own stock in a small business C corporation, the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, just made one of the most powerful tax exclusions in the Internal Revenue Code even more valuable. Section 1202 Qualified Small Business Stock (QSBS) has always allowed eligible shareholders to exclude capital gains on a qualifying sale — but the OBBBA expanded the gross asset limit, shortened the holding periods required for partial exclusions, and increased the per-issuer gain cap. For founders and early investors in growing NE Indiana businesses, the updated rules deserve a fresh look.

This isn't a loophole — it's a deliberate congressional incentive to drive investment into small businesses. But the rules are strict, the timing matters enormously, and the date your stock was issued now determines which set of rules applies to you. Here's what every small business owner in Fort Wayne and the surrounding region needs to know.

What Is Section 1202 Qualified Small Business Stock?

Section 1202 QSBS is stock in a domestic C corporation that meets specific IRS requirements at the time of issuance. When you sell qualifying stock after meeting the applicable holding period, you can exclude some or all of the resulting capital gain from federal income tax. Congress introduced the incentive in 1993 and expanded the exclusion to 100% for stock acquired after September 27, 2010 — and the OBBBA has now layered on additional enhancements for stock issued after July 4, 2025.

The key threshold date is now July 4, 2025. Stock issued before that date follows the pre-OBBBA rules. Stock issued on or after that date gets the upgraded benefits.

What Did the One Big Beautiful Bill Act Change for QSBS?

The OBBBA made three major updates to Section 1202 — all applying to stock issued after July 4, 2025. Together, they make QSBS accessible to more companies, more valuable to shareholders, and easier to use for business owners who may not be ready to hold for a full five years.

1. Shorter Holding Periods for Partial Exclusions

Under the old law, you had to hold QSBS for more than five years to get any exclusion at all. The OBBBA introduced a tiered exclusion schedule for post-July 4, 2025 stock that rewards shorter hold periods:

• 3 years held: 50% of capital gains excluded from federal tax

• 4 years held: 75% of capital gains excluded from federal tax

• 5 or more years held: 100% of capital gains excluded from federal tax

For stock issued before July 5, 2025, the old rule still applies — you must hold for more than five years to access any exclusion, and the tiered schedule does not apply retroactively.

2. Higher Gross Asset Limit

Under the prior law, the issuing corporation's aggregate gross assets could not exceed $50 million at the time of (and immediately after) stock issuance. The OBBBA raised that ceiling to $75 million for stock issued after July 4, 2025. This brings more established small businesses — including many manufacturers, logistics firms, and tech companies across NE Indiana — into the eligible pool. Notably, gross assets are measured by cash plus adjusted tax basis of other property — not fair market value — which is an important distinction for asset-heavy businesses.

3. Larger Per-Issuer Gain Cap

The maximum gain eligible for exclusion from a single issuer rose from $10 million to $15 million under the OBBBA, and that cap will be indexed for inflation for tax years beginning after 2026. The alternative 10-times-basis cap remains in place — so the exclusion limit per issuer per taxpayer is now the greater of $15 million or 10 times the taxpayer's adjusted basis in the stock. For founders with a low cost basis, the 10x rule may still be the more valuable cap.

Which Businesses Qualify to Issue QSBS?

To issue QSBS, a corporation must be a domestic C corporation whose aggregate gross assets did not exceed $75 million (post-OBBBA) or $50 million (pre-OBBBA) at the time of issuance and immediately after. The company must also conduct an active qualified trade or business — meaning at least 80% of the corporation's assets (by value) must be used in the active conduct of a qualifying business during substantially all of the shareholder's holding period.

Several industries remain explicitly excluded from QSBS eligibility regardless of the OBBBA changes:

• Health, law, engineering, architecture, accounting, and actuarial science

• Performing arts, consulting, and athletics

• Financial services, banking, insurance, and brokerage

• Leasing, farming, and hospitality

Manufacturing, technology, retail, and many other industries common throughout Allen County and NE Indiana can qualify. If your business falls into one of the excluded service categories, QSBS may not be available — but consult your CPA at Warrior to confirm, because the lines aren't always obvious. Our manufacturing industry clients, for example, are often strong QSBS candidates.

One important nuance: startups and early-stage companies can be vulnerable to failing the active-business test during fundraising rounds, when cash is sitting idle. Section 1202(e)(6) provides a working-capital exception — cash earmarked for reasonably required working capital, or expected to fund R&D or business expansion within two years, can count toward the 80% active-use threshold. However, once a company has been in existence for at least two years, no more than 50% of assets can qualify under this exception. Good documentation of intended use is essential.

What Are the Shareholder-Level Requirements?

Even when the corporation qualifies, the individual shareholder must also meet specific conditions. The stock must be acquired at original issuance, held for the applicable period, and the shareholder must be a non-corporate taxpayer.

• Original issuance only: Stock must be acquired directly from the corporation — in exchange for money, property, or services. Buying shares from another shareholder does not qualify.

• Holding period: For pre-July 5, 2025 stock: more than five years required. For post-July 4, 2025 stock: three years for 50%, four years for 75%, five years for 100%.

• Non-corporate holders: The exclusion applies to individuals, trusts, and estates — not C corporations. Pass-through entities like partnerships and S corporations may pass the exclusion through to their partners or shareholders if the requirements of Section 1202(g) are met.

• Per-issuer gain cap: Greater of $15 million (post-OBBBA stock) or $10 million (pre-OBBBA stock) — or 10 times the taxpayer's adjusted basis — per issuer, per taxpayer.

How Much Can You Actually Save With QSBS?

The savings potential is substantial and grew with the OBBBA. A qualifying shareholder who excludes $15 million in capital gains under the 100% exclusion avoids federal capital gains tax entirely on that amount. At the current top long-term federal capital gains rate of 20% — plus the 3.8% Net Investment Income Tax — that's potentially over $3.5 million in federal taxes avoided on a $15 million gain.

The tiered holding schedule also creates new planning opportunities. A founder who needs liquidity after four years of holding can now exclude 75% of their gain rather than 0% under the old rules — a meaningful difference in after-tax proceeds.

It's worth noting that Indiana does not automatically conform to the federal QSBS exclusion — meaning Indiana state income tax may still apply to gains that are fully excluded federally. This is an important planning consideration your CPA at Warrior can help you model as part of a full tax planning engagement well before any sale.

What Advanced Planning Strategies Can Multiply QSBS Benefits?

Beyond the basic exclusion, Section 1202 offers several layered planning strategies that can dramatically increase after-tax outcomes — particularly for family-owned businesses and founders planning multi-generational wealth transfers. Three strategies stand out: gifting and stacking, entity structuring timing, and Section 1045 rollovers.

Gifting and Stacking the Exclusion

Because the $15 million (post-OBBBA) or $10 million (pre-OBBBA) gain cap applies per taxpayer per issuer, it may be possible to multiply the total exclusion by gifting QSBS shares to family members or grantor trusts before a sale — a strategy sometimes called "stacking." Each recipient gets their own exclusion cap.

The critical rule: gifts must occur before a binding sale agreement is in place. The IRS may attribute the gain back to the donor if the gift happens after a deal is effectively agreed upon. The stock must also retain its original-issuance and holding-period characteristics when transferred. Coordinate any stacking strategy closely with your estate planning attorney and your CPA at Warrior — this is not a last-minute maneuver.

Entity Structure and Timing

Section 1202 only applies to domestic C corporations. Businesses currently operating as LLCs or S corporations must convert before issuing qualifying stock, and only equity issued after conversion starts the holding-period clock. Value created during pass-through years does not carry over. If you're weighing a C corporation structure for a high-growth business, explore how S corporation tax services fit into the broader picture before making an irrevocable election — the long-term QSBS upside can outweigh the near-term pass-through tax efficiency for the right business.

Section 1045 Rollovers

If you must sell QSBS before meeting the full holding period, Section 1045 of the Internal Revenue Code provides a potential lifeline. A non-corporate shareholder can roll over the gain from a sale of QSBS held for more than six months into a new qualifying QSBS purchase within 60 days, deferring — but not eliminating — the gain and carrying over the original holding period. This is underutilized and technically complex — your CPA at Warrior should be in the room before you sign a purchase agreement.

What Are the Most Common QSBS Pitfalls to Avoid?

QSBS eligibility can be lost quietly — through a redemption, a restructuring, or a balance sheet that drifts out of compliance. The following are the most common traps that disqualify otherwise eligible stock.

Stock Not Acquired at Original Issuance

Shares purchased on the secondary market — from another shareholder, in an internal buyout, or during a reorganization — do not qualify as QSBS. The taxpayer must receive the stock directly from the corporation in exchange for money, property, or services. Certain tax-free corporate transactions under Sections 351 and 368 can preserve QSBS status, but only to the extent of gain that would have been recognized at the time of the exchange — not future appreciation. These are narrow exceptions that require precise structural compliance.

Redemption Anti-Abuse Rules

Section 1202(c)(3) contains strict anti-abuse rules: stock is disqualified if the issuing corporation redeems any of its stock from the same shareholder, or from a related person, within the two-year window before or after the stock's issuance. Even deemed redemptions — such as those arising from related-party stock sales recharacterized under Section 304 — can trigger disqualification. Review your full capitalization table and any transactions involving related entities before issuing new QSBS.

Active-Business Requirement Drift

A company can inadvertently fail the 80% active-use test by accumulating excess cash, holding investment property, or gradually shifting revenue toward excluded-service activities. Monitor the balance sheet throughout the holding period — not just at issuance. If the company holds excess cash beyond working-capital needs and the two-year investment window, those assets may no longer count toward the active-business threshold, putting the entire exclusion at risk.

How Should Small Business Owners Plan for QSBS After the OBBBA?

QSBS planning works best when it starts early — ideally at or before founding. Waiting until you're ready to sell is often too late to qualify or cure defects in the stock's issuance history. The OBBBA's changes make proactive planning even more valuable for businesses issuing stock now.

• Date of issuance is now critical. Whether your stock was issued before or after July 4, 2025 determines which rules govern your exclusion. Document issuance dates carefully.

• Track the gross asset ceiling. Under the OBBBA, the $75 million limit is measured at issuance. Growth after issuance doesn't disqualify the stock, but exceeding the limit at issuance does.

• Model the state tax impact. Work with your CPA / EA at Warrior to quantify Indiana's tax on the same gain and factor it into your after-tax exit projections.

• Maintain a detailed tracking workpaper. For clients with multiple issuance dates, gifts, or equity rounds, document each acquisition date, applicable holding period tier, and exclusion cap separately.

• Integrate with your exit plan. QSBS is one piece of a larger puzzle. Succession and exit planning should account for QSBS eligibility, deal structure, installment sale elections, gifting windows, and the new tiered holding period schedule all at once.

Sources

1. One Big Beautiful Bill Act Increases Tax Benefits for Qualified Small Business Stock. Holland & Knight LLP. July 2025. https://www.hklaw.com/en/insights/publications/2025/07/one-big-beautiful-bill-act-increases-tax-benefits-for-qualified-small

2. Explaining Enhanced Section 1202 Benefits. Grant Thornton. 2025. https://www.grantthornton.com/insights/alerts/tax/2025/insights/explaining-enhanced-section-1202-benefits

3. QSBS Benefits Expanded Under the One Big Beautiful Bill Act. Richmay Law. 2025. https://www.richmaylaw.com/qsbs-benefits-expanded-under-one-big-beautiful-bill-act/

4. Indiana Income Tax – Conformity and Adjustments. Indiana Department of Revenue. https://www.in.gov/dor/individual-income-taxes/filing-my-taxes/indiana-income-tax-overview/

5. Revisiting Sec. 1202: Strategic Planning After the 2025 OBBBA Expansion. The Tax Adviser. December 2025. https://www.thetaxadviser.com/issues/2025/dec/revisiting-sec-1202-strategic-planning-after-the-2025-obbba-expansion/