On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) was signed into law by President Trump. OBBBA amends, among others, provisions of Section 1202 of the Internal Revenue Code (IRC) as it pertains to qualified small business stock (QSBS). Immediately prior, on June 30, 2025, New Jersey Governor Murphy signed into law Bill A4455/S4503 (NJ QSBS Exemption) aligning IRC Section 1202 on behalf of New Jersey based taxpayers.
Background
QSBS is a U.S. tax incentive benefitting eligible stockholders in early-stage companies. QSBS provides an exclusion, subject to limits described below, on capital gains tax for U.S. federal tax purposes on the divestiture of stock from such companies. And, beginning in tax year 2026, New Jersey taxpayers will have the ability to claim the NJ QSBS Exemption for the purposes of N.J. state tax purposes. The intent of QSBS under the IRC and NJ QSBS Exemption seeks to promote investment in early-stage companies and reward founders/employees in a stock sale.
QSBS Qualifications & OBBBA Changes
The issuance of QSBS is only available to U.S. C-corporations. Such company structure typically allows companies to retain earnings at a lower tax rate and promote company growth. Moreover, if you are a venture backed company, you will most likely be forced into becoming/converting to a U.S. C-corporation.
Additional criteria for issuing QSBS is that (i) the stock needs to be issued directly by the company, and (ii) the company needs to be an active small business as prescribed under the IRC. Furthermore, it must meet the thresholds to which OBBBA amends for QSBS issued after July 4, 2025: QSBS Thresholds
QSBS Disqualification
It is important to note that certain rules continue to apply to companies being disqualified from issuing QSBS based on certain company activities such as stock repurchases, cash management of investments, and exceeding gross asset thresholds in fundraising activities.
Conclusion
Taken together, OBBBA changes make QSBS more flexible, more generous, and accessible to a broader swath of companies in the startup ecosystem allowing many early investors and founders/employees to realize meaningful tax benefits.
If you have any questions about this Alert, how OBBBA impacts your business, explore the formation/conversion of a C-corporation structure, or require a QSBS attestation letter for your stockholders, please contact Kurt Olender (), Paul Lee () or Niharika Reddy ().
