When it’s time to sell their business, every owner hopes the payout reflects the years of hard work, long days, and grit it took to get there. For a lot of owners in places like Gillette, WY and Marion, IA, it’s the single biggest financial moment of their lives. There’s a flip side: if the business isn’t set up right ahead of time, a big chunk of that hard-earned gain can vanish straight to taxes. But with the right structure and planning a tax-free business sale is possible.
So, what sort of structure avoids such a large tax bill? A provision in the tax code—Section 1202, also known as the Qualified Small Business Stock (QSBS) Exemption—offers an opportunity to exclude up to $15 million in capital gains from tax.²
Under the One Big Beautiful Bill Act (signed July 4, 2025), this exemption has become more flexible, generous, and accessible.³ For business owners, founders, and early investors, these changes open new doors for strategic exit planning that can dramatically increase after-tax proceeds.
Understanding the QSBS Exemption in 2025
Section 1202 allows shareholders of qualifying C corporations to exclude a significant portion of their capital gains when they sell stock they’ve held for several years.⁴ It was designed to encourage investment in small businesses and reward long-term growth—but recent changes have made it even more attractive.
Under the new law, stock issued after July 4, 2025, qualifies for a tiered exemption:
- 3-year hold: 50% of the gain excluded⁵
- 4-year hold: 75% excluded⁵
- 5-year hold: 100% excluded⁵
This opens up a lot of options. Previously, a five-year hold was required to access the full exclusion.⁶ Now, shareholders can see significant tax savings earlier while still benefiting from a complete exclusion if they remain invested for the full term.
In addition, the maximum gain exclusion increased from $10 million to $15 million.¹ The gross-assets test—which determines whether a company qualifies as a “small business” for QSBS purposes—also rose from $50 million to $75 million.¹ These two changes alone make it possible for a broader range of companies and investors to benefit from the exemption.
Who Qualifies for QSBS?
To use the QSBS exemption:
The business must be a C corporation
Gross assets must be under $75M at stock issuance
You must hold qualified stock for at least 3 years
The business must operate in an eligible industry (e.g., manufacturing, tech, ag, trades)
This planning window is especially valuable for founders, family businesses, and closely held operations.
Why This Matters for Business Owners
For many owners, the sale of their business represents the culmination of years of risk-taking, reinvestment, and strategic growth. Seeing federal and state tax bills come through on capital gains from the sale can throw a wet blanket over that achievement.
QSBS changes this equation. By structuring a business as a C corporation, issuing qualifying stock, and maintaining eligibility requirements, owners can position themselves for a tax-free business sale of up to $15 million in gains.²
This isn’t just about tax efficiency. It’s about unlocking liquidity to:
- Strengthen personal and family financial security
- Reinvest in new ventures or growth opportunities
- Build multi-generational wealth
- Support employees and communities through sustainable succession
For closely held businesses, these outcomes can have a ripple effect far beyond a single transaction.
A Case for Soliciting Investors
For owners seeking to grow their business, Section 1202 can be a great tool to attract investors. They provide capital in exchange for qualified C-Corp stock—and after 3–5 years, the company can buy it back—letting investors keep their gains tax-free.¹
Practical Steps to Capture the QSBS Benefit
Capturing QSBS benefits requires proactive planning, not last-minute action. Key considerations typically include:
Entity Structure Review
Only C corporation stock can qualify for Section 1202. Businesses currently structured as LLCs or S corporations may explore conversion strategies to start the QSBS clock.⁷
Stock Issuance and Documentation
The exemption applies to qualified stock issued directly to the shareholder. Accurate records, including dates of issuance, are critical for proving eligibility later.⁷
Business Activity and Asset Tests
The company must meet certain active business requirements and stay below the $75 million gross‐assets threshold at the time the stock is issued.⁸
Holding Period Management
Strategic planning around the holding period (3, 4, or 5 years) can help owners align exit timelines with maximum tax benefits.⁵
Compliance and Advisory Coordination
Attorneys, CPAs, and financial advisors play an essential role in ensuring documentation, compliance, and structuring align with QSBS rules—especially after legislative changes.⁹
Sale Type
The QSBS exclusion applies only to the sale of qualified stock. The owner must sell some or all of their stock as an equity sale to qualify for the exclusion. If the owner sells the business as an asset sale for tax purposes, this exemption does not apply.¹
Industries and Businesses That Stand to Gain
QSBS is particularly impactful for founders, early investors, and business owners in industries positioned for growth and eventual sale.
These include:
- Manufacturing and industrial companies
- Technology and software firms
- Professional services and specialty trades
- Advanced agriculture and ag-tech ventures
- Health, wellness, and medical service providers
However, the exemption is not limited to these sectors. Any qualifying C corporation can potentially access these benefits, provided it meets the eligibility tests.⁴
A Planning Opportunity for Advisors
The 2025 legislative changes also create meaningful planning opportunities for CPAs, attorneys, financial advisors, and bankers who work with closely held businesses.¹
Early coordination can:
- Align entity structures with future exit plans
- Ensure clean and complete shareholder documentation
- Manage compliance and reporting over time
- Help business owners understand the long-term impact of these choices
By integrating QSBS planning early in a company’s lifecycle—or before a planned growth phase—advisors can help position owners for transformative tax savings at exit.¹
The QSBS At Work
Consider a founder who converts a manufacturing company to a C corporation in 2026 and issues qualifying stock to themselves. Over the next seven years, the business grows significantly and is eventually sold for a $20 million gain over cost basis.
Under the new QSBS rules:
- The first $15 million of gain can be fully excluded from capital gains tax.²
- Only the remaining $5 million would be taxable at long-term capital gains rates.²
For many owners, this could mean an additional several million dollars in after-tax proceeds—capital that can be reinvested, transferred to family, or used to support employees and communities long after the sale.¹
A Window of Opportunity
The QSBS exemption has existed for years, but the new rules make it far more accessible.¹ The reduced holding periods, expanded asset limits, and increased exclusion amounts create an opportunity with tremendous impact.¹
For many owners, these changes mean it’s no longer just about how much a business sells for—but how much of the gain ends up in their bank account.¹ By taking deliberate steps now, a future exit could be structured to maximize tax efficiency and preserve the value of many years of hard work.¹
Final Thoughts
The decision to sell a business carries a lot of weight—both financial and emotional. For founders and investors, Section 1202 offers a way to reward years of effort with a greater after-tax outcome.²
Strategic planning today can set the stage for a tax-free business sale tomorrow—one that supports not just the owner’s personal goals, but employees, family members, and the community connected to the business.
For many owners, the window to start that planning has already opened.
Footnotes
- “One Big Beautiful Bill Act Increases Tax Benefits for Qualified Small Business Stock (QSBS)”. Holland & Knight, July 2025. link
- “Qualified Small Business Stock Benefits Expanded in New Tax Bill”. JDSupra, July 2025. link
- “Expanded QSBS Benefits Under One Big Beautiful Bill Act”. Mondaq, August 2025. link
- “Qualified Small Business Stock (QSBS) Regime Expanded Under One Big Beautiful Bill Act”. GT Law, July 2025. link
- “Big Changes for QSBS: What the 2025 Trump Tax Bill Means for Founders and Investors”. Mintz/JDSupra, July 2025. link
- “QSBS Just Got a Major Upgrade: What Founders, Investors, and Startups Need to Know”. DWT, July 2025. link
- “Significant Changes by the One Big Beautiful Bill Act to the Qualified Small Business Stock Provisions of Section 1202”. Perkins Coie, July 2025. link
- “One Big Beautiful Bill Act Significantly Expands Section 1202 QSBS Exclusion”. Michael Best, July 2025. link
- “How the OBBBA’s changes to Section 1202 represent opportunity for private equity”. RSM US, July 2025. link
