By Jessica I. Marschall, CPA
July 8, 2025
The recently enacted One Big Beautiful Bill Act delivers a comprehensive package of federal tax reforms aimed at accelerating small business formation, investment activity, and long-term capital growth. Among its most impactful provisions are the enhancements to Qualified Small Business Stock (QSBS) under Internal Revenue Code Section 1202, which modernize the 1993-era statute to reflect the realities of startup financing in the current economy.
Expanded QSBS Benefits
The legislation makes significant changes to the rules for QSBS issued on or after July 4, 2025, including:
- Reduced Holding Periods for Partial Exclusion
Investors may now exclude:- 50 percent of capital gain after 3 years
- 75 percent of capital gain after 4 years
- 100 percent of capital gain after 5 years
This is a material shift from the previous five-year minimum holding period required for any exclusion. The goal is to increase liquidity in early-stage venture investment and encourage broader participation in startup capitalization efforts. In our work with small business clients, we expect this to attract a higher volume of investors who many not have the patience of portfolio for the 5-year holding period.
- Increased Gain Exclusion Cap
The per-issuer lifetime exclusion cap has been raised from $10 million to $15 million, allowing founders and early investors to shelter a greater portion of their gain from federal income tax. - Expanded Gross Asset Threshold
The total gross asset limit of the issuing corporation has been raised from $50 million to $75 million at and immediately after the issuance, thereby allowing larger emerging businesses to qualify for QSBS treatment.
These enhancements apply prospectively to stock issued after July 4, 2025. Stock issued prior to that date continues to follow the original rules under Section 1202.
Other Pro-Business Tax Reforms
In addition to QSBS reform, the One Big Beautiful Bill Act includes several key pro-business provisions:
- Permanent 100 Percent Bonus Depreciation
The Act restores and makes permanent the 100 percent bonus depreciation for qualifying property placed in service, including real property used in production activities. - Expanded Section 179 Expensing
The deduction cap and eligible property list under Section 179 have been broadened for qualified production property placed in service through 2030.
- Permanent Research and Development (R&D) Expensing
The prior law requiring amortization of domestic R&D expenditures over five years has been reversed. R&D expenses are now fully deductible in the year incurred. - Qualified Business Income (QBI) Deduction Made Permanent
The Section 199A 20 percent deduction for pass-through business income is now a permanent feature of the tax code, eliminating uncertainty for S Corporations, partnerships, and sole proprietors. Keep in mind the alternate calculations under Section 199A that include a deduction based upon payroll and assets and can be applied to taxpayers whose income exceeds the phase-out. - Interest Deduction Based on EBITDA Restored
The business interest deduction limitation under Section 163(j) is now permanently tied to EBITDA rather than EBIT, which provides broader deduction potential for capital-intensive businesses. - Expanded State and Local Tax (SALT) Deduction
The SALT deduction cap has been increased from $10,000 to $40,000 per taxpayer, with income-based phaseouts and a sunset provision in 2030. - Increased Estate and Gift Tax Exclusion
Starting in 2026, the federal estate and gift tax exemption increases to $15 million per individual, adjusted annually for inflation. - Temporary Deductions for Tips, Overtime, and Vehicle Loan Interest
For tax years 2025 through 2028, individuals and small businesses may deduct certain tip income, overtime compensation, and auto loan interest expenses. These temporary deductions aim to support middle-income workers and business operators during a transitional economic period. This provision is not as attractive as it may sound for lower-income tip-workers as they often do not make enough money to trigger federal income taxes and states do not exclude this income from state income taxes.
The One Big Beautiful Bill Act represents a structural shift in how the federal tax code supports small business investment and growth. By reducing QSBS holding periods, increasing the exclusion thresholds, and restoring key business incentives such as full R&D expensing and bonus depreciation, the legislation strengthens the ecosystem for early-stage business development. These changes are expected to attract more investor capital, improve liquidity timelines for founders, and stimulate reinvestment in domestic production and innovation.
The Congressional Budget Office (CBO) estimates that the Act will add approximately $3 trillion to the federal deficit over the next decade. While proponents argue that the investment-oriented provisions will lead to long-term economic expansion and job growth, this projected shortfall is expected to be offset in part by cuts to the Supplemental Nutrition Assistance Program (SNAP) and Medicaid. As future political cycles unfold, individuals and businesses should monitor the potential for revisions or repeals to some of the bill’s more generous business provisions, especially if deficit-reduction pressures intensify.
Businesses considering C Corporation conversions, capital raises, or QSBS structuring should reevaluate their planning strategies immediately to ensure alignment with the new law. Likewise, pass-through entities should consider the implications of the permanent QBI deduction and bonus depreciation provisions in modeling long-term profitability.
Taxpayers and advisors alike must carefully document stock issuance dates, gross asset values, and business activity to preserve QSBS eligibility and to fully benefit from the new framework. Professional guidance is strongly recommended to navigate these changes and to optimize both compliance and planning outcomes.
