One of the most powerful tax breaks in the code just got more generous. For founders of qualifying C-corporations, a sale that used to require a five-year wait and capped out at $10 million can now start paying off at three years and shelter up to $15 million — per shareholder. The catch, if you’re in California, is a big one.
A break that can zero out federal tax on a sale
Qualified Small Business Stock — QSBS, under Section 1202 — is the rare provision that sounds too good until you read the statute and realize it’s real. If you own stock in a company that qualifies and you hold it long enough, you can exclude a large share of your gain — up to 100% — from federal income tax when you sell.
Not defer it. Exclude it. For a founder selling qualifying stock, that can mean a multimillion-dollar gain with a federal tax bill of zero. It’s one of the few places in the tax code where the number that comes out the other side is genuinely that good — which is exactly why the requirements are strict and the planning starts early.
What the new law changed
The One Big Beautiful Bill Act rewrote three of the most important QSBS rules for stock issued after July 4, 2025.
The five-year wait is no longer all-or-nothing. Under the old rule, you got nothing unless you held for five full years — then 100%. Now there’s a graduated schedule: hold three years for a 50% exclusion, four years for 75%, and five or more for the full 100%. Earlier, partial exits finally count for something. One caveat worth knowing: the non-excluded slice on a three- or four-year sale is taxed at 28%, not the usual 20% — so the full five-year hold is still the sweet spot.
The cap went up. The per-shareholder exclusion limit rose from $10 million to $15 million (or 10 times your basis, whichever is greater), and it starts adjusting for inflation in 2027.
Bigger companies can qualify. The ceiling on a company’s gross assets at the time it issues the stock rose from $50 million to $75 million, so a more mature business can still issue qualifying stock.
One important note: these improvements apply to stock issued after July 4, 2025. Stock you already own keeps the rules that were in place when it was issued.
Who actually qualifies
QSBS is generous, but narrow. The stock has to be in a domestic C-corporation — S-corporations, LLCs, and partnerships don’t qualify, though they can convert (which starts the clock anew). You have to acquire the stock at original issuance, directly from the company, not buy it from another shareholder. The holder has to be a person, trust, or estate — not another corporation. The company has to use at least 80% of its assets in an active business. And certain fields are excluded outright: health, law, accounting, consulting, financial services, brokerage, performing arts, and athletics, among others.
The C-corporation requirement is the one that catches most small-business owners, since the majority default to pass-through structures for other good reasons. Whether converting makes sense is a real question with real trade-offs — and one to model carefully before acting.
The California problem
Here’s the part that matters most if you’re reading this in Orange County. California does not conform to Section 1202. At all.
That means a gain that’s 100% excluded on your federal return is taxed in full by California — at a top rate of 13.3%. And it’s your residency that controls, not where the company is incorporated: a California founder with a Delaware C-corporation still owes California tax on the gain. The state is also known to scrutinize residency changes made shortly before a large liquidity event, so “I’ll just move first” is rarely as simple as it sounds.
The practical takeaway isn’t that QSBS doesn’t matter in California — eliminating the federal tax on a large gain is still enormous. It’s that the headline “tax-free” is a federal story here, which makes coordinated planning around the state piece that much more valuable.
How to plan around it
The thing to understand about QSBS is that it’s designed in, not bolted on. The most important decisions happen years before a sale.
If you run a pass-through and a sale is somewhere on the horizon, the C-corporation question belongs in the conversation now, weighed against its costs — double taxation and the loss of the qualified business income deduction among them — with your CPA. Because the exclusion is per shareholder, gifting stock to family members or properly structured trusts before a sale can multiply the total exclusion across several taxpayers. And if you need to sell before your holding period is met, a rollover provision lets you reinvest the proceeds into new qualifying stock within 60 days and carry your clock forward. Each of these is technical, fact-specific, and worth coordinating with your CPA and attorney well ahead of any transaction.
QSBS is the rare tax break you design years in advance — and the rare one a California founder can’t take for granted.
None of this is about reacting to a sale once it’s in motion. The founders who capture the full benefit are the ones who set the structure up correctly at the start and refine it over the years, with their advisor, CPA, and attorney coordinated before the exit — not scrambling after a term sheet lands.
Key takeaways
• QSBS (Section 1202) lets eligible shareholders exclude up to 100% of the gain on qualifying C-corporation stock from federal tax — an exclusion, not a deferral.
• OBBBA, for stock issued after July 4, 2025, added a tiered hold (50% at three years, 75% at four, 100% at five), raised the per-shareholder cap to $15 million, and raised the company gross-asset ceiling to $75 million.
• The non-excluded portion on a three- or four-year sale is taxed at 28%, so the full five-year hold remains the most valuable.
• Eligibility is narrow: domestic C-corp, original issuance, non-corporate holder, an active business, and certain service fields excluded.
• California does not conform — it taxes the full gain at up to 13.3% even when the federal exclusion is 100%, and residency (not the state of incorporation) controls.
• QSBS is designed in early; stacking via gifts/trusts and the 60-day rollover are planning levers best coordinated with a CPA and attorney before a sale.
Common questions about QSBS
What is QSBS?
Qualified Small Business Stock under Section 1202 — stock in a qualifying domestic C-corporation that, if held long enough, lets a non-corporate shareholder exclude a large share of the gain (up to 100%) from federal income tax when sold.
What did OBBBA change?
For stock issued after July 4, 2025: a tiered holding period (50% excluded at three years, 75% at four, 100% at five), a higher per-shareholder cap ($15 million or 10× basis), and a higher company gross-asset ceiling ($75 million). Older stock keeps its original rules.
Does my LLC or S-corp qualify?
Not as-is — QSBS requires C-corporation stock. A pass-through can convert to a C-corp, which can make future stock issuances eligible, but it restarts the holding-period clock and carries its own trade-offs to weigh with your CPA.
How much can be excluded?
For post-OBBBA stock, the greater of $15 million or 10 times your basis, per company. Because the cap is per shareholder, gifting stock to family or trusts before a sale can multiply the total exclusion.
Does California honor QSBS?
No. California taxes the full gain at up to 13.3% even when it’s 100% excluded federally, and it’s your residency — not where the company is incorporated — that determines whether California tax applies.
When should I start planning?
Well before a sale — ideally at formation or when considering a conversion. QSBS is built in early; trying to retrofit it right before an exit usually means leaving the benefit on the table.
This article is for educational purposes only and is not tax or legal advice. Consult your CPA and attorney before acting on anything described here.
Brent Rupnow is a Registered Representative with, and Securities and advisory services are offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. Via Luce Capital is not registered as a broker-dealer or investment advisor. Registered representatives of LPL offer products and services using Via Luce Capital, and may also be employees of Via Luce Capital. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of Via Luce Capital.