The story of qualified small business stock is a masterclass in how tax policy, when designed well, can create real economic impact. Born under President Bill Clinton, revitalized by President Barack Obama, nearly curtailed under President Joe Biden, and expanded in 2025, QSBS reflects a rare cross-administration commitment to empowering entrepreneurs.
Clinton Administration: A Promising Start with Gaps
QSBS was created in 1993 as part of the Revenue Reconciliation Act. It offers a 50% capital gains exclusion for small business investors holding stock for over five years. However, the benefit was blunted by the alternative minimum tax add-back, which required high-income taxpayers to pay tax on the excluded portion. As a result, QSBS saw limited adoption in the 1990s and early 2000s.
Obama Era: Reviving QSBS Through Reform
The Great Recession brought new urgency to incentivize long-term, risk-based investment in the real economy:
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2009: The American Recovery and Reinvestment Act increased the exclusion to 75% and reduced the AMT impact, but didn’t eliminate it.
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2010: The Small Business Jobs Act raised the exclusion to 100% and eliminated both the AMT and net investment income tax (NIIT) add-backs.
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2015: The PATH Act made these changes permanent, finally giving entrepreneurs and early investors a reliable tool to reduce tax on successful exits.
These reforms led to QSBS-aware structuring, especially in startup hubs like Silicon Valley and New York.
2021: Biden Administration Attempts Rollback
In 2021, as part of the Build Back Better framework, Democrats proposed to:
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Reduce the QSBS exclusion to 50% for taxpayers with AGI over $400,000; and
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Reinstate the AMT add-back and apply NIIT to excluded gains.
But these changes failed in the Senate, due in part to Senator Joe Manchin’s opposition. QSBS survived intact, for the moment.
2025: The OBBBA Modernizes QSBS
On July 4, 2025, the One Big Beautiful Bill Act was signed into law. Among its updates, Section 70431 introduced the most meaningful changes to QSBS in over a decade, primarily to modernize the rules for inflation and fiscal policy needs.
1. Tiered Exclusion for Earlier Liquidity
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3-year hold ? 50% exclusion
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5-year hold ? 100% (as before)
Policy insight: These early-tier exclusions may raise revenue compared to the prior regime, as they reduce taxpayer incentives to use Internal Revenue Code Section 1045 rollovers (which allow gain deferral and requalification for 100% exclusion after five years). Many taxpayers may now choose to realize gains earlier, generating current-year tax revenue.
2. Inflation-Adjusted Thresholds
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Exclusion cap raised from $10 million to $15 million per issuer;
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Gross asset limit raised from $50 million to $75 million; and
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Both are indexed for inflation starting in 2027.
Why it matters: From 2010 to 2025, cumulative U.S. inflation has been nearly 47%, meaning the original $10 million cap would equal about $14.7 million today. The new $15 million cap simply restores the original intent in today’s dollars. Likewise, the updated $75 million gross asset limit represents a 50% inflation adjustment to the original $50 million threshold.
State Conformity
While federal QSBS benefits are significant, state-level conformity varies widely, which can significantly impact effective tax outcomes. Some states fully conform to IRC Section 1202 and follow the federal exclusion. Others don’t conform, or only partially conform, resulting in state-level tax even when federal gain is excluded.
Notable examples:
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California: Doesn’t conform to QSBS. Gains are fully taxable at the 13.3% state rate, regardless of federal treatment.
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New York: Provides partial conformity as of 2021, but planning is still necessary depending on the taxpayer’s profile.
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New Jersey, Massachusetts and Pennsylvania: Also don’t conform, meaning state tax applies in full.
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Florida, Texas, Washington and Nevada: No state income tax; QSBS benefits are fully preserved.
This patchwork creates planning complexity, especially for founders who relocate or structure through trusts. Residency and trust situs can significantly impact after-tax outcomes.
When Does Small Become Big?
QSBS has always walked the line between helping true small businesses and offering meaningful tax benefits to high-growth founders. But as someone who works with real entrepreneurs building real companies, I can say that they aren’t running big business empires. They’re trying to build something that lasts.
QSBS helps level the playing field against dominant incumbents like Google, Meta and Tesla, especially in emerging sectors like AI, clean tech and digital health.
Modernization, Not Expansion
QSBS isn’t a loophole. It’s a carefully designed tax policy that:
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Rewards long-term investment;
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Helps founders defer compensation in favor of equity;
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Encourages capital flow into risky sectors; and
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And now, thanks to the OBBBA, reflects modern economic realities.
Rather than gutting the policy, Congress has chosen to update it, with smart adjustments that reward both patience and fiscal discipline. That’s good news for America’s next generation of entrepreneurs and the ecosystem supporting them.
#Clinton #Biden #Empowering #Entrepreneurs