Latest news with #QSBS
Forbes
a day ago
- Business
- Forbes
How The New QSBS Rules Affect Founders And Investors
Peyton Carr is a Personal Financial Advisor for pre- and post-exit founders, entrepreneurs, and UHNW families | Keystone Global Partners. On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) ushered in a new era for qualified small business stock (QSBS), introducing the most significant tax changes to this framework in 15 years. For founders and investors, these updates, which include shorter holding periods, increased exclusion limits and broader eligibility criteria, offer exciting opportunities to optimize tax savings and liquidity strategies. Below, I will break down these changes and provide planning considerations to illustrate how founders and investors can effectively use the new rules. Overview Of The New QSBS Rules QSBS has long been a powerful tool for startup founders and early investors. Under the previous rules, holding QSBS for at least five years allowed for up to $10 million in federal capital gains tax to be excluded, or 10 times the investment basis, whichever was higher. However, the five-year holding period acted as an "all-or-nothing" barrier. Selling just one day too early meant losing all QSBS benefits. The OBBBA has modernized QSBS in critical ways, making it more flexible and attractive. Here's an overview of the primary changes: Now, QSBS offers partial tax relief sooner: • 50% exclusion after three years (15.9% effective federal tax rate) • 75% exclusion after four years (7.95% effective federal tax rate) • 100% exclusion after five years (0% federal tax rate, as before) This tiered approach removes the prior rules' rigidity, which enables earlier exits without forfeiting all tax benefits for QSBS acquired after July 4, 2025. The lifetime cap has increased from $10 million to $15 million per taxpayer, per company. Beginning in 2027, this limit will also adjust for inflation, adding even more value over time. The gross asset threshold for companies to qualify as a 'small business' has risen from $50 million to $75 million, allowing more startups, especially larger or capital-intensive ones, to qualify and issue QSBS to investors. This will also adjust for inflation starting in 2027. QSBS issued before July 4, 2025, remains under the old rules, while the new benefits apply to stock issued on or after this date. Managing pre- and post-OBBBA QSBS under these parallel systems will be crucial. For instance, you could have QSBS under the old rules for your Series A, and QSBS under the new rules for your Series B. Planning Considerations For Founders And Investors The new QSBS rules bring valuable opportunities, but they also require strategic planning. Here are some key considerations: The new three- and four-year exclusions provide more flexibility for investors who need early liquidity. Founders considering secondary sales or tender offers now have practical options to de-risk sooner. However, if possible, aim for the full five-year hold to optimize tax benefits. For example, if a founder sells QSBS stock valued at $15 million after three years, previous QSBS rules would have resulted in about $3.57 million in federal capital gains taxes using the 23.8% long-term capital gains rate. With the new system, the 50% exclusion reduces the taxable amount, resulting in an approximate 15.9% effective tax rate and a significant drop in federal taxes to roughly $2.39 million. If held for four years at roughly a 7.95% tax rate, the federal tax due would be approximately $1.19 million. The increased $15 million QSBS cap provides founders with large exits a valuable opportunity to minimize more taxes. Founders can consider strategies such as "QSBS stacking," where shares are gifted to family members or trusts to maximize the QSBS exclusions. Consider an investor with $60 million in anticipated QSBS exit value. If the investor keeps $15 million and gifts $15 million to three separate non-grantor trusts (one for each of their three children), the entire $60 million could potentially be excluded from federal taxes upon exit, provided the five-year holding period is met. If the shares are held for only four years, 75% of the $60 million would be excluded. At three years, 50% would be exempt. The $75 million gross asset threshold allows more startups to raise larger or later-stage rounds that might qualify for QSBS. However, it's important to carefully track compliance with the QSBS requirements during and after fundraising. For instance, a Series B round might qualify for QSBS under the new rules, whereas it might not have under the old rules. Option holders who exercise after July 4, 2025, will benefit from the new rules. Under these changes, the exercise date starts the holding period for tiered exclusions, creating value even on shorter timelines, such as three or four years before an exit. For startup founders who hold both stock and options, like many of our clients at Keystone Global Partners, this presents a significant opportunity to exercise and take advantage of QSBS tax benefits in just three years, when previously they may have thought the capital outlay and holding period of five years was not realistic. Advanced planning is essential to fully unlock QSBS benefits. Whether it's using gifting strategies, exploring Section 1045 rollovers for deferrals or aligning exit dates with key holding-period milestones, founders and investors should work closely with experienced tax and legal professionals. Final Thoughts I believe the 2025 QSBS tax changes will profoundly impact how founders and investors manage liquidity, plan exits and preserve wealth. By offering tiered exclusions, expanded caps and broader company eligibility, these rules encourage startup innovation while delivering significant tax savings. For founders, integrating these strategies into exit planning will help maximize their financial outcomes. The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation. Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
Yahoo
16-07-2025
- Business
- Yahoo
How the "Big Beautiful Bill" boosts QSBS benefits for startup employees and founders
QSBS benefits got an update in Trump's new budget law. Range shares how that could impact startup founders, investors, and employees. The new GOP budget legislation includes a massive win for startup employees and founders: dramatically expanded Qualified Small Business Stock (QSBS) benefits that could save qualifying investors from paying 28% capital gains taxes on millions of dollars in returns. The changes increase the maximum tax exclusion from $10 million to $15 million while allowing partial benefits after just three years instead of the current five-year minimum. For the tech sector specifically, this represents the most significant expansion of startup investment incentives in over a decade. The Joint Committee on Taxation estimates these changes will provide an additional $17.2 billion in tax benefits over the next decade. The GOP budget legislation restructures Qualified Small Business Stock benefits in three key ways: Reduced Holding Period with Tiered Benefits: Previously, you had to hold QSBS for five years to get any tax exclusion. The new rules create a graduated schedule: 50% exclusion after 3 years (effective tax rate: 14%) 75% exclusion after 4 years (effective tax rate: 7%) 100% exclusion after 5+ years (tax-free) Higher Exclusion Limits: The maximum tax-free gain increases from $10 million to $15 million (or 10 times your investment, whichever is higher). Both limits will be indexed for inflation starting in 2027. Raises the Maximum Gross Asset Threshold For Companies: The gross asset threshold rises from $50 million to $75 million, meaning more mature startups remain QSBS-eligible longer. The expanded QSBS rules create three fundamental improvements that benefit anyone holding qualifying startup equity: More Companies Qualify for Tax Exclusion The gross asset threshold increase from $50 million to $75 million means companies can maintain QSBS eligibility deeper into their growth cycles. This expansion particularly helps employees at Series B and C companies who previously lost qualification and extends the window for later-stage hires to capture these benefits. Earlier Exit Flexibility with Meaningful Tax Savings The tiered approach transforms QSBS from an all-or-nothing proposition into a graduated benefit system. Rather than losing all tax advantages if you sell before five years, you could capture a 50% exclusion after three years and 75% after four years. This change removes the penalty for circumstances beyond your control, like acquisitions or liquidity needs. Substantially Higher Tax-Free Gains The exclusion cap jumping from $10 million to $15 million means 50% more capital gains could be sheltered from taxes. For high-growth companies where individual equity stakes can reach eight or nine figures, this expansion captures significantly more wealth preservation. These changes can particularly impact several key groups: Serial Entrepreneurs and Angel Investors gain the flexibility to recycle capital between ventures without waiting for arbitrary holding periods, while still capturing substantial tax benefits. Startup Employees with Stock Options face less pressure around exercise timing, knowing they'll receive meaningful tax advantages even if their company exits before the traditional five-year mark. Venture Capital and Private Equity professionals can optimize portfolio exits around business fundamentals rather than tax calendars, while still preserving significant tax advantages for their investments. Consider this scenario: You exercise $100,000 worth of startup options that grow to $5 million over four years, then your company gets acquired. Under Previous Rules: You'd pay the full 28% QSBS rate on all gains (about $1.37 million in taxes) because you didn't hit the five-year threshold. Under New Rules: You'd get 75% exclusion after four years, paying taxes on only 25% of gains (about $343,000 in taxes)—saving over $1 million. With the "Big Beautiful Bill" signed into law, the new exemption structure applies only to QSBS acquired after the enactment date, making timing important for current equity holders considering exercise decisions. This expansion comes at a particularly relevant moment for the tech sector. As artificial intelligence and other emerging technologies drive new startup formation, the enhanced QSBS benefits create stronger incentives for both founding teams and early employees to take entrepreneurial risks. The proposed changes acknowledge that the original $10 million and $50 million thresholds, established in the early 1990s, no longer reflect today's startup economics. This is just one example of how tax policy and financial regulations are constantly in flux. That's one of the reasons why it can be easy to miss out on new wealth strategy opportunities as they emerge. The expanded QSBS tax exemption doesn't require new risk-taking or complex restructuring to make startup equity positions more valuable from a tax perspective, as long as investors know how to time option exercising and stock sales to take advantage of the exclusion. This story was produced by Range and reviewed and distributed by Stacker. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Miami Herald
15-07-2025
- Business
- Miami Herald
How the 'Big Beautiful Bill' boosts QSBS benefits for startup employees and founders
How the "Big Beautiful Bill" boosts QSBS benefits for startup employees and founders QSBS benefits got an update in Trump's new budget law. Range shares how that could impact startup founders, investors, and employees. The new GOP budget legislation includes a massive win for startup employees and founders: dramatically expanded Qualified Small Business Stock (QSBS) benefits that could save qualifying investors from paying 28% capital gains taxes on millions of dollars in returns. The changes increase the maximum tax exclusion from $10 million to $15 million while allowing partial benefits after just three years instead of the current five-year minimum. For the tech sector specifically, this represents the most significant expansion of startup investment incentives in over a decade. The Joint Committee on Taxation estimates these changes will provide an additional $17.2 billion in tax benefits over the next decade. What Changes with QSBS Under the GOP Tax and Spending Package The GOP budget legislation restructures Qualified Small Business Stock benefits in three key ways: Reduced Holding Period with Tiered Benefits: Previously, you had to hold QSBS for five years to get any tax exclusion. The new rules create a graduated schedule: 50% exclusion after 3 years (effective tax rate: 14%)75% exclusion after 4 years (effective tax rate: 7%)100% exclusion after 5+ years (tax-free) Higher Exclusion Limits: The maximum tax-free gain increases from $10 million to $15 million (or 10 times your investment, whichever is higher). Both limits will be indexed for inflation starting in 2027. Raises the Maximum Gross Asset Threshold For Companies: The gross asset threshold rises from $50 million to $75 million, meaning more mature startups remain QSBS-eligible longer. How These Changes Amplify the QSBS Tax Exemption The expanded QSBS rules create three fundamental improvements that benefit anyone holding qualifying startup equity: More Companies Qualify for Tax Exclusion The gross asset threshold increase from $50 million to $75 million means companies can maintain QSBS eligibility deeper into their growth cycles. This expansion particularly helps employees at Series B and C companies who previously lost qualification and extends the window for later-stage hires to capture these benefits. Earlier Exit Flexibility with Meaningful Tax Savings The tiered approach transforms QSBS from an all-or-nothing proposition into a graduated benefit system. Rather than losing all tax advantages if you sell before five years, you could capture a 50% exclusion after three years and 75% after four years. This change removes the penalty for circumstances beyond your control, like acquisitions or liquidity needs. Substantially Higher Tax-Free Gains The exclusion cap jumping from $10 million to $15 million means 50% more capital gains could be sheltered from taxes. For high-growth companies where individual equity stakes can reach eight or nine figures, this expansion captures significantly more wealth preservation. Who Might Benefit Most from These Changes These changes can particularly impact several key groups: Serial Entrepreneurs and Angel Investors gain the flexibility to recycle capital between ventures without waiting for arbitrary holding periods, while still capturing substantial tax Employees with Stock Options face less pressure around exercise timing, knowing they'll receive meaningful tax advantages even if their company exits before the traditional five-year Capital and Private Equity professionals can optimize portfolio exits around business fundamentals rather than tax calendars, while still preserving significant tax advantages for their investments. Real-World Example: Million-Dollar Tax Savings Consider this scenario: You exercise $100,000 worth of startup options that grow to $5 million over four years, then your company gets acquired. Under Previous Rules: You'd pay the full 28% QSBS rate on all gains (about $1.37 million in taxes) because you didn't hit the five-year threshold. Under New Rules: You'd get 75% exclusion after four years, paying taxes on only 25% of gains (about $343,000 in taxes)-saving over $1 million. Keeping an Eye on Evolving Tax Legislation With the "Big Beautiful Bill" signed into law, the new exemption structure applies only to QSBS acquired after the enactment date, making timing important for current equity holders considering exercise decisions. This expansion comes at a particularly relevant moment for the tech sector. As artificial intelligence and other emerging technologies drive new startup formation, the enhanced QSBS benefits create stronger incentives for both founding teams and early employees to take entrepreneurial risks. The proposed changes acknowledge that the original $10 million and $50 million thresholds, established in the early 1990s, no longer reflect today's startup economics. This is just one example of how tax policy and financial regulations are constantly in flux. That's one of the reasons why it can be easy to miss out on new wealth strategy opportunities as they emerge. The expanded QSBS tax exemption doesn't require new risk-taking or complex restructuring to make startup equity positions more valuable from a tax perspective, as long as investors know how to time option exercising and stock sales to take advantage of the exclusion. This story was produced by Range and reviewed and distributed by Stacker. © Stacker Media, LLC.
Business Insider
11-07-2025
- Business
- Business Insider
Trump's Big Beautiful Bill is quietly handing startups a shot at a faster payday
Under President Donald Trump's new tax bill, startup founders and investors might be able to turn their equity into a payday sooner than they think. The "One Big Beautiful Bill" Act, which became law last week, includes some key changes to the tax provisions for small businesses. The biggest changes are threefold. For one, the provisions now allow companies with larger fundraises under their belts to qualify as small businesses. They also increase the amount of profits that company stakeholders can receive tax-free after selling their shares. Most importantly, the provisions introduce a tiered system that brings tax benefits to investors faster. Previously, startup founders and investors were exempt from capital gains taxes on any profits from the company only if they got that profit five years after the stock was issued. That restriction could dissuade founders from taking an M&A deal or secondary sale in a startup's early years to avoid a massive tax hit. Now, those profits will be 50% tax-free after three years, 75% after four, and completely tax-free after five. Venture investors and startups who've caught on to the changes, and what they could mean for earlier startup exits, are buzzing. "With the previous five-year exit minimum, a lot of people don't get the benefit," said Luke Fischer, cofounder and CEO of geospatial tech startup SkyFi. "I think this looks like a forward-leaning administration that understands the reality of business and what that means for those folks to deploy their hard-earned capital, with the tax-free benefit, back into their own company or into a new company." Breaking down the changes The updates to Qualified Small Business Stock rules, or QSBS, expand the definition of a small business to include companies with less than $75 million in gross assets, up from the previous $50 million cap. Founders, investors, and employees who acquire a stake in a company before it hits $75 million in assets can now cash out down the line and get up to $15 million in profits per taxpayer from a sale of the startup's shares tax-free, or up to 10 times their initial investment in profits tax-free, whichever amount is greater. That's up from a previous $10 million profit cap. Some other limitations apply. Businesses that primarily sell services, like hospitals and law firms, don't qualify for QSBS benefits. Companies must also be registered as C corporations to qualify. Venture capital lawyer Chris Harvey pointed out that plenty of companies that last raised capital years ago and saw their assets hit $50 million or more, boxing them out of QSBS benefits, may now be eligible if their total assets don't exceed $75 million. That expansion also likely brings more Series A- and B-stage startups into the mix, he said. The average sizes of Series A and B funding rounds have decreased since the 2021 funding boom, which means startups may have raised less money overall later in their lifecycles, potentially extending their eligibility for QSBS benefits. "If you're at a company in that category and you have options, you might have previously thought, why even bother exercising my options. Now there may be a pathway for you," Harvey said. More M&A could be on the table The updated provisions' biggest promise could be the potential for more, earlier M&A. "Startups can now actually entertain an acquisition offer at three years," said Milad Alucozai, cofounder and general partner at Pamir Ventures. Before the July changes, any acquisition offers that a small business received before the five-year mark had a huge caveat: they'd be subject to massive taxes on any profits made from the deal. While startup M&A timelines can vary wildly, most data suggests that startups get acquired on average between the five- and ten-year mark. However, Alucozai said that he's seeing more companies, especially AI startups, get acquisition offers earlier as Big Tech and other industries scramble to scoop up AI assets and talent. The changes could also make secondary sales more attractive. While secondary transactions usually happen later in a startup's life, Menlo Ventures principal Deedy Das suggested that the new provisions could encourage founders to entertain those deals earlier on. "It probably will increase the willingness of early employees and founders to sell in three to five years after their equity vests with the huge tax benefit, so we'll likely see more secondary sales for good companies where there's a lot of investor demand," he said. Gray areas and brain drain Investors will overwhelmingly benefit from the QSBS expansions, since they hold nearly 60% of all qualified small business stock, according to Carta data from August 2024. Founders follow behind, with 26%. Employees hold about 10%. Employees with stock options aren't off the hook on taxes, either, since they have to pay to convert their options into shares and face taxes on that conversion. Founders and investors, on the other hand, generally own company stock from the jump. Harvey said more changes would need to be made to QSBS provisions for the tax benefits to apply fairly to employees, founders, and investors. He also pointed to a lack of clarity in the new provisions about how SAFEs, or simple agreements for future equity, would be handled. SAFEs are commonly used by pre-seed and seed-stage startups to raise capital and promise equity to an investor down the line. However, those investors would likely have to be able to convert their shares to equity before a startup hit $75 million in gross assets, Harvey said. That could get complicated, since SAFE conversions usually happen at the company's next fundraise, adding more money that could disqualify the startup from QSBS benefits. There's also always the potential for brain drain if employees get a chance to cash out and decide to leave the company, Alucozai said. But he thinks the changes will encourage more capital flow in the venture ecosystem overall, and perhaps give founders and employees staying for the long haul a boost along the way. "If you want to build for the long term, liquidity along the way is not a bad thing," he said.
Business Times
27-06-2025
- Business
- Business Times
Wealthy Silicon Valley investors in line for US$17 billion windfall in US senate Republican tax Bill
[NEW YORK] Silicon Valley's favourite tax break may be getting an upgrade. Venture capitalists, along with successful tech founders and early startup employees, already pay no taxes on billions of US dollars of gains annually, thanks to a lucrative and complicated provision called Qualified Small Business Stock, or QSBS. Now the carve-out could get even more generous in changes included in Senate Republicans' proposed tax and spending Bill moving through Congress. The once-obscure provision is the subject of 'every dinner conversation in Silicon Valley,' said Christopher Karachale, a partner at law firm Hanson Bridgett in San Francisco. 'It's already an exceptional benefit for people who take risks on startups.' Taxpayers claimed US$51 billion of QSBS gains in 2021, a record year for venture capital deal activity, according to a Treasury paper earlier this year, with the benefits skewed to a select group. While about 33,000 people reported QSBS to the Internal Revenue Service annually over the decade studied by Treasury, 90 per cent of the total income went to individuals reporting more than US$1 million of gains on eligible stocks. Shares qualify as QSBS if they're acquired early enough in a startup's life cycle and held for more than five years. Once sold, capital gains aren't taxed up to certain limits, which advisers to the wealthy have figured out how to stretch and multiply several-fold. With the right planning, a venture capital investor or founder can end up with hundreds of millions of US dollars of tax-free income. Now the QSBS break could get even better. Though it was not addressed in previous versions of US President Donald Trump's 'One Big Beautiful Bill,' Senate Republicans slipped into their version tweaks relaxing its complex rules. Taxpayers would be able to invest at later stages in startups and still get QSBS, cash out earlier and still get a partial benefit, and skip taxes entirely on up to 50 per cent more of their windfalls. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up 'I'm surprised' Critics say the QSBS provision is unnecessary and overly expensive. House Democrats proposed restricting the tax break in 2021. 'I'm surprised they're not killing this thing, but I guess the lobbyists did their work,' said Manoj Viswanathan, a professor at the University of California Law San Francisco who has studied QSBS. 'I just don't think it's worth it.' The Treasury projects the current QSBS break will cost the US$44.6 billion over the decade beginning in 2025. The Senate bill's proposed changes would boost that by another US$17.2 billion over that period, the Joint Committee on Taxation estimates. Defenders of the provision have spent several years pushing Congress to expand it, arguing it encourages innovation and risk-taking. 'It brings more capital off the bench and into the game that might otherwise go to different asset classes,' said Patrick Gouhin, chief executive officer of the Angel Capital Association. 'QSBS encourages long-term investment in high-growth startups across the country by lowering the cost of capital,' Bobby Franklin, president and CEO of the National Venture Capital Association, said in a statement. 'It tells investors and founders alike: building something new in America is still worth it.' Despite the name Qualified Small Business Stock, the vast majority of small businesses are not eligible. Only C-corporations issue stock that qualifies as QSBS. Service industries are generally excluded, and the break is most valuable for technology or biotech that can grow quickly and generate large capital gains. The Senate proposal would be a potential boon to investors in artificial intelligence and other hot areas. 'Stacking' strategy To qualify under current law, taxpayers must have obtained their shares in a C-corporation at an early stage, when it had less than US$50 million of gross assets, an accounting definition often significantly less than its valuation. People who hold QSBS for at least five years can avoid taxes on up to US$10 million of capital gains or 10 times their initial investment, whichever is more. An early investor who puts US$30 million into a startup, therefore, can theoretically receive US$300 million tax-free. Founders can maximise their initial basis, and thus their potential QSBS-eligible gains, by transferring intellectual property into a startup from a predecessor company. Through a process called 'stacking,' QSBS holders can multiply the benefits of the US$10 million exclusion as well. 'It's the biggest game in town,' Brian Gray, a partner at accounting firm Gursey Schneider in Los Angeles, said of the strategy. His clients typically set up six or seven trusts, each benefiting a different family member, to get up to US$60 million or US$70 million in tax-free gains rather than just US$10 million. Senate Republican lawmakers would turbo-charge those benefits. They would set a US$75 million limit on an eligible startup's gross assets, up from US$50 million, on QSBS issued after the bill is enacted. Maximum tax-free gains would jump to US$15 million, from US$10 million. Both limits would be adjusted for inflation starting in 2027. The bill would also make it easier for QSBS holders to exit their investments sooner than five years without forfeiting tax benefits, allowing them to exclude half their gain after three years and 75 per cent after four years. That will be valuable to serial entrepreneurs, according to Gouhin of the Angel Capital Association. 'This gives you an added incentive to turn that company as quickly as possible.' BLOOMBERG
