The newly signed One Big Beautiful Bill Act (“OBBB”) contains many items that affect businesses in Columbia, Howard County, Maryland, and all over the country. One of the more overlooked aspects of the OBBB, however, is the expansion of rules for Qualified Small Business Stock (“QSBS”) for small businesses.
Any corporation formed as a corporation in the State of Maryland without making any special tax designation under Federal law is regarded by the IRS as a C-corporation by default. As a requirement, all corporations must issue shares of ownership interest in the corporation (generally known as stock).
QSBS rules are a series of tax exemptions within Section 1202 of the U.S. Internal Revenue Code of 1986 as amended that allow for shares issued by domestic C-corporations to noncorporate entities to exclude federal capital gains taxes. QSBS rules have been in effect, with several modifications, since 1993. The criteria of C-corporations to qualify as QSBS has changed throughout the years, but the general intent of QSBS rules are to encourage the creation of and investment in small domestic businesses.
Under the OBBB, QSBS rules have been expanded in several ways. First, an expansion of what qualifies as a “small business” was made by replacing a Fifty Million Dollar ($50,000,0000) cap of aggregate gross assets with a Seventy-Five Million Dollar ($75,000,0000) cap of aggregate gross assets, now subject to an annual inflation adjustment.
The OBBB also amends tax exemptions based on the amount of time a taxpayer has held a share of the C-corporation. Currently, a QSBS can only be issued after the stock of the corporation has been held for at least 5 years. Under the OBBB, however, a 50% exemption can be claimed after the stock is held for 3 years, a 75% exemption can be claimed after the stock is held for four years, and a 100% exemption can be claimed after the stock is held for 5 years.
The last change to QSBS rules under the OBBB relates to adjusted basis and per-issuer limitations. The adjusted basis of an asset is the sum of the asset’s purchase price, acquisition costs, and capital improvements, minus depreciation and other losses. A per-issuer limitation is the highest amount of capital gains that a taxpayer can exclude from a single corporation’s stock.
While a taxpayer can still choose to exclude capital gains between the greater of ten times the adjusted basis of the taxpayer in QSBS stock or the per-issuer limitation on QSBS, the OBBB increased the current per-issuer limitation of QSBS from Ten Million Dollars ($10,000,000) to Fifteen Million Dollars ($15,000,000), with an annual adjustment for inflation. Anyone receiving a QSBS can now exempt capital gains up to the greater of $15,000,000, subject to annual inflation, or ten times the adjusted basis of the taxpayer in QSBS stock.
As with the initial intent of QSBS rules, the changes made by the OBBB incentivize entrepreneurs and investors to create more business by expanding the tax exemptions available by those who take on such risks. Although QSBS rules have been in existence for over thirty years, you can expect QSBS practices to become more popular following these changes in the OBBB.
If you or your Maryland business are interested in taking advantage of the new opportunities offered by the expanded QSBS rules, contact Saltzman Law with any questions!
