Episode Overview

Title: How the OBBBA Impacts Qualified Small Business Stock (QSBS)
Podcast: ACTEC Trust & Estate Talk
Date: September 16, 2025
Host: Connie Ister, ACTEC Fellow, Boulder, Colorado
Guest: Justin Miller, ACTEC Fellow, San Francisco, California

This episode provides a detailed analysis of how the One Big Beautiful Bill Act (OBBBA or "OB3") introduces significant changes to Qualified Small Business Stock (QSBS) under IRC Section 1202. Justin Miller breaks down the key provisions affecting founders, investors, and estate planners, focusing on what practitioners and clients need to know to navigate these updates for wealth and tax planning.

Key Discussion Points & Insights

1. Overview of Qualified Small Business Stock (QSBS)

[01:13-03:40]

• QSBS Basics:
  • Must be C Corporation stock issued after August 10, 1993.
  • Applies only to C Corps—LLCs or S Corps may need to convert to qualify.
• Active Business Requirement:
  • At least 80% of assets must be used in a qualified active trade or business.
  • Exclusions: Health, law, accounting, performing arts, consulting, athletics, financial services, hotels, restaurants, etc., do not qualify.
  • "So if it's that type of a business, you don't get QSBS treatment. But everything else should qualify." — Justin Miller [02:17]
• Original Issuance Rule:
  • Must be acquired directly from the company (not another shareholder).
  • Exception: QSBS retains its status if acquired via gift or inheritance.
  • "It is still QSBS if you get that QSBS via a gift or inheritance." — Justin Miller [03:20]

2. Three Major Changes to QSBS Under OB3

[03:41-13:55]

A. Gross Asset Limit Increased

[03:41-06:13]

• Formerly: $50 million gross asset limit to qualify as "small business."
• Now (for QSBS issued after July 4, 2025): $75 million limit.
• Calculation is based on cash plus adjusted basis of assets (not FMV, and does not include self-created intangibles like goodwill).
• Limit adjusts for inflation after 2026.
• Funny note on legislation typo:
  • “At least for me, the one thing I can say is my mistake has never ended up in a published final tax legislation that was approved and reviewed by Congress and the President.” — Justin Miller [05:41]

B. Increased Exclusion Amount

[06:14-08:08]

• Old rule: Can exclude the greater of $10 million or 10 times basis per taxpayer.
• OB3 (post-July 4, 2025): Raises exclusion to $15 million (plus inflation indexing after 2026).
• Applies only to stock issued after July 4, 2025.
• Cannot double-dip—$10M cap on old stock, $15M on new QSBS, but not both for the same shares.
• "You don't get two limits. You don't get a $10 million and a $15 million limit. This is one figure limit." — Justin Miller [07:43]

C. New Percentage Limitations for Shorter Holding Periods

[08:09-12:45]

• Historical context:
  • Originally only 50% of gain excludable (with remaining taxed at 28% + possible AMT).
  • Increased to 75% and then 100% (post-2010 stock).
• OB3 changes for stock issued after July 4, 2025:
  • Retains full 100% exclusion for 5-year holding.
  • New benefit for shorter holding:
    • 3 years: 50% of the exclusion (remaining taxed at 28%).
    • 4 years: 75% exclusion.
    • 5 years: 100% exclusion.
  • These allow earlier liquidity while retaining (partial) benefits.
• “If you hold it for at least three years, we're going to still let you exclude 50% of your gains.... If you hold it at least four years but you haven't held it for the required five years, we're going to give you a 75% limitation.” — Justin Miller [10:54]-[11:24]
• Section 1045 Rollover:
  • An alternative: If needing liquidity before five years, can roll QSBS gain into new QSBS for deferral and potentially full exclusion.
  • Even allows establishing your own new C Corp for rollover with legitimate intent.
  • “It's almost like going back to Las Vegas and putting all your money back on the table... But... you can start your own new QSBS company to roll over that QSBS and make the five year holding period.” — Justin Miller [12:10]

3. Advanced Planning: Stacking & Multi-Trust Strategies

[12:45-13:55]

• Stacking with Trusts:
  • Create separate non-grantor trusts for children or loved ones—each gets a separate exclusion.
  • Example: Four children → four trusts = $60 million extra in exclusions; with parent’s own, up to $75 million.
  • State Income Tax Strategy:
    • Use states such as Delaware or Nevada (no state income tax + asset protection), especially relevant for states like California that don't recognize the QSBS exclusion.
• Estate, Gift, GST Tax Planning Synergy:
  • Transferring via trusts removes assets from estate for additional ~40% tax savings on top of income tax exclusion.
  • “Not only could [the stock] be sold tax free ... but also avoid future estate and generation skipping transfer taxes.” — Justin Miller [13:50]

Memorable Quotes & Moments

• On legislative errors:
  "At least for me, the one thing I can say is my mistake has never ended up in a published final tax legislation that was approved and reviewed by Congress and the President." — Justin Miller [05:41]

• On why stacking trusts matters:
  “So instead of a $15 million exclusion with four kids, now we're talking about a $75 million exclusion. We're also minimizing state income tax. And look, the cherry on top is... also avoid future estate and generation skipping transfer taxes.” — Justin Miller [13:36-13:50]

Key Timestamps

• 01:13 – Justin Miller introduces QSBS requirements
• 03:41 – The new $75 million gross asset test
• 06:14 – Exclusion limit increases to $15 million
• 08:09 – Historical and new percentage exclusion rules explained
• 10:54 – New 3-year and 4-year holding period benefits
• 12:10 – Section 1045 rollover strategy
• 12:45 – Trust stacking and additional estate/GST planning benefits
• 13:55 – Wrap-up of changes

Final Takeaways

Justin Miller effectively summarizes how the One Big Beautiful Bill Act/OB3 modernizes Qualified Small Business Stock rules by raising company size limits, increasing gain exclusions, and introducing new partial exemption strategies for shorter holding periods. These changes present significant planning opportunities—but also new complexities—for founders, investors, and estate planners, particularly when using trusts for multi-generational, multi-beneficiary benefit.

For further information or to find an ACTEC lawyer, visit actec.org.