New Tax Rules: A Game Changer for Startup Founders

The OBBBA has introduced significant updates to the Qualified Small Business Stock (QSBS) rules, offering substantial benefits for startup founders and investors.

Key Changes

• Increased Exclusion Cap:
• The cap on tax-exempt gains has been raised to $15 million.

• Post-July 4, 2025, the cap will adjust for inflation.

• Phased Exclusion for Founders:
• Year 3: 50% of gains excluded.
• Year 4: 75% of gains excluded.

• Year 5: 100% of gains excluded. This phased approach provides flexibility in exit planning.

• Higher Gross Asset Limit:
• Companies can now issue QSBS with assets up to $75 million (previously $50 million).
• Helps startups attract more investment while retaining tax benefits.

• Tax Basis Adjustments:
• Provisions like immediate expensing of research costs and bonus depreciation help companies stay under the cap.
• Particularly beneficial for research-intensive businesses.

Considerations for Founders

• C Corporation Requirement: Benefits apply only to domestic C corporations.
• Double Taxation: While C corps face double taxation, QSBS benefits can offset this.
• Strategic Planning: Founders should evaluate entity structure and tax implications when raising capital or planning exits.

Opportunities for Growth

These changes create new opportunities for innovation and scaling in a challenging economic environment. Founders should leverage these updates to optimize growth, fundraising, and exit strategies.