Growing Interest in IRC Sec. 1202 Highlights Treasury Identified Planning and Risk Areas

The favorable changes under the One Big Beautiful Bill Act (OBBBA) have heightened interest in IRC Sec. 1202 qualified small business stock (QSBS) planning, and many practitioners are seeing increased questions from investors and privately held businesses evaluating possible exit opportunities.

Key Takeaways

• Favorable changes under the OBBBA have increased interest in the already-popular QSBS exclusion.
• The Treasury released a report covering tax years 2012-2022, showing the increase in popularity of the provision while highlighting key trends the agency is seeing.
• The increased popularity, combined with the fact that IRC Sec. 1202 is utilized by higher-income taxpayers, makes the exclusion a potential flag for examination.
• Taxpayers should take the time to verify their eligibility for QSBS by consulting with a trusted and experienced advisor.

What Changed Under OBBBA?

For qualifying stock issued after July 4, 2025, OBBBA expanded IRC Sec. 1202 in several important ways. First, it increased the basic exclusion amount from $10 million to $15 million, while retaining the favorable ability to exclude the greater of the basic exclusion amount of ten times the taxpayer’s basis in stock. It also increased the gross asset threshold from $50 million to $75 million. For the first time since the provision was enacted in 1993, both the exclusion amount and the gross asset threshold will be increased annually to account for inflation beginning in 2027.

Perhaps most favorably, the bill allows taxpayers to exclude a percentage of gain based on their holding period:

As a result of these changes, the provision is now available to a broader group of taxpayers and applies earlier in the investment lifecycle. This shift is driving increased interest for startup founders, private company shareholders, and investors that may not have previously qualified under the former thresholds.

How Popular Is the QSBS Exclusion?

As interest grows, a largely overlooked Treasury working paper, Quantifying the 100% Exclusion of Capital Gains on Small Business Stock, shows just how widely the exclusion was being used even before these changes. Looking at return data from 2012 through 2022, the Treasury found taxpayers claimed more than $140 billion in QSBS exclusions during that period. The report also found that 70.3% of excluded dollars were claimed by taxpayers with cumulative exclusions exceeding $1 million, highlighting how heavily the benefit is concentrated among larger claims. While most of the exclusions are concentrated among larger claims, the data also shows a broad base of taxpayers claiming more modest amounts with a median of approximately $2,800, showing how widely the exclusion is being used.

The Treasury also identified several trends tax practitioners should watch:

• Approximately one-quarter of individual taxpayers claimed exclusions over multiple years, which the Treasury suggested may be tied to installment sales and structured payouts.
• There is no requirement for corporations to certify QSBS eligibility, which can create issues later when documentation is needed.
• Trusts represented a notable share of IRC Sec. 1202 claimants, accounting for approximately 13% of excluded gains in peak years. This highlights another area practitioners may want to monitor as planning strategies evolve.

The Treasury paper does not announce enforcement changes but highlights two practical points. First, the IRS has limited visibility into QSBS eligibility until a sale occurs, and second, the dollar amounts at stake can be significant. Taken together, those factors often lead to increased scrutiny.

Steps to Take Now

With more taxpayers exploring whether they qualify for IRC Sec. 1202 exclusions, now is a good time to revisit core requirements:

• Confirm the stock was acquired at original issuance.
• Does the business meet active trade or business requirements?
• Review ownership structures, including trusts.
• Review any redemptions that could change eligibility.
• Get all documentation in place before transaction.

The OBBBA is changing when IRC Sec. 1202 planning happens. Shorter holding periods and higher exclusion limits are prompting clients to address these issues at formation and as ownership changes occur, instead of waiting until a transaction is near.

Whether you are a founder in the early formation stages or an investor looking for your next target company, EisnerAmper has the professionals to help you. Contact our team below to see how we can assist you.