Key Benefits for Qualified Small Businesses

Easier access to capital: The expanded QSBS benefits make investing in QSBs more attractive, likely increasing access to funding for startups and growth-stage companies.Faster liquidity for investors: Investors can realize partial tax-free gains after just three years, encouraging more early-stage investment.Broader eligibility: More companies now qualify as QSBs, especially those in capital-intensive sectors like technology and life sciences.Long-term tax certainty: Permanent deductions and higher expensing limits provide stability for business planning and investment.

Notable changes

1. Expanded QSBS gain exclusion

Shorter holding periods for tax exclusion: Investors can now exclude a portion of gains from the sale of QSBS after holding the stock for as little as three years, rather than the previous five-year minimum. The new exclusion schedule is:
3 years: 50% gain exclusion4 years: 75% gain exclusion5+ years: 100% gain exclusion
Higher gain exclusion cap: The per-issuer cap on gain exclusion increases from $10 million to $15 million for stock issued after July 4, 2025, with future inflation adjustments. This allows investors to exclude more gains from taxation, meaning more access to capital and higher potential returns.Larger company eligibility: The maximum asset threshold for a company to qualify as a QSB rises from $50 million to $75 million, also indexed for inflation. This expansion means that a greater number of growing businesses can issue QSBS and attract investment.These changes apply to QSBS acquired after July 4, 2025.

2. Permanent and enhanced tax deductions

Qualified Business Income (QBI) deduction: The 20% deduction for qualified business income, crucial for pass-through entities (sole proprietorships, partnerships, S corporations), is made permanent. This provides long-term tax certainty and reduces effective tax rates for many small businesses. Increased expensing limits: The maximum amount a small business can expense under Section 179 for qualifying property is raised from $1 million to $2.5 million, with a higher phase-out threshold and inflation adjustments. This allows for immediate deduction of more capital investments, improving cash flow and encouraging growth.

3. Additional provisions

Estate tax: The estate tax exemption for small business owners is increased, making it easier to pass businesses to the next generation.Restored bonus depreciation: 100% bonus depreciation is reinstated, which allows businesses to immediately deduct the full cost of new equipment and facilities.

Investor Kevin Kwok noted on X that the changes, such as increased investing and expensing incentives and tax benefits, are so significant that companies should consider reincorporating to reap the benefits.

These changes are widely regarded as a substantial boost for small businesses and their investors, though some critics note that the benefits may be concentrated among higher-growth firms and investors.

For this story, Fortune used generative AI to help with an initial draft. An editor verified the accuracy of the information before publishing.