For consumer packaged goods (“CPG”) founders, understanding the complexities of business structures and tax consequences is essential to maximize growth and attract investors. The Qualified Small Business Stock (“QSBS”) exclusion provides considerable tax advantages when structuring a corporate entity. For example, founders and early investors may be eligible to exclude up to 100% of capital gains on qualifying startup stock from federal income tax—up to $15 million or ten times their investment—which can result in substantial tax savings.
What is QSBS?
The qualified small business stock exclusion under Section 1202[i] can be a beneficial lever for early-stage founders and investors. Shareholders who meet specific requirements can exclude up to 100% of recognized gains from federal income taxes when selling qualifying shares. For example, if Jane is issued QSBS for $5 million and then six years later sells such QSBS for $15 million, she could exclude all $10 million of gain from taxable income on the sale (assuming all the QSBS requirements are satisfied).
As food and beverage founders consider corporate structure, the QSBS exclusion can be available to shareholders if founders choose to:
- Form a Limited Liability Company and immediately (or later) elect to be treated as a C Corporation for federal income tax purposes (or convert to a C Corporation); or
- Form a C Corporation
Though there are many qualifying factors, discussed more in-depth here, key eligibility requirements include:
- Only non-corporate shareholders qualify for the exclusion.
- Shareholders must hold QSBS for at least three (3) years before they are able to sell shares and benefit from a partial or full exclusion.
- The corporation’s gross assets must not exceed $75 million at the time before or immediately after equity was issued.
- Other factors including timing of redemption of shares and the line of business of the Corporation.
Latest 2025 Changes to QSBS
On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (the “Act”), also referred to as the “Working Families Tax Cut” Legislation. The Act expands shareholder QSBS eligibility and permits earlier access to QSBS tax benefits. The Act resulted in three key changes:
1) Increase to the Gross Asset Cap
The Act raised the Gross Asset Cap from $50 million to $75 million, meaning, if the value of the gross assets of a corporation exceeds $75 million (previously $50 million), shareholders will not be eligible for the QSBS exclusion. This requirement takes effect upon formation. A corporation that exceeds the gross asset cap cannot issue QSBS.
This increase is advantageous for CPG businesses because stock is typically granted to founders, early employees, and investors at a time when the corporation’s gross assets are still relatively low.
2) A More Approachable Holding Period
Prior to July 2025, shareholders had to hold shares for five (5) years to qualify for the QSBS exclusion. However, the Act implemented a tiered approach enabling earlier use of the exclusion as follows:
- 50% exclusion of QSBS capital gain after three (3) years,
- 75% exclusion of QSBS capital gain after four (4) years, and
- 100% exclusion of QSBS capital gain after five (5) years.
3) Increased Shareholder Gain Exclusion
For stock acquired after July 4, 2025, the Act increased the exclusion of the greater of $15 million or ten times the share cost (the “Adjusted Basis Cap”). When a business is sold, the QSBS exclusion allows shareholders to exclude gain based on increased share value rather than pay capital gains tax on the original basis, thereby reducing the tax bill. Growing corporations can benefit from delaying the issue of QSBS to maximize share value and the amount that can be excluded under the Adjusted Basis Cap. However, these corporations must balance the timing of issuing QSBS carefully so that that they do not exceed the gross asset cap.
For a more detailed analysis of the increased gain exclusion, before and after the Act, please see our firm’s previous blog post.
Impact on Small Business Owners
Selecting the right business structure is vital for founders, especially for CPG brands looking for early-stage investors. The Act’s revised QSBS exclusion can play a pivotal role in supporting a startup’s growth and success. A higher gross asset cap can make startups more appealing to investors seeking growth with tax benefits. The QSBS exclusion also helps attract and retain employees through significant tax incentives.
Ultimately, the business must be eligible for the QSBS exclusion the entire time that an individual holds shares, so businesses need to beware of some common pitfalls:
- If certain events occur before shares are transferred, such as converting from a C corporation to an LLC taxed as a partnership, shareholders can lose QSBS eligibility and
- Share buybacks can also prohibit shareholders from taking advantage of the exclusion.
Founders should note that while the QSBS exclusion offers federal tax benefits, state tax treatments vary. Transitioning a LLC to a corporation and ensuring QSBS eligibility can be complex, especially in the functional food and beverage sector (view more insight here).
Contact us
With strategic planning, the Husch Blackwell team is here to guide you. For more insights, contact Megan Beebe and Kal Dargan, and explore Kal’s Qualified Small Business Stock after the OBBBA.
[i] All Section references provided herein are to the Internal Revenue Code of 1986, as amended.