By Jacquelyn Dunne[1] and Rachel Partain
Qualified Small Business Stock (“QSBS”) is a valuable tax incentive available to founders, investors, and employees of startups. Section 1202 permits shareholders to exclude from income certain long-term capital gains from the sale of stock eligible for QSBS status.
QSBS Requirements
To qualify as QSBS, there are a number of corporate-level and shareholder-level requirements. On the corporate side, the company must be a qualified small business. For stock issued on or before July 4, 2025, the corporation must have a gross asset value below $50 million. Also, the stock must be issued by a domestic C corporation engaged in an active and qualified trade or business. Service-based businesses in the fields of law, health care, and financial services are excluded, as are businesses where the principal asset is the reputation or skill of its employees. Typical industries that can take advantage of QSBS are technology, manufacturing, and consumer products.
Recent Legislative Changes
The One Big Beautiful Bill Act (“OBBBA”) enacted on July 4, 2025 expanded the benefits of Section 1202 for stock received after July 4, 2025. The corporation’s gross asset value at the time of stock issuance has been increased to $75 million and is indexed for inflation. Additionally, the maximum per-taxpayer gain exclusion was increased to $15 million. This amount will also be indexed for inflation. The final change is that shareholders no longer need to hold the stock for five years to receive any benefit applicable to QSBS. There is now a phase in, the stock qualifies for a 50% exclusion if held for three years, a 75% exclusion if held for four years, and a full exclusion in year five.
Trust “Stacking”
Under IRC Section 1202(h), a gift recipient steps into the shoes of the original shareholder, allowing the donee to retain QSBS status on the transferred shares and the original shareholder’s holding period and cost basis. “Stacking” has become an estate planning technique that is being used when a shareholder anticipates that the proceeds on the sale of QSBS will exceed the maximum exclusion amount. Stacking allows shareholders to gift QSBS into separate trusts, typically nongrantor trusts. Nongrantor trusts are considered a separate taxpayer where, among other things, the transferor does not serve as a trustee or retain powers sufficient to cause the trust to be treated as a grantor trust. As the QSBS exclusion is “per-taxpayer,” trust stacking enables a shareholder to multiply the maximum exclusion by the number of trusts created.
A “downside” to trust stacking is that transferring QSBS to a nongrantor trust constitutes a gift, subject to annual and lifetime limitations. Shareholders need to appraise the stock being gifted and, depending on the value of the stock at such time, shareholders may need to use a portion of their annual and lifetime gift and estate tax exemption. Shareholders who want to take advantage of gifting or “stacking” transfers of QSBS to a nongrantor trust should consider doing so while the valuation of the corporation is still low, reducing the gift tax implications.
On the Radar
On May 20, 2026, a senior Treasury official signaled that forthcoming IRS guidance on the expanded Section 1202 exclusion will target trust stacking arrangements. Specifically mentioned were situations where shareholders establish more than one trust per family member (“stacking abuse”). Currently, Section 643(f) allows the IRS to treat multiple trusts as one trust if the trusts have substantially the same grantor and primary beneficiary and if a principal purpose of the trust formation was the avoidance of tax.
Conclusion
The expanded Section 1202 benefits under the OBBBA make QSBS planning more valuable than ever. As always, planning before an exit and while valuations are low offers taxpayers the best path forward. Taxpayers considering trust stacking should note that guidance may be coming soon on aggressive multiplication of the per-taxpayer exclusion and it is not known if the guidance will apply retroactively. Existing structures should be reviewed under Section 643(f) and related doctrines. We will continue to monitor developments and provide updates as Treasury and the IRS release guidance.
[1] Jacquelyn Dunne is a third-year student at the Maurice A. Deane School of Law at Hofstra University and served as a summer law intern at Forchelli Deegan Terrana LLP.