How the OBBBA Reshapes Startup and Investor Strategy

Introduction

Last summer, in July, President Donald Trump passed the One Big Beautiful Bill Act, to which its sponsor among Congress, Representative Jodey Arrington hoped to extend and solidify the 2017 tax cuts established by the Section 199A deduction. Additionally, this bill would add tax breaks to boost the economy and add jobs. As expected from the bill targeting the deduction, headlines primarily focused on income-tax cuts and deficit projections. However, within the legislation lies significant amendments to the tax code in the eyes (and wallets) of start-up founders and venture investors: revamped Qualified Small Business Stock (“QSBS”) rules under the Internal Revenue Code (IRC) § 1202.  

These amendments accelerate liquidity opportunities, expand eligibility, and increase the potential for tax-free gains for founders and early-stage investors alike.  Dovetailed with extensions to R&D expensing, bonus depreciation, and the § 199A QBI pass-through deduction, OBBBA signals a clear policy message: the federal government aims to bolster the U.S. startup space and reward those along for the ride.

Modernization of QSBS Rules

The big question is how would this bill incentivize investment in small businesses? Summarily, the OBBBA expands the benefits under IRC § 1202 through three significant changes:

First, the bill provides accelerated opportunities for liquidity. Previously, QSBS had to be held for 5 years in order to qualify for a 100% exclusion. A new tiered approach allows stockholders to enjoy a 50% exclusion at 3 years and a 75% exclusion at 4 years, while still maintaining the traditional 100% exclusion at the 5-year threshold. This holding period would be subject to a 28% capital gains rate, although the gap between three and four years would only result in a 14% rate.  While the 5-year 100% exclusion remains highly favorable, the flexibility it offers investors, especially funds that rely on small pools of capital, is a significant added benefit. 

Second, under IRC § 1202, a corporation could not have gross assets exceeding $50 million to qualify as a “small business.”  OBBBA increases that limit to $75 million adjusted for inflation.  This increase allows for later-stage start-ups seeking Series C or D investment rounds to be included under the QSBS umbrella. As a result, more companies raise capital without worrying about losing their small-business benefits. With this change, however, the importance of tracking assets at each issuance and conversion remains, as the timing of equity issuances or conversions still determines whether a company preserves or forfeits QSBS status.

Third and finally, the OBBBA raises the lifetime exclusion from $10 million to $15 million, with inflation adjustments beginning in 2027, for QSBS issued after its enactment.  This means that founders and investors in a qualifying corporation can now exclude up to $15 million from federal income tax for that issuer, assuming all other QSBS requirements are met. This increase clearly aims to make early-stage investing more appealing.

Other Startup Friendly Provisions

In addition to the QSBS benefits, OBBBA also provides for several other startup-friendly tax benefits.

Under IRC § 174(a), startups may immediately deduct R&D costs rather than amortize them over 5 years.  This change benefits smaller companies in capital-intensive industries that are often strapped for cash.

Additionally, the OBBBA amends § 168(k) to allow 100% bonus depreciation on equipment placed in the year of service, effectively reducing the after-tax cost for companies that wish to scale. Without these changes, companies would be expected to follow the phase-down rate of 40% this year.  By allowing for immediate deductions on the cost of equipment, the OBBBA improves cash flow and encourages investment in R&D.

Finally, the 20% QBI (qualified business income) pass-through deduction under § 199A, which was set to expire this year, has been extended for the unforeseeable future.  While still at 20%, the OBBBA raises the phase-out threshold from $197,300-$247,300 to $250,525-$325,525.  This change allows higher-income owners to qualify for the deduction. This expansion allows founders and early employees to retain more of their income, further incentivizing startup growth by improving early-stage liquidity, easing hiring needs, and ultimately reducing the tax burdens associated with launching a startup

ECVC Impacts/Moving Forward

Ideally, the OBBBA rethinks strategy throughout the startup ecosystem.  For founders, the ability to raise larger funding rounds without triggering the old $50 million cap eases the decision between continued growth and preserving QSBS eligibility.  With more leeway, companies can pursue more capital in an effort to scale without sacrificing tax benefits that are crucial to early investors and operators.  

The tiered exclusion system provides more options for liquidity for employees. Equity becomes an even more attractive form of compensation, especially in the short-term for quickly-evolving industries like AI and tech.  By enabling partial tax exclusions on earlier exits, companies can retain talent during their most critical growth phases.

For investors, the amended QSBS framework likely stimulates portfolio reevaluation.  It may push investment strategies toward domestic C corporations intentionally structured to meet the more favorable amended QSBS requirements.  Venture funds may also find later-stage rounds more appealing now that the expanded thresholds keep companies eligible for tax exclusion later in their growth cycle.  And with quicker opportunities to exit with tax advantages, private equity investors—who typically seek returns quicker than venture funds—may be more willing to invest at earlier stages.

Viewed at the macro level, the OBBBA allows for the prioritization of aggressive growth within the U.S. startup space, which may result in healthier competition and decreased hierarchical dynamics between different startup companies and corporate behemoths.  

Conclusion

The One Big Beautiful Bill Act strengthens the foundation of the early-stage ecosystem by expanding QSBS eligibility along with extending complementary tax benefits.  For founders, employees, and investors involved in building and scaling companies, the path forward is a more friendly, flexible, and rewarding one.

Ultimately, the Act serves to reduce friction at every stage of the startup lifecycle, lowering the tax burden associated with growing startup businesses.  The task now, for founders, employees, and investors alike, is to integrate these new rules into their decision-making strategy on formation, fundraising, and exits.

*The views expressed in this article do not represent the views of Santa Clara University.