New Small Business Stock Tax Rules to Reshape Corporate Mergers

New qualified small business stock rules could fundamentally reshape corporate decision-making in 2026, shift capital formation strategies and exit timing, and lead to more capital investment opportunities as well as greater merger-and-acquisition activity.

QSBS, codified in Section 1202 of the Internal Revenue Code, was created to encourage investment into small businesses that traditionally struggled to raise capital. Initially, the rules excluded 50% of up to $10 million in capital gains for investors holding qualifying stock for at least five years.

According to statistics released by the Treasury Department’s Office of Tax Analysis, investors claimed $40 billion in QSBS capital gains in 2021, the most recent stats available, amounting to approximately $11.6 billion in tax savings distributed among 33,000 individual investors.

The Republican tax bill signed into law July 4 expanded QSBS opportunities with a new “tiered” eligibility structure. Beginning in 2026, companies will operate under a transformed QSBS regime featuring an increased $15 million gain exclusion at five years, 75% of that gain exclusion at four years, and 50% of that gain exclusion at three years. The gross assets eligibility threshold for qualifying companies increases from $50 million to $75 million.

This means that in 2026, strategic companies and investors can position themselves to maximize benefits under both the current and new thresholds.

Anticipated Corporate Behaviors

By aligning incentives with economic self‑interest, the QSBS amendments are expected to prompt the following actions by corporations, investors, and third-parties.

Accelerated exit activity: The most significant behavioral shift expected involves exit timing. The availability of meaningful tax benefits in years three and four will compress traditional five-year hold strategies.

Financial markets can anticipate a surge in M&A transactions involving companies approaching these anniversaries, as founders and investors recalibrate risk-reward and return profiles.

Corporate boards will have to evaluate whether waiting an additional year or two for incremental benefits justifies foregoing strategic opportunities or advantages. Companies that received equity investments in 2023 and 2024 may decide to exit in 2026 as they approach the earliest eligibility threshold.

Expanding eligibility and capital formation strategies: The expanded $75 million gross assets threshold will allow more companies to pursue QSBS-eligible financing in 2026. Companies previously disqualified may structure larger series rounds while maintaining eligibility, particularly in capital-intensive sectors such as artificial intelligence and biotech.

Expect heightened competition among venture capital firms to deploy capital into QSBS-eligible opportunities, with term sheets increasingly incorporating preservation covenants and eligibility representations. Family offices and high-net-worth investors may allocate more aggressively to qualifying investments, driving up valuations for companies that can credibly demonstrate and maintain QSBS status.

Dual-regime complexity and liquidity programs: Companies may need to navigate a bifurcated shareholder base in 2026, with pre-2025 tax law investors subject to the legacy $10 million cap and post-enactment investors eligible for the enhanced $15 million limit.

This dual structure will complicate secondary liquidity programs and tender offers. It also will require companies to closely manage and better understand their investors’ short and long-term objectives.

Emerging Business Opportunities

M&A transactions in 2026 will increasingly incorporate QSBS considerations into their fundamental deal structures. We will likely see more deals where sellers keep a small stake in the company to get future QSBS tax breaks.

We may also see instances where the business is split so that activities that don’t qualify for QSBS are separated from the parts that do. Corporate leaders should use audits to distinguish pre- and post-2025 tax law shares and establish tracking systems for dual-regime management.

They also should assess eligibility for raising capital and run model scenarios under inflation-adjusted thresholds to optimize timing, particularly if approaching three, four, or five-year anniversaries on large equity issuances.

As QSBS use increases, so will related IRS examinations. The IRS may challenge eligibility criteria for some businesses as asset threshold calculations face additional scrutiny.

A solid documentation infrastructure will help defend positions in future audits. There also will be growth in ancillary services to support increased QSBS compliance activity, such as third parties specializing in QSBS tracking, specialized auditors, valuators, and legal practitioners.

Moving Forward

The coming year will be a defining one for QSBS planning and corporate strategy. The behavioral changes anticipated, accelerated exits, larger capital raises, increased conversions, and enhanced compliance infrastructure will reshape dynamics across growth-stage companies.

Companies, family offices, and investors that proactively adapt governance structures, enact robust compliance controls, and align corporate actions with the new incentives will gain competitive advantages.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Jay L. Taylor is a partner at Stinson focused on corporate and financial transactions.

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