Make the Most of Expanded QSB Stock Tax Advantages

Investors frequently consider small, growing companies as a way to diversify their portfolios and pursue higher growth opportunities. In some cases, these investments may also come with meaningful tax benefits. Shares that qualify under the qualified small business (QSB) stock rules can provide valuable capital gains exclusions. Tax legislation enacted in 2025, widely referred to as the One Big Beautiful Bill Act (OBBBA), expanded these benefits.

Understanding QSB Stock

A qualified small business generally must be a domestic C corporation that satisfies certain requirements. One key requirement is that the company must be actively conducting a trade or business. Many professional service companies are not eligible, although some businesses in health-related or engineering fields may qualify depending on their specific operations.

Another requirement involves the company’s gross assets. Before the OBBBA, a corporation generally could not have aggregate gross assets exceeding $50 million. For stock issued after July 4, 2025, the OBBBA raises that limit to $75 million, with inflation adjustments beginning after 2026.

Reduced Holding Period Requirements

One of the main advantages of QSB stock is the ability to exclude some or all capital gains when the stock is sold. Under the prior rules, investors typically had to hold QSB stock for at least five years to qualify for a gain exclusion. The percentage excluded could range from 50% to 100%, depending on when the stock was acquired.

For QSB stock acquired after July 4, 2025, the OBBBA introduces a tiered exclusion structure with shorter holding periods. Investors may exclude 50% of the gain after holding the stock for at least three years and 75% after holding it for at least four years. Any gain that is not excluded under these rules is generally subject to a special 28% federal tax rate, plus the 3.8% net investment income tax when applicable.

Stock acquired on or before July 4, 2025, generally continues to follow the previous rules. This includes the potential for a 100% gain exclusion after a five-year holding period for stock acquired on or after September 28, 2010.

Higher Gain Exclusion Limits

The OBBBA also increased the maximum amount of gain that may be excluded. For QSB stock acquired after July 4, 2025, the exclusion limit for each issuer is the greater of $15 million, adjusted for inflation after 2026, or 10 times the taxpayer’s aggregate adjusted basis in the stock sold during the year. Previously, the dollar limit was $10 million. For married taxpayers filing separately, these dollar amounts are reduced by half.

To be eligible for the exclusion, the investor generally must acquire the stock when it is originally issued, either directly from the corporation or through an underwriter. The stock must typically be received in exchange for cash, property other than stock, or services. Certain exceptions may apply, such as transfers by gift or inheritance.

Investors who sell QSB stock and reinvest the proceeds in other QSB stock within 60 days may be able to defer the gain. In that case, the deferred gain reduces the basis of the newly acquired stock. For long-term capital gain purposes, the holding period of the new stock may include the holding period of the stock that was sold.

Planning Ahead

QSB stock can provide significant tax savings, but the rules are detailed and require careful planning. State tax treatment can also vary, since some states do not follow the federal QSB stock rules. As a result, state income taxes may still apply depending on where the investor lives or files.

Lowering IRS Audit Risk for Small Businesses

When business owners evaluate risk, they often think first about competition, cash flow, staffing or daily operating concerns. An IRS audit may not be an immediate concern, but it can create significant expense, stress and disruption. While some audits are selected at random, many are triggered when the IRS detects unusual activity, reporting gaps or inconsistencies. Knowing the areas most likely to attract attention can help reduce your company’s audit exposure.

5 Common Audit Risk Areas

The following issues may increase the likelihood of IRS scrutiny:

1. Unreported or inconsistent income. Large changes in revenue from year to year can draw attention, particularly when those changes don’t align with broader industry trends or current economic conditions. Differences between the income reported on a tax return and amounts reported by third parties, such as Forms 1099 or payment platform records, may also lead to IRS questions. Strong documentation is essential when business income varies significantly.

2. Large or unusual deductions. Expenses that seem excessive compared with income or appear outside the norm for your industry may raise concerns. To be deductible, business expenses generally must be both ordinary and necessary. Personal costs, such as nonbusiness travel, personal vehicle use or clothing that isn’t specifically required for work, are frequent problem areas. Detailed records are particularly important for meals, travel and vehicle expenses.

3. Ongoing business losses. Reporting losses year after year may cause the IRS to question whether the activity is truly operated with a profit motive. Real losses can happen, especially for new businesses or during difficult economic periods. However, repeated losses should be backed up by clear records, sound business planning and evidence that the owner is actively working toward profitability.

4. Poor recordkeeping. Disorganized, incomplete or missing records can increase audit risk and make an audit harder to manage. Lost receipts, unclear bookkeeping entries and inconsistent financial reports may put deductions at risk. Using digital accounting systems and maintaining organized records throughout the year can make your tax filings more accurate and easier to support.

5. Misclassified workers. Treating workers as independent contractors when they should be classified as employees can lead to unpaid payroll taxes, penalties and interest. The IRS generally looks at how much control the business has over the worker’s tasks and how the work is performed, rather than simply relying on the worker’s title or payment method.

Staying Prepared

No company can eliminate audit risk completely. However, accurate reporting, consistent bookkeeping, careful documentation and professional guidance can go a long way toward lowering exposure. These practices can also help your business respond more confidently if the IRS does request additional information.

How Educational Assistance Programs Can Enhance Your Company’s Benefits Package

Many businesses are looking for better ways to recruit, support and retain skilled employees. One benefit worth considering is a tax-favored educational assistance program under Internal Revenue Code Section 127. Recent tax law changes have made this employee benefit even more valuable.

How These Programs Work

Employer-provided Sec. 127 educational assistance plans allow employees to receive tax-free education benefits up to an annual limit, which is $5,250 for 2026. These amounts are not included in the employee’s federal gross income. Employers may also deduct the payments as ordinary business expenses.

A plan does not need to be funded in advance. Instead, employers may pay qualifying education costs directly or reimburse employees as eligible expenses arise.

Qualified expenses generally include tuition, books, fees, supplies and equipment related to coursework. However, some costs are excluded. Meals, lodging, transportation, and tools or supplies that employees keep after completing a course usually do not qualify. Courses involving sports, games or hobbies are also excluded unless they are required as part of a degree program.

To qualify under Sec. 127, the educational assistance program must be in writing and must satisfy specific legal requirements. The benefit may be provided only to employees, not to their spouses or dependents.

Recent Improvements

Tax legislation enacted in 2025, commonly referred to as the One Big Beautiful Bill Act (OBBBA), made two notable updates to Sec. 127 programs. First, it added an inflation adjustment to the annual benefit limit. For tax years beginning after 2026, the $5,250 cap will be indexed for inflation and rounded down to the nearest $50. This change helps preserve the benefit’s value over time.

Second, the OBBBA permanently allows qualified student loan payments to be treated as eligible Sec. 127 expenses. As a result, employers may contribute up to the annual limit toward an employee’s qualified student loan, and the payment can be excluded from the employee’s taxable income.

Compliance Requirements

Sec. 127 plans must meet several important rules. For instance, employers cannot give employees a choice between receiving tax-free educational assistance and taxable pay, such as wages or bonuses. Employees must also receive reasonable notice about the plan, including its availability and key terms.

The plan must comply with nondiscrimination rules and limits on benefits provided to certain owners. For example, no more than 5% of the total benefits paid under the plan during the year may go, in total, to employees who own more than 5% of the business, or to their spouses or dependents.

Benefits for Family Employees

Educational assistance benefits may also be available to employees who are related to business owners, including children, provided they are legitimate employees of the business. The plan must still satisfy all applicable nondiscrimination rules and ownership-related limitations.

In closely held businesses, ownership attribution rules may affect whether a family member is considered a more-than-5% owner for purposes of these restrictions. This makes proper plan design especially important.

Moving Forward

When structured correctly, a Sec. 127 educational assistance program can be a valuable addition to an employer’s benefits strategy. It can help employees improve their skills, reduce education-related costs and manage student loan debt, while giving employers another tool to attract and keep talented workers.

Stay Prepared With a Midyear Tax Checkup

Major life events can have a bigger impact on your tax situation than you may realize. Reviewing your tax position before year-end can help you avoid potential penalties and identify opportunities to reduce your overall tax bill.

Begin by checking your federal withholding and any estimated tax payments. If your income has increased or decreased, you may need to revise your Form W-4 so your paycheck withholding better matches your current situation. If you’re self-employed or receive substantial income that isn’t subject to withholding, such as investment dividends or capital gains, quarterly estimated payments may be necessary to help prevent underpayment penalties.

You should also review available deductions and credits. Changes involving your filing status, dependents, education costs or homeownership may affect which tax benefits you can claim. Higher charitable contributions may also create additional tax-saving opportunities. Keep clear, organized records for charitable donations, medical costs and, for self-employed individuals, business expenses so you can support deductions and claim the full benefits available.

Midyear is also a useful time to look at retirement savings. Increasing contributions to an employer-sponsored retirement plan or an IRA may lower taxable income while helping build long-term financial security. If you qualify for a Health Savings Account, consider contributing to it as well. HSAs offer valuable tax advantages, including deductible contributions, tax-deferred growth and tax-free withdrawals when used for qualified medical expenses.

Pandemic-Era IRS Penalties May Qualify for Refunds

A significant court decision, Kwong v. United States, determined that the IRS incorrectly imposed certain penalties and interest during the COVID-19 pandemic. Taxpayers who were assessed penalties or interest for missed filing or payment deadlines between Jan. 20, 2020, and July 10, 2023, may qualify for a refund or abatement. However, additional litigation is anticipated, and other courts may reach different conclusions when interpreting the law.

Taxpayers who may be affected should consider filing a protective claim by July 10, 2026, to help preserve their rights while related legal matters remain unresolved.

Employers Must Follow New Limits on Meal Expense Deductions

Does your company offer free meals, snacks or beverages to employees at the workplace? If so, it’s important to be aware that the deduction rules for certain employer-provided meals are changing. Starting in 2026, employers generally will no longer be able to deduct meals that qualify as de minimis fringe benefits or meals provided on the business premises for the employer’s convenience that are excluded from employees’ taxable income.

For the 2025 tax year, these expenses were generally treated more favorably. De minimis food and beverage benefits were typically 100% deductible, while meals provided for the employer’s convenience were generally 50% deductible.

Check and Pay Your Advance Tax Before the Deadline

June is an important month for small business owners to review their financial position and stay ahead of tax responsibilities. One of the most important accounting tasks during this month is checking and paying advance tax before the due date. By estimating your yearly income, reviewing business profits, checking expenses, and adjusting any TDS already deducted, you can understand how much tax needs to be paid in advance.

Paying advance tax on time helps your business avoid unnecessary interest charges and keeps your financial records clean and compliant. It also reduces the burden of paying a large tax amount at the end of the financial year. For small businesses, freelancers, traders, and service providers, this simple step can improve cash-flow planning and prevent last-minute stress.

Make June the month to organize your books, review your tax liability, save payment challans, and prepare your business for the months ahead. A timely advance-tax check shows strong financial discipline and helps your business stay focused on growth without worrying about tax surprises later.