The life sciences industry depends on long-term capital, high-risk innovation, and patient investment. The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, significantly enhances Section 1202 of the Internal Revenue Code — the provision governing Qualified Small Business Stock (QSBS). These changes make investing in and building life sciences companies more attractive by expanding tax benefits for founders and early investors.
For biotechnology, pharmaceutical, and medical technology companies that require substantial upfront investment and extended development timelines, the revised Section 1202 rules create meaningful new opportunities for capital formation and exit planning.
Section 1202 Pre-OBBBA
Congress created Section 1202 in 1993 to encourage investment in small, growth-oriented businesses. Under Section 1202, noncorporate taxpayers – including individuals, trusts, and estates – may exclude from income capital gains from the sale of QSBS if they satisfy certain conditions.
To qualify for the benefits of Section 1202, the stock must be issued by a domestic C corporation and acquired by the taxpayer at its original issue (either directly or through an underwriter). Before the OBBBA, Section 1202 required that the C corporation issuing the stock have aggregate gross assets of no more than $50 million both before and immediately after the stock issuance. At least 80% of the corporation’s assets must be used in the active conduct of a qualified trade or business.
Certain service-oriented types of businesses are excluded from qualification. Importantly, companies focused on research, product development, and manufacturing — the core activities of most life sciences startups — generally fall within qualifying trades or businesses.
Pre-OBBBA, shareholders were required to hold QSBS for more than five years to exclude any gain from income upon its sale. If this holding period was satisfied, the following percentages of gain could be excluded from the shareholder’s income upon sale of the QSBS:
| Date of Stock Issuance | Maximum Exclusion Percentage |
| 8/11/1993 – 2/17/2009 | 50% |
| 2/18/2009 – 9/27/2010 | 75% |
| 9/28/2010 – 7/4/2025 | 100% |
The maximum gain eligible for exclusion was the greater of $10 million or ten times the taxpayer’s basis in the stock.
Enhanced Tax Benefits under the OBBBA
Many of the Section 1202 rules remain unchanged following the OBBBA’s enactment. However, the OBBBA expands the tax benefits available under Section 1202 in three primary ways.
Tiered Holding Period
Under the OBBBA, taxpayers are no longer required to hold QSBS for more than five years to benefit from gain exclusion. Instead, taxpayers that hold QSBS for at least three years are eligible to exclude 50% of the gain from the sale of the stock from income. If a taxpayer holds QSBS for at least four years, 75% of the gain may be excluded. For QSBS held for five or more years, 100% of the gain may be excluded. This new, tiered holding period applies to QSBS acquired after July 4, 2025.
Life science companies often progress through defined development stages – early research, clinical trials, regulatory approval, and commercialization. This new tiered holding period gives investors greater flexibility to align exit timing with these milestones.
Increased Cap on Maximum Gain Exclusion
The OBBBA raises the cap on the maximum amount of gain a taxpayer may exclude from income upon the sale of QSBS from $10 million to $15 million. Thus, for stock acquired after July 4, 2025, a taxpayer may exclude the greater of $15 million or ten times the taxpayer’s basis of the stock sold. Beginning in 2027, the $15 million amount is adjusted annually for inflation.
A higher exclusion cap allows founders and early investors to retain more of their gains after tax. For venture-back startups with rapid valuation growth, the expanded exclusion can materially affect after-tax economics, making early equity ownership more attractive and strengthening incentives for long-term commitment.
Higher Asset Threshold to Qualify as a Small Business
Prior to the OBBBA, the C corporation issuing the stock was required to have aggregate gross assets of no more than $50 million both before and immediately after the stock issuance. The OBBBA increases the aggregate gross asset limit to $75 million, indexed for inflation beginning in 2027. The higher limit applies to stock issued after July 4, 2025.
Life sciences companies are capital-intensive. Research infrastructure, laboratory equipment, intellectual property development, and clinical trials can quickly increase asset levels. The higher threshold better reflects the realities of scaling a science-driven business.
Conclusion
The OBBBA’s changes to Section 1202 strengthen an already powerful incentive for investing in innovative small businesses. For life sciences startups — where capital intensity, long development horizons, and high growth potential intersect — these enhancements are especially meaningful.
The new tiered holding period provides earlier access to tax benefits. The increased exclusion cap boosts after-tax returns. And the higher asset threshold expands eligibility for growing companies. Together, these changes support capital formation and reinforce the economic foundation needed to advance scientific innovation.
Life sciences companies face unique tax and financing considerations. Understanding how Section 1202 planning fits into your overall growth strategy can materially impact founder and investor outcomes. If you’re interested in learning more about how the expanded opportunities under the OBBBA could benefit you, contact Dean Dorton.
