Ralph Pastore, CFO, Verdelis Investments, and Principal, Sciara Pastore & Megale LLC, offers valuable insight into a newly signed tax provision that can directly benefit ag startups. Ralph is a noted expert in accounting and tax accounting and has published numerous articles on U.S. taxation for foreign entities.
On July 4, 2025, President Donald J. Trump signed the so called Big Beautiful Bill (BBB), which was indeed big: 900 pages or so. No doubt tax professionals will curtail their vacation plans to study this monumental tax legislation. Included in the BBB was an enhancement to the existing Qualified Small Business Stock (QSBS) tax treatment which will benefit many ag-tech startup founders and attract more capital to this sector.
In general, under prior tax provisions, classifying an ag startup as a QSBS allowed a stockholder to exclude $10 million or more of any capital gain on the sale of their stock interest held for at least five years. This provision of the tax law was especially valuable in planning an exit strategy for private equity as well as company founders.
Under the new version of the law, the capital gain exclusion has been increased to $15 million or more and is indexed for inflation throughout the provision’s existence. Additionally, the current law allows 50% of the capital gain to be excluded if held for three years, 75% if held for at least four years, and the full amount if held for at least five years. Also, the former requirement that at issuance the gross assets cannot exceed $50 million has now been increased to $75 million.
With a higher gain exclusion, tiered gain exclusion, and expanded eligibility, more capital should be available to start up a company when investors factor in these tax benefits within their return-on-investment calculation.
It should be noted that the $15 million exclusion is per entity, so quite a bit of tax planning can be weeded into the structure process of a QSBS to achieve multiple exclusion within the same family as well as within an investment group. For example, gifts to family members such as spouses, children, and grandchildren can achieve multiple exclusions. Also, members of a partnership who meet the holding period requirement can apply the new exclusion provisions to each partner. And although this is not referenced definitively by the Internal Revenue Service, a Trust can be used to further multiply the number of exclusions applicable to the same exit strategy sale.
Because the exclusion is a minimum of $15 million, a technique commonly referred to as stacking also can allow an exclusion larger than $15 million per entity.
A factor quite often overlooked by startups is that a QSBS applicant must be a C Corporation. Many start-up companies are established as LLC partnerships or Subchapter S corporations and continue to operate in this fashion until they implement their exit strategy. These operating entities will not be treated as QSBS, and the exclusion will not apply. In this case, these entities can reorganize their entity classification to a C corporation, usually tax free. Once this reorganization is implemented, the three- to five-year period begins, and the gain will be excludable.
Needless to say, the QSBS exclusion should be a tax planning alternative that should be part of the exit strategy for all ag startups.
In conclusion, the application of this tax provision requires a significant amount of tax know-how both at the founding of a company and throughout a startup’s funding endeavor. As such, it’s highly recommended to consult with a tax advisor to fully implement these changes.