Many Turkish founders now run their business through a Delaware C corporation that owns the Turkish operating company after a flip-up. Public Law 119-21, signed on 4 July 2025 and commonly known as the One Big Beautiful Bill Act, changed two US tax rules that matter here: the exclusion for qualified small business stock (QSBS) under section 1202 of the Internal Revenue Code, and the treatment of research costs under sections 174 and 174A. Separately, FinCEN has narrowed beneficial ownership reporting. This article explains, as of November 2026, what changed, who benefits, why development in Türkiye is treated differently and what the topco must still maintain. Vircon Legal is a Turkish law firm: the US tax points are informational and must be confirmed by US tax counsel or a CPA.
QSBS after July 2025: tiers, caps and the gross assets test
Section 1202 lets non-corporate taxpayers exclude gain on selling qualified small business stock. Public Law 119-21 rewrote it for stock acquired after the “applicable date”, the date of enactment (4 July 2025). Earlier stock keeps the old rules, so one cap table can hold two regimes.
| Rule | Stock acquired on or before 4 July 2025 | Stock acquired after 4 July 2025 |
|---|---|---|
| Exclusion | Held more than 5 years; 100 per cent for stock acquired after 27 September 2010 (Creating Small Business Jobs Act of 2010), less for older stock | Held at least 3 years: 50 per cent; at least 4 years: 75 per cent; 5 years or more: 100 per cent |
| Per-issuer cap | Greater of USD 10 million (less gain already excluded on that issuer’s stock) or 10 times basis | Greater of USD 15 million (same reduction) or 10 times basis; indexed for taxable years beginning after 2026 |
| Issuer’s gross assets | At most USD 50 million before and immediately after issuance | At most USD 75 million (stock issued after 4 July 2025), indexed for taxable years beginning after 2026 |
The other conditions are unchanged. The issuer must be a domestic C corporation, such as a Delaware topco, and the stock must be acquired at original issue for money, property other than stock, or services. During substantially all of the holding period, at least 80 per cent of the company’s assets by value must be used in a qualified trade or business; services in fields such as health, law, engineering, accounting, consulting, financial services and brokerage, as well as banking, financing and investing, are excluded. Software businesses are commonly treated as qualifying; fintechs should check. Both tests look through to subsidiaries more than 50 per cent owned, so the Turkish subsidiary’s assets and activities generally count. Assets used in research for a future qualified business, including foreign research under section 174, are treated as used in an active business.
Who benefits, and the traps after a flip-up
QSBS is a US federal income tax exclusion. It helps US taxpayers: US-resident founders and employees, US angels, and US funds structured as partnerships, whose partners can use the pass-through rules in section 1202(g). A founder resident in Türkiye is, as a rule, taxed in Türkiye on a gain from selling shares, including shares in a foreign company, and QSBS does not change that; the Turkish tax treatment of a specific exit needs its own analysis (foreign holdings, double taxation and CFC rules). For that founder QSBS matters mainly because US investors look for it, or after a move to the US. If the structure is still open, see Delaware C corp or Turkish joint-stock company.
- The flip-up exchange. QSBS must be acquired for money, property other than stock, or services (section 1202(c)(1)(B)). Topco stock received in exchange for shares of the Turkish company is therefore at risk of never qualifying, however long it is held. A Turkish A.Ş. is a per se corporation for US tax purposes (Treas. Reg. §301.7701-2(b)(8)) and cannot elect a different classification. Where other property is contributed, section 1202(i) dates the stock from the exchange and gives it a basis of at least the property’s fair market value, so earlier value stays outside the exclusion, and the property counts at fair market value for the USD 75 million test. Stock later issued for cash or services is not affected. Settle the flip structure with US tax counsel before signing.
- Original issue. Shares bought in a secondary sale are not QSBS for the buyer.
- Redemptions. Stock fails if the company bought back stock from the holder or a related person in the 4-year period starting 2 years before issuance, or bought back more than 5 per cent of its stock by value in the 2-year period starting 1 year before issuance.
- Large rounds. Gross assets are tested immediately after issuance, counting the money raised. Stock in a round that takes the company over USD 75 million fails, and as a rule so does stock issued later.
- Options and SAFEs. An option is not stock, so the holding period generally starts no earlier than exercise (see moving the ESOP to Delaware after a flip-up). For SAFEs there is a risk that the clock, and the applicable regime, are fixed only at conversion. US tax counsel should confirm both.
- State tax. Some states do not follow the federal exclusion; California’s tax authority states that California does not conform to section 1202.
Research costs: section 174A at home, section 174 abroad
For taxable years beginning after 31 December 2021, research and experimental expenditures, expressly including software development, had to be capitalised and amortised over 5 years (US research) or 15 years (foreign research). Public Law 119-21 added section 174A: domestic research expenditures paid or incurred in taxable years beginning after 31 December 2024 are deductible immediately, with an option to amortise them over at least 60 months.
- Unamortised 2022 to 2024 domestic costs can be deducted in the first taxable year beginning after 31 December 2024 or ratably over two years (IRS procedures: Rev. Proc. 2025-28; the accounting method change procedures were further modified by Rev. Proc. 2026-32).
- Small business retroactive election. Taxpayers meeting the section 448(c) gross receipts test for their first taxable year beginning after 31 December 2024 (average annual gross receipts of USD 31 million for taxable years beginning in 2025, per Rev. Proc. 2025-28) could apply section 174A back to taxable years beginning after 31 December 2021 by amended returns. The deadline was 6 July 2026 and has passed.
- Foreign research stays under section 174: capitalised and amortised over 15 years from the midpoint of the year in which it is paid or incurred. For property disposed of after 12 May 2025, disposal triggers no deduction; amortisation continues.
Development in Türkiye: a 15-year deduction and a transfer pricing cost
Foreign research is research conducted outside the United States, Puerto Rico and US possessions; IRS interim guidance (Notice 2023-63) looks to where it is performed. Code written in Istanbul is foreign research even when a Delaware company pays for it.
- The topco’s payments. If the topco pays the Turkish subsidiary under a development services agreement, those payments will generally be the topco’s foreign research expenditure, amortised over 15 years. Because of the midpoint rule, the first-year deduction for a full 12-month taxable year is one thirtieth of the cost. Notice 2023-63 (interim guidance predating the 2025 law) looks at financial risk and rights to use the result; US tax counsel should confirm how it applies to the agreement.
- Turkish transfer pricing. Under Article 13 of the Corporate Tax Law No. 5520, the subsidiary must charge the topco an arm’s length price (for development services often set on a cost-plus basis), and its profit is taxed in Türkiye. The US deduction for the same payment is spread over 15 years, so a topco with US revenue can show taxable income while the group burns cash.
- No research credit. Foreign research is also excluded from the US research credit (section 41(d)(4)(F)).
- Structure. Where the IP sits and how the intercompany arrangement is built change where the cost lands; design it with US and Turkish advisers, consistent with the Turkish subsidiary’s IP position after the flip.
Beneficial ownership reporting: what is left
FinCEN’s interim final rule, announced on 21 March 2025 and published on 26 March 2025 (90 FR 13688), removed US-formed companies from the definition of “reporting company” and exempted reporting of US person beneficial owners. The final rule, published and effective on 14 August 2026 (91 FR 52508), adopted that position with limited changes. As of November 2026:
- A Delaware topco is a domestic entity and files no beneficial ownership report.
- A foreign entity registered to do business in a US state, such as a Turkish A.Ş. registered to open a US office, remains a reporting company and must report its non-US beneficial owners within 30 days of receiving actual notice of its registration (or of public notice, if earlier), and changes within 30 days.
- The Corporate Transparency Act itself remains in force; check FinCEN’s BOI page before relying on this.
A Delaware corporation must maintain a registered agent in Delaware (8 Del. C. §132) and file its annual franchise tax report and payment by 1 March (late: USD 200 penalty plus 1.5 per cent monthly interest). A US corporation with at least one foreign person owning, directly or indirectly, 25 per cent or more of the vote or value attaches Form 5472 to its tax return for reportable related-party transactions, such as payments to the Turkish subsidiary; the penalty for not filing is USD 25,000, with more if the failure continues after IRS notice. See also the first 90 days of a US company.
Where to start
- Map the cap table by holder: US taxpayer or not, acquired before or after 4 July 2025, and how (original issue, flip exchange, option exercise, SAFE conversion).
- Keep a valuation of the flip exchange and track gross assets at each issuance.
- Check redemption windows with US tax counsel before any founder or employee buyback.
- Review the intercompany development agreement and transfer pricing file against the 15-year US amortisation.
- Diary 1 March for Delaware, the US tax return with any Form 5472, and the Turkish dates on our upcoming legal deadlines page.
Frequently asked questions
I am a founder living in Istanbul. Does QSBS reduce my tax on an exit?
Generally not. Section 1202 is an exclusion from US federal income tax, and a founder resident in Türkiye is, as a rule, taxed in Türkiye on gains from selling shares, including Delaware shares; the Turkish treatment of a specific exit should be confirmed separately. QSBS matters for your US investors, and for you only if you later become a US taxpayer.
Our SAFEs converted after 4 July 2025. Which QSBS rules apply?
Stock acquired after 4 July 2025 falls under the tiered rules (50, 75 and 100 per cent after 3, 4 and 5 years), the USD 15 million cap and the USD 75 million gross assets test. Whether the holding period runs from the SAFE investment or from conversion is not settled, so US holders should assume conversion unless their counsel advises otherwise.
Our developers are in Türkiye. Can the topco deduct their cost immediately?
No. Section 174A covers only domestic research. Development performed in Türkiye is foreign research under section 174, amortised over 15 years from the midpoint of the year, so for a full 12-month taxable year the first-year deduction is one thirtieth of the cost. The intercompany price must also be at arm’s length under Turkish rules.
Does our Delaware topco have to file a beneficial ownership report?
No, as of November 2026. FinCEN’s final rule, effective 14 August 2026, exempts US-formed companies. A foreign company registered to do business in a US state, such as a Turkish A.Ş., must still report its non-US beneficial owners. The topco should keep its registered agent, franchise tax and any Form 5472 in order.
Sources. Public Law 119-21 (4 July 2025), 139 Stat. 72, sections 70302 and 70431; Internal Revenue Code section 1202 (with 2025 effective date notes), section 174, section 174A and section 41(d)(4)(F); IRS Rev. Proc. 2025-28, Rev. Proc. 2026-32, Notice 2023-63 and Instructions for Form 5472; Treas. Reg. §301.7701-2(b)(8); California Franchise Tax Board, Instructions for Schedule D (540); FinCEN final rule, 91 FR 52508 (14 August 2026), and interim final rule, 90 FR 13688 (26 March 2025); FinCEN BOI page; 8 Del. C. §132; Delaware Division of Corporations, franchise tax; Corporate Tax Law No. 5520 (Article 13).
This article is general information and not legal advice; a specific situation should be assessed with counsel.
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