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Building Back Better on Qualified Small Business Stock Provisions

October 28, 2021

 By: Joe Spillner of Squire 

Historically, there has been a terrific tax incentive for noncorporate taxpayers to invest in small businesses granted under section 1202 of the Internal Revenue Code. More commonly known as Qualified Small Business Stock (“QSBS”) gain exclusion, section 1202 provides noncorporate taxpayers the opportunity to exclude 100% of any gain on a sale or exchange of any QSBS acquired after September 27, 2010, 75% for QSBS acquired after February 17, 2009, and before September 28, 2010, and 50% for QSBS acquired on or before February 17, 2009, from their gross income. The amount of gain eligible for exclusion is generally limited to $10 million, or ten times the taxpayer’s basis in the stock. 

That said, we all know that tax legislation seems to be an ongoing point of debate for the ever-revolving door of the oval office, and with the inauguration of President Biden, we find this particular tax incentive in the crosshairs slated for change. The Build Back Better Act, which was recently approved by the House Ways and Means Committee, includes a proposal to modify the current “QSBS” tax incentive based on the eligible taxpayer’s level of adjusted gross income. In particular, the 100% and 75% gain exclusions would no longer be afforded to any taxpayer that (i) has an adjusted gross income (determined without regard to section 1202) equal to or greater than $400,000 or (ii) is a trust or estate. 

As a result of the suggested modification, certain identified taxpayers would only be able to exclude 50% of the gain recognized on the sale or exchange of their respective QSBS, regardless of when the stock was acquired, after August 10, 1993. If this tax proposal is approved, it’s intended to be effective retroactive to any sale or exchange on or after September 13, 2021. Therefore, taxpayers who had previously invested their capital based on the incentives under section 1202 may find their expected tax benefit now eliminated. At Squire and Company, we recommend that taxpayers speak with their trusted tax advisors to determine if this change could affect them in any way. For any concerns or questions regarding this matter, reach out to our tax professionals today to discuss your options.