Senate Finance Committee Proposes Expanding QSBS

The One Big Beautiful Bill Act (“OBBBA”) that passed the House had a lot of notable tax provisions, but none relating to qualified small business stock (“QSBS”). The version proposed by the Senate’s Committee on Finance surprisingly includes changes that would expand QSBS benefits. These changes would increase the number of companies eligible to issue QSBS and the number of taxpayers that can recognize QSBS benefits.

Those that invest in, or work for, private companies are usually familiar with the power of QSBS. For those that are not—gain from QSBS can be excluded from income and thus not subject to tax, if numerous requirements are satisfied. As of today, those requirements include:

• The QSBS must be held for more than 5 years (5 Year Requirement);

• The “aggregate gross assets” of the company issuing the stock cannot exceed $50 million at any point prior to the issuance of the stock or immediately after the issuance of the stock (Gross Asset Requirement); and

• A taxpayer’s excluded gain generally cannot exceed the greater of $10 million or 10 times the “aggregate adjusted bases” of the taxpayer’s QSBS (Gain Cap).

  
  

These requirements can frustrate taxpayers. When a time-sensitive liquidity event

arises before the 5 Year Requirement is satisfied, a QSBS holder must decide between a significant tax bill and losing the chance to liquidate the QSBS. The $50 million threshold in the Gross Asset Requirement has not changed since its enactment in 1993, despite $50 million today being very different than in 1993. And the Gain Cap can require taxpayers to engage in complex structuring to maximize QSBS benefits for an investment in a small business that has done exactly what the QSBS regime is supposed to incentivize—grow significantly.

The Senate’s proposed version would change each of the above requirements in

taxpayer-favorable ways:

• The 5 Year Requirement would be replaced with the following tiered approach:

  • 50% gain exclusion for QSBS held for 3+ years;

  • 75% gain exclusion for QSBS held for 4+ years; and

  • 100% gain exclusion for QSBS held for 5+ years.

• The Gross Asset Requirement threshold would be $75 million, adjusted for

  inflation, instead of $50 million.

• The Gain Cap dollar threshold would be $15 million, adjusted for inflation,

  instead of $10 million.

The changes would only apply to stock issued after the OBBBA is enacted. Previously issued stock would continue to be subject to current rules.

It’s still unknown whether QSBS changes will become law. The Senate has not voted on the committee’s proposal, and once a Senate version is approved, it needs to be reconciled with the House version. But we may have clarity soon – the White House wants Congress to send a bill to the President’s desk before the July 4th holiday.

Questions about how this might impact your business or investment? Contact Oak Ridge Tax Law Partners Chase Manderino and Martin de Jong to discuss.