Senate Proposal Enhances the Qualified Business Stock Exclusion

IRC Sec. 1202 generally permits taxpayers to exclude from their gross income gain from the sale of qualified small business stock. The Senate version of the “One Big Beautiful Bill Act” would significantly expand the benefits of Sec. 1202 and relax certain requirements. The proposed changes would not be retroactive and would take effect for stock acquired after the legislation is enacted.   

The proposed changes to Sec. 1202 offer private equity and venture capital funds a unique opportunity to leverage tax benefits, enhance investment flexibility, and expand their target acquisition strategies. With the impending changes, there may be situations where deferring the acquisition date until after enactment could qualify you for these benefits or result in increased tax savings. Staying informed and consulting with experts during this legislative process will be crucial for maximizing the advantages these changes may bring. 

Specifically, the legislation would make the following changes: 

• Increase the gross asset test from $50 million to $75 million, adjusted annually for inflation starting in 2027.   
  • This would expand the reach of Sec. 1202 to more targets.  Any target between $50 million and $75 million would qualify. Right-sizing targets above the new threshold would still be an option in the right circumstances.   

• Increase the lower gain exclusion amount from $10 million to $15 million ($7.5 million per individual if married filing separately), adjusted for inflation annually starting in 2027.   
  • The upper limit of ten times the taxpayer’s tax basis would still be available.  

• Allow taxpayers to claim reduced benefits if the stock is held for less than five years.   
  • Currently, a taxpayer must hold the stock for five years to claim any benefits under Sec. 1202.   
  • The proposal would allow taxpayers to claim a 50% exclusion after holding the stock for 3 years, a 75% exclusion after holding the stock for four years, and the 100% exclusion after holding the stock for over five years.   

• For targets under $50 million, taxpayers might benefit from relaxed holding period requirements and increased exclusion amount.
    
• Targets above $50 million might be able to avoid having to engage in right-sizing transactions and also might qualify when they did not under current rules.  

As a reminder, this proposal is currently only in the Senate version of the bill, and it may be removed or altered before the legislation becomes law. 

In light of the above, we strongly recommend that you contact one of our Sec. 1202 experts if you are considering acquiring a target with the intention of qualifying for Sec. 1202 benefits while the legislation is pending or are generally looking at targets around $75 million.