H.R. 1199

119th CONGRESS 1st Session

To amend the Internal Revenue Code of 1986 to modify the exclusion for gain from qualified small business stock.

IN THE HOUSE OF REPRESENTATIVES · February 11, 2025 · Sponsor: Mr. Kustoff · Committee: Committee on Ways and Means

Table of contents

• H.R. 1199
  • SEC. 1. Short title
  • SEC. 2. Phased increase in exclusion for gain from qualified small business stock
  • SEC. 3. Tacking holding period of convertible debt instruments
  • SEC. 4. Gain exclusion allowed with respect to qualified small business stock in corporation

SEC. 1. Short title

• This Act may be cited as the Small Business Investment Act of 2025.

SEC. 2. Phased increase in exclusion for gain from qualified small business stock

• (a) In general
  • of the Internal Revenue Code of 1986 is amended— Section 1202(a)(1)
    • by striking 50 percentand inserting the applicable percentage, and
    • by striking held for more than 5 yearsand inserting held for at least 3 years.
• (b) Applicable percentage
  • (5) Applicable percentage
    • Except as provided in paragraphs (3) and (4), the applicable percentage under paragraph (1) shall be determined under the following table:
  • Section 1202(a) of such Code is amended by adding at the end the following new paragraph:
• (c) Continued treatment as not item of tax preference
  • (1) In general
    • Section 57(a)(7) of such Code is amended by striking An amountand inserting In the case of stock acquired on or before the date of the enactment of the Creating Small Business Jobs Act of 2010, an amount.
  • (2) Conforming amendment
    • Section 1202(a)(4) of such Code is amended—
      • by striking at the end of subparagraph (B) and inserting a period, and
      • by striking subparagraph (C).
• (d) Other conforming amendments
  • Section 1202(a)(4) of such Code is amended by inserting after .
  • Paragraphs (3) and (4) of section 1202(a) of such Code are each amended by inserting after .
    • the applicable percentage under paragraph (1) shall be 75 percent, and
  • Section 1202(a)(3)(A) of such Code is amended to read as follows:
    • the applicable percentage under paragraph (1) shall be 100 percent, and
  • Section 1202(a)(4)(A) of such Code is amended to read as follows:
  • Section 1202(b)(2) of such Code is amended by striking more than 5 yearsand inserting at least 3 years.
  • Section 1202(g)(2)(A) of such Code is amended by striking more than 5 yearsand inserting at least 3 years.
  • Section 1202(j)(1)(A) of such Code is amended by striking more than 5 yearsand inserting at least 3 years.
• (e) Effective date
  • (1) In general
    • Except as provided in paragraph (2), the amendments made by this section shall apply to stock acquired after the date of the enactment of this Act.
  • (2) Continued treatment as not item of tax preference
    • The amendment made by subsection (c) shall take effect as if included in the enactment of section 2011 the Creating Small Business Jobs Act of 2010.

SEC. 3. Tacking holding period of convertible debt instruments

• (a) In general
  • of the Internal Revenue Code of 1986 is amended— Section 1202(f)
    • by redesignating paragraphs (1) and (2) as subparagraphs (A) and (B) and moving such subparagraphs (as so redesignated) 2 ems to the right,
    • by striking and inserting the following:
      • (1) Other stock
        • If any stock
      • (2) Convertible debt instruments
        • (A) In general
          • If any stock in a corporation is acquired by the taxpayer, without recognition of gain, solely through the conversion of a qualified convertible debt instrument—
            • (i) the stock so acquired shall be treated as qualified small business stock in the hands of the taxpayer, and
            • (ii) the stock so acquired shall be treated as having been held during the period during which the qualified convertible debt instrument was held.
        • (B) Qualified convertible debt instrument
          • For purposes of this paragraph, the term qualified convertible debt instrument means any bond or other evidence of indebtedness—
            • (i) which is originally issued by the corporation to the taxpayer,
            • (ii) the issuer of which—
            • from issuance until conversion, is a qualified small business, and
            • during substantially all of the taxpayer’s holding period of such bond or evidence of indebtedness, the corporation meets the active business requirements of subsection (e), and
            • (iii) which is convertible into stock in the corporation.
    • by adding at the end the following new paragraph:
• (b) Effective date
  • The amendments made by this section shall apply to debt instruments originally issued after the date of the enactment of this Act.

SEC. 4. Gain exclusion allowed with respect to qualified small business stock in corporation

• (a) In general
  • of the Internal Revenue Code of 1986 is amended— Section 1202(c)
    • by striking in paragraphs (1) and inserting corporation, and
    • by striking in paragraph (2)(A).
• (b) Qualified small business definition
  • Section 1202(d)(1) of such Code is amended by striking .
• (c) Clarification of aggregation rules applicable to corporations
  • Clarification of aggregation rules applicable to corporations
    • (C) Clarification with respect to corporations
      • Any determination of the members of a controlled group of corporations under this paragraph shall include taking into account any stock ownership in an S corporation.
      • Clarification with respect to corporations
  • Section 1202(d)(3) of such Code is amended by adding at the end the following new subparagraph:
• (d) Treatment of passive losses
  • (D) Certain dispositions of small business stock
    • In the case a disposition any gain from which is excluded from gross income under section 1202, subparagraph (A) shall not apply.
  • Section 469(g)(1) of such Code is amended by adding at the end the following new subparagraph:
• (e) Special rules relating to corporations
  • Special rules relating to corporations
    • (9) Applied at corporation level
      • In the case of an S corporation, the requirements of this subsection shall be applied at the corporate level.
      • Applied at corporation level
  • Section 1202(e) of such Code is amended by adding at the end the following new paragraph:
• (f) Effective date
  • The amendments made by this section shall apply to stock acquired after the date of the enactment of this Act.