Sponsor
John Cornyn
Senator · R-TX
Senator · R-TX
The bill increases and accelerates tax-favored treatment for qualifying small-business stock—boosting liquidity and incentives for startup investment and clarifying some S‑corp rules—while trading off substantial revenue loss, greater complexity, and unequal treatment between pre- and post-enactment holders.
Investors and small-business owners: increases and preserves larger QSBS exclusions (including preserved 75% and 100% rates) for qualifying stock acquired after enactment, reducing federal capital gains taxes on eligible sales.
Investors and startup backers: shortens the required QSBS holding period from more than 5 years to at least 3 years, enabling earlier tax-favored liquidity and likely increasing the attractiveness of investing in startups.
Investors using convertible debt and the small businesses they fund: stock received on conversion of qualifying debt can be treated as QSBS with the debt’s holding period tacked, preserving Section 1202 benefits after conversion and making convertible financings more attractive.
All taxpayers: expanding and accelerating QSBS exclusions (including shorter holding periods and conversion tacking) will reduce federal tax receipts and could increase deficits or pressure to raise revenue elsewhere.
Small-business owners, investors and tax preparers: the new 'applicable percentage', vintage-specific rules, conversion provisions, and subgroup/controlled-group tests increase tax-law complexity and recordkeeping, raising compliance and advisory costs.
Pre-enactment holders and many existing investors: the rules apply only prospectively (and to debt issued after enactment), producing unequal treatment between pre- and post-enactment holders and perceived unfairness or windfalls for new issuances.
Based on analysis of 4 sections of legislative text.
Shortens QSBS holding period to 3 years, replaces the fixed 50% exclusion with an "applicable percentage," allows certain debt-to-equity conversions to tack holding periods, and clarifies S‑corp and passive-loss interactions.
Official title: Amend the Internal Revenue Code of 1986 to modify the exclusion for gain from qualified small business stock.
Introduced February 24, 2025 by John Cornyn · Last progress February 24, 2025
Changes the tax treatment of gains from qualified small business stock (QSBS) by shortening the required holding period from more than 5 years to at least 3 years, replacing the fixed 50% exclusion with a variable “applicable percentage,” and expanding rules so certain conversions of qualified convertible debt and S corporation situations can qualify. It also clarifies interactions with passive loss rules and adjusts a preference-item rule tied to an earlier 2010 law. Most changes apply to stock or debt issued or acquired after the date of enactment, with one technical provision treated as if effective when the 2010 law took effect.