“A bill to amend the Internal Revenue Code of 1986 to modify the exclusion for gain from qualified small business stock.”
No CRS summary available for this bill.
This section revises the exclusion for gain from qualified small business stock (QSBS)—which allows noncorporate taxpayers to exclude a percentage of capital gain from the sale of stock in certain eligible C corporations—to provide an applicable percentage based on holding period for QSBS acquired after enactment: 50% if held at least three years (previously, 50% if held more than five years), 75% if held four years, and 100% if held five or more years. It limits the exclusion from alternative minimum tax (AMT) preference treatment to QSBS acquired on or before enactment of the Creating Small Business Jobs Act of 2010 (i.e., December 17, 2010) and makes conforming amendments, including (1) applying the three-year minimum holding period generally, (2) limiting higher exclusion percentages for QSBS issued in empowerment zones or certain disaster areas to stock held more than five years and acquired before enactment of this Act, and (3) adjusting those percentages to 75% and 100%, respectively.
This section amends the holding period tacking rules in IRC §1202(f) for qualified small business stock (QSBS)—which allows exclusion of up to 100% of gain from the sale of certain C corporation stock held more than five years if asset and active business requirements are met—to treat stock acquired solely through conversion of a qualified convertible debt instrument as QSBS with a tacked holding period that includes the period the debt was held. A qualified convertible debt instrument is debt originally issued by the corporation to the taxpayer that is convertible into the corporation's stock, with the issuer qualifying as a QSBS from issuance until conversion and meeting subsection (e) active business requirements during substantially all of the taxpayer's holding period. The amendments apply to debt instruments originally issued after the date of enactment.
This section expands the exclusion of gain from the sale of qualified small business stock (QSBS) under IRC §1202 to include stock issued by S corporations (previously limited to C corporations). (As background, the exclusion allows eligible taxpayers to exclude up to 100% of gain—subject to limits based on the taxpayer's basis—from QSBS acquired at original issue by the taxpayer and held for more than five years if the issuing corporation meets asset and active business requirements.) Specifically, the section (1) removes C corporation requirements from the definitions of QSBS and qualified small business; (2) clarifies that controlled group aggregation rules apply to S corporation stock ownership; (3) provides that passive activity loss rules under IRC §469(g)(1) do not apply to QSBS dispositions eligible for the exclusion; and (4) directs that QSBS requirements for S corporations be applied at the corporate level. The changes apply to stock acquired after the date of enactment.