Retain
On June 16, 2025, the Senate finance committee published its draft legislative text (the Senate proposal) following the previous adoption of the law on One Big Beautiful Bill by the House of Representatives (the bill of the Chamber). Compared to the House bill, the Senate proposal considerably expanded the tax advantages currently available under article 1202 for “small qualified companies” (QSB).1 These changes, if they were finally adopted, would provide additional incentives to promote the growth of small eligible businesses and investments within the start -up ecosystem.
Summary of the current law
Under the current American federal tax law, article 1202 allows a non -corporate taxpayer to potentially exclude up to 100% of the amount of the eligible gain made from the sale or exchange of QSB. The amount of the eligible for exclusion by a taxpayer with regard to the QSB held in a particular company is subject to an annual limitation equal to the biggest (i) $ 10 million (reduced by the total amount of eligible gains taken into account by the taxpayer during the previous taxation years with regard to the QSB provisions of this company) or (ii) 10 times the total adjusted basis of QSB issued by such a company and eliminated by the taxpayer during the taxation year.
In order to potentially qualify for the advantages of article 1202, a non -corporate taxpayer must acquire and hold actions in an additional C company. The potential advantages of article 1202 do not apply directly to the interests in actions acquired and held in assassination entities, such as companies or partnerships (or LLC imposed as partnerships). However, the part of the attributable gain of an individual taxpayer attributable to a sale of QSB by a passing entity can potentially be considered as a gain eligible for the exclusion of article 1202.
In addition, assuming that a non -corporate taxpayer has actions in a company C (directly or indirectly through a passing entity), there are four main requirements which must be met before gaining the sale of actions are potentially eligible for exclusion under article 1202: (i) the course of actions “; (ii) the issuing company must be a” qualified company ” “Of $ 50 million on the adjusted tax base of assets”);2
Potential changes contained in the Senate proposal
The Senate proposal contains three important changes which have the potential to considerably expand the nature and scope of the tax advantages granted to QSB holders under the current law:
- Exclusion at gain on several levels. First, the Senate proposal would establish “exclusion of gain on several levels” for the QSBs which is acquired after the date on which any real legislation can ultimately be promulgated (the date of entry into force). More specifically, the variation provides for an exclusion of 50% after three years, an exclusion of 75% after four years and an exclusion of 100% after five years. In addition, assum that the love of any taxable tiered gaain would be subject to tax at the maximum capital gains rate of 28% that generally apps to the taxable portion of gains realized with respect to qsbs acquired on or before September 27, 2010 (and that such gains would also Item for purposes of the minimum tax alternative (AMT)), the effective tax rate would be 14% for stock in the three-year tier and 7% for stock in the level of four years (with actions in the five-year level retaining an exclusion and an exemption of 100% of the AMT).
- 15 million dollars CAP per outlet. Second, the Senate’s proposal would increase the amount of the current “cap” potentially applicable to qsbs’ eligible gains from $ 10 million to $ 15 million for QSBs which are acquired after the date of entry into force, indexed to inflation from 2027. Taxpayers (such as founders and employees at an early stage) which have a relatively low tax base in their actions QSB.
- 75 million dollars overall limitation of raw assets. Thirdly, the Senate proposal would increase the current limitation of the overall gross active ingredient of $ 50 million to $ 75 million for QSBs which is acquired after the date of entry into force, indexed to inflation starting in 2027. This also represents a significant change compared to the current law because it will create a much higher threshold for new action emissions. In addition, this change proposed, when associated with the modifications proposed in article 174 which would allow taxpayers to immediately deduct domestic research or experimental expenditure, would considerably extend the potential number of small eligible businesses which could benefit from article 1202.
Potential impact of changes
At this stage, it is not clear if the modifications of article 1202 contained in the Senate proposal will ultimately be promulgated or, if they are promulgated, if the modifications will be considerably modified in relation to their current form. Constituents of the community of small businesses and the start -up ecosystem should continue to monitor developments in relation to these potential changes and examine the impacts, if necessary, such changes may have on future potential stock emissions.
For questions or more details concerning the information contained in this Wilmerhale customer alert, please contact the tax partner David Strong or another member of the tax practice of Wilmerhale.