The Senate Finance Committee's version of the Republicans' budget reconciliation legislation (the “Senate Bill”) would significantly expand the qualified small business stock (QSBS) benefits under Section 1202 of the Code effective for investments made after the date of enactment. 

QSBS Changes:

Under the Senate Bill, QSBS benefits are expanded in three main ways, applying to stock acquired after the date the bill is signed into law by the President (the “applicable date”):

1. The required holding period for QSBS benefits for stock acquired after the applicable date would be reduced from 5 years to 3 years, with partial benefits phasing in beginning after a three-year holding period.
   • The gain exclusion percentage would depend on the holding period:
     • Taxpayers that hold stock for at least 3 years can exclude 50% of their gain.
     • Taxpayers that hold stock for at least 4 years can exclude 75% of their gain.
     • Taxpayers that hold stock for at least 5 years can exclude 100% of their gain.
   • Example:  Taxpayer acquires QSBS eligible stock after the applicable date, and disposes of the stock three years later for $10 million of gain.  Taxpayer can only exclude 50% of its gain on the sale of shares ($5 million).  
2. $15 million (up from $10 million) of gain from stock acquired after the applicable date could be excluded.
   • Known as the “per-issuer limitation,” a taxpayer's gain excluded from the sale of QSBS acquired after the applicable date would not exceed the greater of:
     • $15,000,000; and
     • 10 times the aggregate adjusted basis of QSBS issued by the corporation and disposed of by the taxpayer.
   • Note that the 10x basis rule does not change, so that the fixed dollar cap would become relatively more attractive.
3. The permitted gross assets limit would increase from $50 million to $75 million.
   • For stock issued after the applicable date, a corporation's “aggregate gross assets” (cash and the tax basis of other property held by the corporation) must not exceed $75,000,000 immediately after the stock is issued (or at any prior time).

The $75 million asset limit and $15 million maximum exclusion would automatically be increased by amounts indexed to inflation beginning in the 2027 tax year.  

The QSBS enhancements were not in the version of the budget reconciliation bill passed by the House.  So it remains to be seen if they will be incorporated in any legislation that passes Congress. 

Section 174 Changes:

At the same time, the Senate Bill (like the House Bill) proposes to restore expensing for domestic R&D and software development costs beginning after December 31, 2024.  The Senate Bill also allows small businesses with average annual revenue below certain thresholds to make this change retroactively to 2022.

This change may also be helpful for QSBS by reducing the gross assets of a corporation taken into account in the $50 million / $75 million test, possibly on a retroactive basis for stock issued during the 2022-2024 period.