We continue to evaluate the impacts to QSBS as Congress works through updating the Build Back Better Act (the “BBBA”).
The most recent update released on 11/3/2021 (available here) includes the same QSBS amendment introduced in September, however it alters some of the related tax code provisions involving “high earners”.
The proposed legislative framework (released yesterday (11/3/2021) and subject to change) contains the following key elements which our calculations include:
- Capital gains rate = 20%
- Unexcluded Section 1202 (QSBS) Capital Gains rate = 28%
- Net Investment Income Tax = 3.8%
- Surcharge on income over $10M = 5% and a surcharge on income over $25M = 3%.
- Alternative Minimum Tax preference applied to 7% of the excluded gain, taxed rate (for certain individuals) = 28%
Based on our calculations, the current framework would create the following differences in effective tax rates between a non-QSBS gain and a QSBS gain at various income levels.
While legislators may believe that they are simply cutting the QSBS exemption in half, in actuality the proposed changes result in a larger than half reduction to the benefits of QSBS for earners in excess of $400,000. If QSBS is meant to encourage investment in the riskiest business ideas at their earliest stages, the question will follow for investors and entrepreneurs whether or not a 6.9% potential tax savings is adequate to foster robust investments in the small businesses that need capital the most. Legislators should carefully consider the potential impacts of any changes to QSBS before modifying it because the collateral consequences to the small business community may be substantial.
If legislation does inevitably move forward through the House, we strongly recommend that legislators in the Senate consider whether it is appropriate to tax the unexcluded portion of QSBS based on the percentage limitation at a 28% rate (originally derived from the capital gains rate when QSBS was first introduced in 1993) in light of the general 20% long term capital gains rate. This modification would be equitable for small business investors, and frankly, long overdue.
Help take action today!
Congressional representatives are repeatedly saying that they are not hearing enough concerns regarding the QSBS amendment.
- Please write or call your representatives to voice your concerns. We have drafted an email template and talking points to assist, and apps such as Democracy.io make it very easy to identify and write your representatives.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.