The startup ecosystem and investment landscape are ever-evolving. As new questions develop, the answers and solutions are not far behind. In a new monthly series, the QSBS Expert team will be providing insight into these pressing questions in the highly nuanced realm of QSBS.
Tax season is in full swing, and naturally, a plethora of questions arise regarding QSBS filing, qualifications, and exemptions. This year is unique due to looming changes to the QSBS exemption in the Build Back Better Act (BBBA). While the BBBA is in legislative limbo, investors and corporations are keeping a close eye on any possible changes that could be coming in the future.
In this month’s edition of QSBS Expert Q&A, our team will answer a crucial question that has come pouring in from our readers since the beginning of the 2021 tax season.
Q: “If I had a QSBS gain in 2021 and file my taxes now, before the Build Back Better Act (BBBA) is enacted, can the IRS make me pay more for 2021 taxes later; if the BBBA becomes law after I file my taxes?”
A: In short, the answer is yes. The IRS can retroactively apply tax law changes for up to a 3-year statute of limitations, even if that causes taxpayers to pay additional taxes.
The details of this question relate specifically to the retroactive element of the BBBA QSBS amendment. This portion states that if a security was not sold before September 12th, 2021, the gains may be subject to a 50%, rather than 100%, exclusion level if a taxpayer’s Adjusted Gross Income (AGI) exceeded $400,000.
However, to date, QSBS regulations within IRC Section 1202 still hold that qualified gain acquired after September 27, 2010, can benefit from the 100% exclusion up to $10 million or 10x the adjusted basis, where eligible.
As explained above, if the proposed BBBA is enacted, it would reduce the QSBS tax exemption from 100% to 50% (up to the applicable exemption limits) for any gains after September 12, 2021, for taxpayers with more than $400,000 in AGI (including their QSBS gains). The existing QSBS regulations base the exemption percentage on when the stock was acquired, i.e. 100% exclusion for stock acquired after September 27, 2010, 75% exclusion for stock acquired between February 17, 2009, and September 27, 2010, and 50% exclusion for stock acquired between August 10, 1993 and February 18, 2009. These dates would continue to remain applicable, however the AGI threshold would then be applied to determine if the exclusion percentage needs to be adjusted.
In the Thinking Ahead to Filing Your 2021 Taxes if You Had a QSBS Gain article, our team explained that the IRS has instructions and documentation in case legislative changes transpire. In the instructions for Form D, the IRS includes a section labeled “Future Developments.” Here, the IRS posts important information about ongoing developments occurring after the forms are published, including enacted legislation that may affect tax filing.
The QSBS Expert team here at Capgains.com continues to actively monitor and engage in the debate surrounding this proposed amendment. Join our coalition to raise awareness, provide support, and collectively foster a healthy startup ecosystem.
Our team is here to help with questions surrounding the highly nuanced nature of the QSBS tax code and how it may affect your business or investments. Reach out and let us know what questions we can answer for you in our next edition of QSBS Expert Q&A.
Capgains specializes in aiding investors and corporations as they navigate QSBS tax exemption qualifications. We are ready to provide guidance and support throughout the entire lifetime of your eligible stock.
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This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.