Many people believe Biden’s Tax Plan will only affect the wealthiest of America; however, many others will be directly impacted. One of these classes of individuals, that will be affected by the tax plan, is the employees of Startups—America’s backbone of economic innovation. The lawmakers behind this Tax Plan made the QSBS provisions in order to save money by taxing the investors, who majority of the time, receive the biggest capital gain returns. However, the ones who know and understand QSBS realize the provisions set a broad scope of taxation that can reach Founders, Investors, and even Employees.
BBBA May Impact You
There are several provisions in BBBA to note when considering whether stock is eligible for QSBS status. At any point in the early-stage startup cycle, if you have exercised stock options in the last five years and decide to sell your shares in an exit, the proposed changes may impact you. There is a chance you may be holding QSBS-qualifying stock without knowing you have it.
Biden’s plan proposes cutting the current tax exemption in half, which will ultimately have a direct impact on innovation and its ecosystem in this country. Early startup employees who sell stock and report a gain of more than $400,000 in adjusted gross income in a single year would be forced to exclude 50% of those gains under the plan. Congress claims these changes would impact the wealthiest Americans by modifying QSBS tax incentives. In the case of early startup employees, who are often middle-class Americans earning a modest living, these individuals would be negatively impacted in the event their company is successful and they are taxed heavily when selling their shares in an exit.
According to our analysis of federal data, this will raise an estimated $570 million per year in new tax revenue over the next decade. This revenue will make little contribution—approximately .016%—when funding Biden’s $3.5 trillion infrastructure plan. The loss of growth in new business and the significance of how this will impact small business contributions to the economy need to be considered. Although there may be a slight uptick in new federal revenue, it is important to consider that this revenue will come at the expense of a small group of people who create new jobs and stimulate innovation in the economy. The risk is not worth the potential damage that may occur with these changes. QSBS exemptions must be preserved and protected as they stand today.
With this in mind, Congress has to reconsider this Tax Plan and save one of the major proponents in America’s Economic innovation. Without QSBS, several investors will not want to invest in startups—which create jobs, opportunities, and revitalization within communities. This would deter employees from working in startups and eventually create a decline in the incorporations of startups as we know it.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.