Ways and Means Proposal Affects QSBS Exclusion if Passed

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The legislative proposal approved by the Ways and Means Committee last week limits the application of the 75-percent exclusion and 100-percent exclusion rules (Section 1202) to taxpayers with adjusted gross income (“AGI”) of less than $400,000. The proposal also provides that the 75-percent exclusion and 100-percent exclusion rules do not apply to trusts and estates. Consequently, for qualified small business stock acquired any time after February 17, 2009, taxpayers with AGI equal to or greater than $400,000, as well as all trusts and estates, may only exclude 50% of the gain for income tax purposes from the sale of qualified small business stock. AGI is also determined without regard to the exclusion of gain from the sale of qualified small business stock. Thus, the full amount of such gain is included in AGI for purposes of determining the applicable exclusion. This proposal would be effective for sales or exchanges of stock on or after September 13, 2021, but not any sale or exchange of stock executed pursuant to a written binding contract which was in effect on September 12, 2021, and which is not later materially modified.

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