Americans for Tax Reform is happy to announce its support for Rep. David Kustoff (R-Tenn.) and Sen. John Cornyn’s (R-Texas) Small Business Investment Act.
The Small Business Investment Act would improve the capital gains rate exemption for qualified small business stock (QSBS). Currently, the tax code allows for individuals and pass-through entities to exempt up to 100 percent of gains made on the sale of qualified small business stock if it was acquired at issuance, and held for at least five years in a C corporation with aggregate gross assets of $50 million or less. Individuals or pass-through entities can sell up to $10 million, or “10 times the investor’s basis in the stock,” in QSBS and still qualify for the tax exclusion.
The bill offers a tiered approach for investors to receive a capital gains exemption prior to five years of holding the stock. The bill allows 50 percent of capital gains to be excluded from the capital gains tax rate after 3 years; 75 percent of the gains to be excluded after 4 years, and then (keeping with current statute) 100 percent of the gains may be excluded after 5 years.
Under the bill, convertible bonds would also qualify under the QSBS exemption. Convertible debt is attractive to investors and allows businesses “to borrow at lower interest rates than a traditional bond, without immediately diluting existing shareholders’ stakes through the sale of new stock.” This change could incentive more investors to provide funding to small businesses.
The legislation would also expand the qualifications to include S-corporations, giving more entrepreneurs access to this essential funding.
The provisions of this bill will further encourage investors to invest in the new start-ups and small businesses that otherwise might not be able to attract the sufficient capital necessary for their survival.
ATR commends Rep. Kustoff and Sen. Cornyn’s efforts to promote capital formation for American entrepreneurs and small businesses.
Lawmakers should support and pass the Small Business Investment Act.
For more background on QSBS, click here.