Tax advisors are seeing more clients looking to claim an exclusion for Qualified Small Business Stock and expecting the gain to be 100 percent tax free. Can this be? Believe it or not, it very well could be, but nuanced criteria, not to mention the recently proposed amendment to IRC Section 1202 through the Build Back Better Act, make it a complex incentive to evaluate and monitor over time.
In fact, QSBS gains haven’t always been 100 percent tax free. When introduced in 1993, QSBS started out as a 50 percent capital gain exclusion. The exclusion was increased to 75 percent in 2009, and increased to 100 percent in September 2010. Currently, the exclusion percentage is solely based on the date the owners acquired QSBS stock, but the proposed BBB amendment would additionally subject the exclusion percentage to the taxpayer’s Adjusted Gross Income (AGI), depending on a $400,000 threshold.
The proposed language has accountants scratching their heads over the seemingly circular reference in determining what level of exclusion their clients would receive. As written, you need to know the QSBS exclusion percentage to calculate AGI, and you need AGI to know the exclusion percentage! Keep reading to learn how.