Retroactive tax increase proposed on small businesses

I try not to pay much attention to proposed changes. Most are crazy ideas that never become law. This one would be a disaster. In this case, someone could spend 20 or 30 years building a business and then, when they are selling it because they are ready to retire, they will have to pay tax on the profit. This is just the worst idea ever.

Small business owners are under attack in Congress. 

In the $1.75 trillion reconciliation bill, lawmakers have proposed a retroactive tax increase that will disproportionately affect small business owners, employees, and investors.

If you care about this issue – whether you operate a business or know someone who does – Tell your Senators and Representatives to support the small business economy by preserving the Qualified Small Business Stock (QSBS) of the United States. Your message will have an impact.

Qualified Small Business Stock (QSBS) Exemption

In 1993, the QSBS exemption was introduced as a tax break for small business owners, investors, and early employees.

Qualified Small Business Stock (QSBS) has benefited from favorable tax treatment since 2010 when compared to stock in big businesses, because lawmakers understood that small businesses were the economic engine of our economy. Presidents Obama and Trump backed QSBS because it encouraged small business hiring, formation, and investment.

Congress claims that by repealing the QSBS exemption, they are targeting America’s wealthiest citizens, and that the proposed changes to QSBS are intended to raise taxes on America’s millionaires and billionaires. However, the net they’re throwing is so wide that it’ll almost certainly catch low-level startup workers, who can easily (and briefly) be pushed into the country’s highest tax bracket if they exercise stock options or sell their shares.

In practice, the QSBS exemption has been popular with startup founders, investors and startup employees — people who take significant financial risks to initiate startup companies. QSBS was originally designed to reward those who drive innovation in the United States.

The proposed changes

People that sell QSBS are currently entitled to a 100 percent tax exemption under existing law. Congress has suggested abolishing the 100 percent bonus, which would apply to stock purchased up to 12 years ago.

For example, if a $100,000 investment was made in an eligible small business back in 2010, their profit might be $500,000.00 when the company is sold later this year. They would not have to pay any Federal tax on such sale under the current law. However, if Congress passes their bill, they will have to pay an additional $84,400 in federal taxes.

If you’ve exercised stock options in an early-stage firm in the last five years, the proposed QSBS change could have an impact on how you sell your shares in an exit. You might not even be aware that you own QSBS-qualifying stock.

The result will be a slight uptick in new federal revenue

This will be taken from a relatively small group of innovative people working in the economy, and it is not worth the risk to entrepreneurs.

It will needlessly choke innovation, while raising an estimated average of $570 million per year in new tax revenue over the next decade, an inconsequential amount in comparison to the nation’s $3.5 trillion infrastructure plan.

Consider the following: If people had known the regulations would change, they would have made different judgments about how to structure their businesses, compensate their staff, invest, and sell.

We are concerned that these unexpected consequences would stifle innovation and damage a tiny group of people while providing the federal government with what would amount to a rounding error in new tax revenue.

Look ahead: if passed, QSBS holders will face billions in additional taxes rather than the tax reduction they were promised:

  • Small enterprises will find it more difficult to get funds from investors.
  • There will be fewer small businesses developed.
  • Small firms will find it more difficult to compete for talent with large corporations.
  • Even as the economy struggles, small businesses will owe billions more in taxes.

Understanding the trend

In Washington, small enterprises are underrepresented. Congress ignores them because they are fragmented and don’t have lobbyists. The QSBS exemption must be protected.

Tell your Senators and Representatives to protect QSBS if you care about small companies.