Debate: Should the Tax Break on Small-Business Stock Be Scaled Back?

Under current law, taxpayers can exclude gain on the sale of certain qualified small-business stock (QSBS) if the taxpayer holds the stock for at least five years prior to sale. If the stock was purchased after Sept. 27, 2010, 100% of the gain on the sale of QSBS can be excluded (a 50% or 75% exclusion applies if the stock was purchased in earlier years).

Pending legislation has been proposed that would reduce the exclusion from 100% to 50% for taxpayers with adjusted gross income that exceeds $400,000 if the stock was purchased after Feb. 18, 2009 (the date the previously applicable 75% exclusion became effective).

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about limiting the gain exclusion for qualified small-business stock. 

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: This new proposed limitation would apply only to high-income taxpayers who have the means to manipulate their income to avoid paying taxes. Currently, the QSBS exclusion provides yet another tax loophole to allow the wealthiest Americans to avoid paying their fair share of taxes. We need to be focused on eliminating as many of these loopholes as possible — especially if we’re going to forgo raising income tax rates on those high-income taxpayers. 

Byrnes: The QSBS exclusion really has less to do with providing a tax benefit to investors and more to do with giving a helping hand to small-business owners seeking to raise capital, especially in a challenging market. The 100% exclusion is a powerful motivator for investors to support our small-business owners. Limiting the exclusion to 50% not only adds complexity to the tax code, but also hurts the small-business owners we should be trying to protect.