Small Business Investment Act of 2023

II 118TH CONGRESS 1ST SESSION S. 1243 To amend the Internal Revenue Code of 1986 to modify the exclusion for gain from qualified small business stock. IN THE SENATE OF THE UNITED STATES APRIL 20, 2023 Mr. CORNYN introduced the following bill; which was read twice and referred to the Committee on Finance A BILL To amend the Internal Revenue Code of 1986 to modify the exclusion for gain from qualified small business stock. Be it enacted by the Senate and House of Representa- 1 tives of the United States of America in Congress assembled, 2 SECTION 1. SHORT TITLE. 3 This Act may be cited as the ‘‘Small Business Invest- 4 ment Act of 2023’’. 5 SEC. 2. PHASED INCREASE IN EXCLUSION FOR GAIN FROM 6 QUALIFIED SMALL BUSINESS STOCK. 7 (a) IN GENERAL.—Section 1202(a)(1) of the Internal 8 Revenue Code of 1986 is amended— 9 VerDate Sep 11 2014 21:38 Apr 25, 2023 Jkt 039200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\S1243.IS S1243 pbinns on DSKJLVW7X2PROD with $$_JOB 2 •S 1243 IS (1) by striking ‘‘50 percent’’ and inserting ‘‘the 1 applicable percentage’’, and 2 (2) by striking ‘‘held for more than 5 years’’ 3 and inserting ‘‘held for at least 3 years’’. 4 (b) APPLICABLE PERCENTAGE.—Section 1202(a) of 5 such Code is amended by adding at the end the following 6 new paragraph: 7 ‘‘(5) APPLICABLE PERCENTAGE.—Except as 8 provided in paragraphs (3) and (4), the applicable 9 percentage under paragraph (1) shall be determined 10 under the following table: 11 ‘‘Years stock held: Applicable percentage: 3 years ...................................................................................... 50% 4 years ...................................................................................... 75% 5 years or more ........................................................................ 100%’’. (c) CONTINUED TREATMENT AS NOT ITEM OF TAX 12 PREFERENCE.— 13 (1) IN GENERAL.—Section 57(a)(7) of such 14 Code is amended by striking ‘‘An amount’’ and in- 15 serting ‘‘In the case of stock acquired on or before 16 the date of the enactment of the Creating Small 17 Business Jobs Act of 2010, an amount’’. 18 (2) CONFORMING AMENDMENT.—Section 19 1202(a)(4) of such Code is amended— 20 (A) by striking ‘‘, and’’ at the end of sub- 21 paragraph (B) and inserting a period, and 22 VerDate Sep 11 2014 21:38 Apr 25, 2023 Jkt 039200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\S1243.IS S1243 pbinns on DSKJLVW7X2PROD with $$_JOB 3 •S 1243 IS (B) by striking subparagraph (C). 1 (d) OTHER CONFORMING AMENDMENTS.— 2 (1) Section 1202(a)(4) of such Code is amended 3 by inserting ‘‘and before the date of the enactment 4 of the Small Business Investment Act of 2023’’ after 5 ‘‘Act of 2010’’. 6 (2) Paragraphs (3) and (4) of section 1202(a) 7 of such Code are each amended by inserting ‘‘held 8 for more than 5 years and’’ after ‘‘In the case of 9 qualified small business stock’’. 10 (3) Section 1202(a)(3)(A) of such Code is 11 amended to read as follows: 12 ‘‘(A) the applicable percentage under para- 13 graph (1) shall be 75 percent, and’’. 14 (4) Section 1202(a)(4)(A) of such Code is 15 amended to read as follows: 16 ‘‘(A) the applicable percentage under para- 17 graph (1) shall be 100 percent, and’’. 18 (5) Section 1202(b)(2) of such Code is amend- 19 ed by striking ‘‘more than 5 years’’ and inserting 20 ‘‘at least 3 years’’. 21 (6) Section 1202(g)(2)(A) of such Code is 22 amended by striking ‘‘more than 5 years’’ and in- 23 serting ‘‘at least 3 years’’. 24 VerDate Sep 11 2014 21:38 Apr 25, 2023 Jkt 039200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\S1243.IS S1243 pbinns on DSKJLVW7X2PROD with $$_JOB 4 •S 1243 IS (7) Section 1202(j)(1)(A) of such Code is 1 amended by striking ‘‘more than 5 years’’ and in- 2 serting ‘‘at least 3 years’’. 3 (e) EFFECTIVE DATE.— 4 (1) IN GENERAL.—Except as provided in para- 5 graph (2), the amendments made by this section 6 shall apply to stock acquired after the date of the 7 enactment of this Act. 8 (2) CONTINUED TREATMENT AS NOT ITEM OF 9 TAX PREFERENCE.—The amendment made by sub- 10 section (c) shall take effect as if included in the en- 11 actment of section 2011 of the Creating Small Busi- 12 ness Jobs Act of 2010. 13 SEC. 3. TACKING HOLDING PERIOD OF CONVERTIBLE DEBT 14 INSTRUMENTS. 15 (a) IN GENERAL.—Section 1202(f) of the Internal 16 Revenue Code of 1986 is amended— 17 (1) by redesignating paragraphs (1) and (2) as 18 subparagraphs (A) and (B) and moving such sub- 19 paragraphs (as so redesignated) 2 ems to the right, 20 (2) by striking ‘‘CONVERSION OF OTHER 21 STOCK.—If any stock’’ and inserting the following: 22 ‘‘CONVERSION.— 23 ‘‘(1) OTHER STOCK.—If any stock’’, and 24 VerDate Sep 11 2014 21:38 Apr 25, 2023 Jkt 039200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\S1243.IS S1243 pbinns on DSKJLVW7X2PROD with $$_JOB 5 •S 1243 IS (3) by adding at the end the following new 1 paragraph: 2 ‘‘(2) CONVERTIBLE DEBT INSTRUMENTS.— 3 ‘‘(A) IN GENERAL.—If any stock in a cor- 4 poration is acquired by the taxpayer, without 5 recognition of gain, solely through the conver- 6 sion of a qualified convertible debt instru- 7 ment— 8 ‘‘(i) the stock so acquired shall be 9 treated as qualified small business stock in 10 the hands of the taxpayer, and 11 ‘‘(ii) the stock so acquired shall be 12 treated as having been held during the pe- 13 riod during which the qualified convertible 14 debt instrument was held. 15 ‘‘(B) QUALIFIED CONVERTIBLE DEBT IN- 16 STRUMENT.—For purposes of this paragraph, 17 the term ‘qualified convertible debt instrument’ 18 means any bond or other evidence of indebted- 19 ness— 20 ‘‘(i) which is originally issued by the 21 corporation to the taxpayer, 22 ‘‘(ii) the issuer of which— 23 ‘‘(I) from issuance until conver- 24 sion, is a qualified small business, and 25 VerDate Sep 11 2014 21:38 Apr 25, 2023 Jkt 039200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\S1243.IS S1243 pbinns on DSKJLVW7X2PROD with $$_JOB 6 •S 1243 IS ‘‘(II) during substantially all of 1 the taxpayer’s holding period of such 2 bond or evidence of indebtedness, the 3 corporation meets the active business 4 requirements of subsection (e), and 5 ‘‘(iii) which is convertible into stock in 6 the corporation.’’. 7 (b) EFFECTIVE DATE.—The amendments made by 8 this section shall apply to debt instruments originally 9 issued after the date of the enactment of this Act. 10 SEC. 4. GAIN EXCLUSION ALLOWED WITH RESPECT TO 11 QUALIFIED SMALL BUSINESS STOCK IN COR- 12 PORATION. 13 (a) IN GENERAL.—Section 1202(c) of the Internal 14 Revenue Code of 1986 is amended— 15 (1) by striking ‘‘C corporation’’ in paragraphs 16 (1) and inserting ‘‘corporation’’, and 17 (2) by striking ‘‘and such corporation is a C 18 corporation’’ in paragraph (2)(A). 19 (b) QUALIFIED SMALL BUSINESS DEFINITION.—Sec- 20 tion 1202(d)(1) of such Code is amended by striking 21 ‘‘which is a C corporation’’. 22 (c) CLARIFICATION OF AGGREGATION RULES APPLI- 23 CABLE TO S CORPORATIONS.—Section 1202(d)(3) of such 24 VerDate Sep 11 2014 21:38 Apr 25, 2023 Jkt 039200 PO 00000 Frm 00006 Fmt 6652 Sfmt 6201 E:\BILLS\S1243.IS S1243 pbinns on DSKJLVW7X2PROD with $$_JOB 7 •S 1243 IS Code is amended by adding at the end the following new 1 subparagraph: 2 ‘‘(C) CLARIFICATION WITH RESPECT TO S 3 CORPORATIONS.—Any determination of the 4 members of a controlled group of corporations 5 under this paragraph shall include taking into 6 account any stock ownership in an S corpora- 7 tion.’’. 8 (d) TREATMENT OF PASSIVE LOSSES.—Section 9 469(g)(1) of such Code is amended by adding at the end 10 the following new subparagraph: 11 ‘‘(D) CERTAIN DISPOSITIONS OF SMALL 12 BUSINESS STOCK.—In the case of a disposition 13 any gain from which is excluded from gross in- 14 come under section 1202, subparagraph (A) 15 shall not apply.’’. 16 (e) SPECIAL RULES RELATING TO S CORPORA- 17 TIONS.—Section 1202(e) of such Code is amended by add- 18 ing at the end the following new paragraph: 19 ‘‘(9) APPLIED AT S CORPORATION LEVEL.—In 20 the case of an S corporation, the requirements of 21 this subsection shall be applied at the corporate 22 level.’’. 23 VerDate Sep 11 2014 21:38 Apr 25, 2023 Jkt 039200 PO 00000 Frm 00007 Fmt 6652 Sfmt 6201 E:\BILLS\S1243.IS S1243 pbinns on DSKJLVW7X2PROD with $$_JOB 8 •S 1243 IS (f) EFFECTIVE DATE.—The amendments made by 1 this section shall apply to stock acquired after the date 2 of the enactment of this Act. 3 Æ VerDate Sep 11 2014 21:38 Apr 25, 2023 Jkt 039200 PO 00000 Frm 00008 Fmt 6652 Sfmt 6301 E:\BILLS\S1243.IS S1243 pbinns on DSKJLVW7X2PROD with $$_JOB