II
119THCONGRESS
1
STSESSION S. 695
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
FEBRUARY24, 2025
Mr. C
ORNYNintroduced 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 2025’’. 5
SEC. 2. PHASED INCREASE IN EXCLUSION FOR GAIN FROM 6
QUALIFIED SMALL BUSINESS STOCK. 7
(a) I
NGENERAL.—Section 1202(a)(1) of the Internal 8
Revenue Code of 1986 is amended— 9
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(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) A
PPLICABLEPERCENTAGE.—Section 1202(a) of 5
such Code is amended by adding at the end the following 6
new paragraph: 7
‘‘(5) A
PPLICABLE 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) CONTINUEDTREATMENT ASNOTITEM OFTAX 12
P
REFERENCE.— 13
(1) I
N 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) C
ONFORMING 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
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(B) by striking subparagraph (C). 1
(d) O
THERCONFORMINGAMENDMENTS.— 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 2025’’ 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
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(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) E
FFECTIVEDATE.— 4
(1) I
N 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) C
ONTINUED 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) I
NGENERAL.—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 ‘‘C
ONVERSION OF OTHER 21
S
TOCK.—If any stock’’ and inserting the following: 22
‘‘C
ONVERSION.— 23
‘‘(1) O
THER STOCK.—If any stock’’, and 24
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(3) by adding at the end the following new 1
paragraph: 2
‘‘(2) C
ONVERTIBLE DEBT INSTRUMENTS .— 3
‘‘(A) I
N 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) Q
UALIFIED 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
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‘‘(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) E
FFECTIVEDATE.—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) I
NGENERAL.—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) Q
UALIFIEDSMALLBUSINESSDEFINITION.—Sec-20
tion 1202(d)(1) of such Code is amended by striking 21
‘‘which is a C corporation’’. 22
(c) C
LARIFICATION OFAGGREGATIONRULESAPPLI-23
CABLE TOS CORPORATIONS.—Section 1202(d)(3) of such 24
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Code is amended by adding at the end the following new 1
subparagraph: 2
‘‘(C) C
LARIFICATION 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) T
REATMENT OF PASSIVELOSSES.—Section 9
469(g)(1) of such Code is amended by adding at the end 10
the following new subparagraph: 11
‘‘(D) C
ERTAIN 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) S
PECIALRULESRELATING 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) A
PPLIED 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
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(f) EFFECTIVEDATE.—The amendments made by 1
this section shall apply to stock acquired after the date 2
of the enactment of this Act. 3
Æ
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