IRC § 1202 And Build Back Better — The Halloween Edition

The Democratic effort to enact President Biden's agenda has taken a rather convoluted path in terms of initiatives, price tag, and revenue-raising provisions. One proposal that has been subjected to much political ping pong in recent months creates new limitations on Internal Revenue Code (IRC) Section 1202, the favorite love child of Silicon Valley entrepreneurs and private equity investors. This proposal effectively nullifies the 2009 and 2010 expansions of IRC § 1202, essentially reinstating IRC § 1202 as originally enacted in 1993 (without bringing back the alternative minimum tax (AMT) headaches).

In a nutshell, for sales of qualified small business stock (QSBS) after September 27, 2010, IRC§ 1202 excludes a gain from tax up to the greater  of $10 million or 10 times the investor's tax basis.  This exclusion applies to noncorporate taxpayers (individuals and trusts) that held the QSBS (directly or via a flow-through entity) for at least five years. For a more