In addition to the price-setting policies and investment implications related to the capital gains tax rate and IRA provisions, the House version of the Build Back Better Act (budget reconciliation package) contains changes to the Internal Revenue Service’s (IRS) Qualified Small Business Stock (QSBS) capital gain exclusion rule.  

Current Status 

On Thursday, the Congressional Budget Office (CBO) released updated scoring of the Act which would increase the deficit by $367 billion over the next decade. Specifically, the price-setting policies would save the Federal government around $160 billion over that period. That includes about $80 billion in savings from allowing Medicare to negotiate drug prices and another $80 billion from tying drug price increases to the rate of inflation. House Democrats passed the bill on Friday morning on a mostly party line vote. The final vote was 220-213 and the Act now heads to the Senate.  

QSBS Implications 

The QSBS rule has been an effective tool for promoting investment in startups and early-stage growth companies. This is particularly the case for early-stage and pre-revenue life sciences companies that already face challenges with attracting investors. The rule limits capital gains taxes for founders, employees, and investors in qualified small businesses on the first $10 million in gains derived from qualified company stock. Shares acquired from a secondary sale are ineligible. To qualify, the enterprise (C-Corp) must, among other things, have less than $50 million in assets, 80% of which are used in the active conduct of a qualified business. Lastly, stock owners must hold the stock for at least five years.   

The QSBS rule has been in place since 1993 and in 2010 the capital gains exclusion was increased to 100%. Under the current proposal: 

• The 100% capital gain exclusion for any sales or exchanges of QSBS occurring after September 13, 2021 would be capped at 50%.  
• The exclusion would remain available for individuals with an adjusted gross income of less than $400,000 along with trusts and estates holding QSBS shares.  

At the end of October, CBSA signed on to a letter led by BIO to Congressional leadership outlining concerns related to changes with the QSBS. As detailed in the letter, early-stage companies generally cannot pay the same salaries or provide the same benefits as large corporations, and they certainly cannot provide the same job security. They can, however, compete for talent by supplementing salary with a piece of ownership of the enterprise. QSBS enables early-stage employees to unlock the full value of the equity they have earned in the small businesses they helped build. This incentivizes talented people to work at innovative startups that strive to build a vibrant economic future. Read the full letter.  

CBSA advocates for proposals that strengthen the incentives necessary to sustain innovation in the life sciences and create high-wage, high-value jobs. Whether it is related to trade, intellectual property rights, or tax incentives we will continue to make the case to policymakers that these sweeping policy efforts will have sustained impacts on our state’s life sciences ecosystem.