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. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Small Business Invest5 ment Act of 2023’’. 

6 SEC. 2. PHASED INCREASE IN EXCLUSION FOR GAIN FROM 

7 QUALIFIED SMALL BUSINESS STOCK. 

8 (a) IN GENERAL.—Section 1202(a)(1) of the Internal 

9 Revenue Code of 1986 is amended— 


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1 (1) by striking ‘‘50 percent’’ and inserting ‘‘the 

2 applicable percentage’’, and 

3 (2) by striking ‘‘held for more than 5 years’’ 

4 and inserting ‘‘held for at least 3 years’’. 

5 (b) APPLICABLE PERCENTAGE.—Section 1202(a) of 

6 such Code is amended by adding at the end the following 

7 new paragraph: 

8 ‘‘(5) APPLICABLE PERCENTAGE.—Except as 

9 provided in paragraphs (3) and (4), the applicable 

10 percentage under paragraph (1) shall be determined 

11 under the following table: 

‘‘Years stock held: Applicable 

percentage: 

3 years ...................................................................................... 50%

4 years ...................................................................................... 75%

5 years or more ........................................................................ 100%’’. 

12 (c) CONTINUED TREATMENT AS NOT ITEM OF TAX

13 PREFERENCE.— 

14 (1) IN GENERAL.—Section 57(a)(7) of such 

15 Code is amended by striking ‘‘An amount’’ and in16 serting ‘‘In the case of stock acquired on or before 

17 the date of the enactment of the Creating Small 

18 Business Jobs Act of 2010, an amount’’. 

19 (2) CONFORMING AMENDMENT.—Section 

20 1202(a)(4) of such Code is amended— 

21 (A) by striking ‘‘, and’’ at the end of sub22 paragraph (B) and inserting a period, and 


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1 (B) by striking subparagraph (C). 

2 (d) OTHER CONFORMING AMENDMENTS.— 

3 (1) Section 1202(a)(4) of such Code is amended 

4 by inserting ‘‘and before the date of the enactment 

5 of the Small Business Investment Act of 2023’’ after 

6 ‘‘Act of 2010’’. 

7 (2) Paragraphs (3) and (4) of section 1202(a) 

8 of such Code are each amended by inserting ‘‘held 

9 for more than 5 years and’’ after ‘‘In the case of 

10 qualified small business stock’’. 

11 (3) Section 1202(a)(3)(A) of such Code is 

12 amended to read as follows: 

13 ‘‘(A) the applicable percentage under para14 graph (1) shall be 75 percent, and’’. 

15 (4) Section 1202(a)(4)(A) of such Code is 

16 amended to read as follows: 

17 ‘‘(A) the applicable percentage under para18 graph (1) shall be 100 percent, and’’. 

19 (5) Section 1202(b)(2) of such Code is amend20 ed by striking ‘‘more than 5 years’’ and inserting 

21 ‘‘at least 3 years’’. 

22 (6) Section 1202(g)(2)(A) of such Code is 

23 amended by striking ‘‘more than 5 years’’ and in24 serting ‘‘at least 3 years’’. 


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1 (7) Section 1202(j)(1)(A) of such Code is 

2 amended by striking ‘‘more than 5 years’’ and in3 serting ‘‘at least 3 years’’. 

4 (e) EFFECTIVE DATE.— 

5 (1) IN GENERAL.—Except as provided in para6 graph (2), the amendments made by this section 

7 shall apply to stock acquired after the date of the 

8 enactment of this Act. 

9 (2) CONTINUED TREATMENT AS NOT ITEM OF

10 TAX PREFERENCE.—The amendment made by sub11 section (c) shall take effect as if included in the en12 actment of section 2011 of the Creating Small Busi13 ness Jobs Act of 2010. 

14 SEC. 3. TACKING HOLDING PERIOD OF CONVERTIBLE DEBT 

15 INSTRUMENTS. 

16 (a) IN GENERAL.—Section 1202(f) of the Internal 

17 Revenue Code of 1986 is amended— 

18 (1) by redesignating paragraphs (1) and (2) as 

19 subparagraphs (A) and (B) and moving such sub20 paragraphs (as so redesignated) 2 ems to the right, 

21 (2) by striking ‘‘CONVERSION OF OTHER

22 STOCK.—If any stock’’ and inserting the following: 

23 ‘‘CONVERSION.— 

24 ‘‘(1) OTHER STOCK.—If any stock’’, and 


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1 (3) by adding at the end the following new 

2 paragraph: 

3 ‘‘(2) CONVERTIBLE DEBT INSTRUMENTS.— 

4 ‘‘(A) IN GENERAL.—If any stock in a cor5 poration is acquired by the taxpayer, without 

6 recognition of gain, solely through the conver7 sion of a qualified convertible debt instru8 ment— 

9 ‘‘(i) the stock so acquired shall be 

10 treated as qualified small business stock in 

11 the hands of the taxpayer, and 

12 ‘‘(ii) the stock so acquired shall be 

13 treated as having been held during the pe14 riod during which the qualified convertible 

15 debt instrument was held. 

16 ‘‘(B) QUALIFIED CONVERTIBLE DEBT IN17 STRUMENT.—For purposes of this paragraph, 

18 the term ‘qualified convertible debt instrument’ 

19 means any bond or other evidence of indebted20 ness— 

21 ‘‘(i) which is originally issued by the 

22 corporation to the taxpayer, 

23 ‘‘(ii) the issuer of which— 

24 ‘‘(I) from issuance until conver25 sion, is a qualified small business, and 


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1 ‘‘(II) during substantially all of 

2 the taxpayer’s holding period of such 

3 bond or evidence of indebtedness, the 

4 corporation meets the active business 

5 requirements of subsection (e), and 

6 ‘‘(iii) which is convertible into stock in 

7 the corporation.’’. 

8 (b) EFFECTIVE DATE.—The amendments made by 

9 this section shall apply to debt instruments originally 

10 issued after the date of the enactment of this Act. 

11 SEC. 4. GAIN EXCLUSION ALLOWED WITH RESPECT TO 

12 QUALIFIED SMALL BUSINESS STOCK IN COR13 PORATION. 

14 (a) IN GENERAL.—Section 1202(c) of the Internal 

15 Revenue Code of 1986 is amended— 

16 (1) by striking ‘‘C corporation’’ in paragraphs 

17 (1) and inserting ‘‘corporation’’, and 

18 (2) by striking ‘‘and such corporation is a C 

19 corporation’’ in paragraph (2)(A). 

20 (b) QUALIFIED SMALL BUSINESS DEFINITION.—Sec21 tion 1202(d)(1) of such Code is amended by striking 

22 ‘‘which is a C corporation’’. 

23 (c) CLARIFICATION OF AGGREGATION RULES APPLI24 CABLE TO S CORPORATIONS.—Section 1202(d)(3) of such 


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1 Code is amended by adding at the end the following new 

2 subparagraph: 

3 ‘‘(C) CLARIFICATION WITH RESPECT TO S

4 CORPORATIONS.—Any determination of the 

5 members of a controlled group of corporations 

6 under this paragraph shall include taking into 

7 account any stock ownership in an S corpora8 tion.’’. 

9 (d) TREATMENT OF PASSIVE LOSSES.—Section 

10 469(g)(1) of such Code is amended by adding at the end 

11 the following new subparagraph: 

12 ‘‘(D) CERTAIN DISPOSITIONS OF SMALL

13 BUSINESS STOCK.—In the case of a disposition 

14 any gain from which is excluded from gross in15 come under section 1202, subparagraph (A) 

16 shall not apply.’’. 

17 (e) SPECIAL RULES RELATING TO S CORPORA18 TIONS.—Section 1202(e) of such Code is amended by add19 ing at the end the following new paragraph: 

20 ‘‘(9) APPLIED AT S CORPORATION LEVEL.—In 

21 the case of an S corporation, the requirements of 

22 this subsection shall be applied at the corporate 

23 level.’’. 


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1 (f) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to stock acquired after the date 

3 of the enactment of this Act. 

Æ 


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