I 
119TH CONGRESS 
1ST SESSION H. R. 1199 
To amend the Internal Revenue Code of 1986 to modify the exclusion for 
gain from qualified small business stock. 
IN THE HOUSE OF REPRESENTATIVES 
FEBRUARY 11, 2025 
Mr. KUSTOFF introduced the following bill; which was referred to the 
Committee on Ways and Means 
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-
tives of the United States of America in Congress assembled, 
SECTION 1. SHORT TITLE. 
This Act may be cited as the ‘‘Small Business Invest-
ment Act of 2025’’. 
SEC. 2. PHASED INCREASE IN EXCLUSION FOR GAIN FROM 
QUALIFIED SMALL BUSINESS STOCK. 
(a) IN GENERAL.—Section 1202(a)(1) of the Internal 
Revenue Code of 1986 is amended— 
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(7) Section 1202(j)(1)(A) of such Code is 
amended by striking ‘‘more than 5 years’’ and in-
serting ‘‘at least 3 years’’. 
(e) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section 
shall apply to stock acquired after the date of the 
enactment of this Act. 
(2) CONTINUED TREATMENT AS NOT ITEM OF 
TAX PREFERENCE.—The amendment made by sub-
section (c) shall take effect as if included in the en-
actment of section 2011 the Creating Small Busi-
ness Jobs Act of 2010. 
SEC. 3. TACKING HOLDING PERIOD OF CONVERTIBLE DEBT 
INSTRUMENTS. 
(a) IN GENERAL.—Section 1202(f) of the Internal 
Revenue Code of 1986 is amended— 
(1) by redesignating paragraphs (1) and (2) as 
subparagraphs (A) and (B) and moving such sub-
paragraphs (as so redesignated) 2 ems to the right, 
(2) by striking ‘‘CONVERSION
OF
OTHER 
STOCK.—If any stock’’ and inserting the following: 
‘‘CONVERSION.— 
‘‘(1) OTHER STOCK.—If any stock’’, and 
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(3) by adding at the end the following new 
paragraph: 
‘‘(2) CONVERTIBLE DEBT INSTRUMENTS.— 
‘‘(A) IN GENERAL.—If any stock in a cor-
poration is acquired by the taxpayer, without 
recognition of gain, solely through the conver-
sion of a qualified convertible debt instru-
ment— 
‘‘(i) the stock so acquired shall be 
treated as qualified small business stock in 
the hands of the taxpayer, and 
‘‘(ii) the stock so acquired shall be 
treated as having been held during the pe-
riod during which the qualified convertible 
debt instrument was held. 
‘‘(B) QUALIFIED CONVERTIBLE DEBT IN-
STRUMENT.—For purposes of this paragraph, 
the term ‘qualified convertible debt instrument’ 
means any bond or other evidence of indebted-
ness— 
‘‘(i) which is originally issued by the 
corporation to the taxpayer, 
‘‘(ii) the issuer of which— 
‘‘(I) from issuance until conver-
sion, is a qualified small business, and 
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‘‘(II) during substantially all of 
the taxpayer’s holding period of such 
bond or evidence of indebtedness, the 
corporation meets the active business 
requirements of subsection (e), and 
‘‘(iii) which is convertible into stock in 
the corporation.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to debt instruments originally 
issued after the date of the enactment of this Act. 
SEC. 4. GAIN EXCLUSION ALLOWED WITH RESPECT TO 
QUALIFIED SMALL BUSINESS STOCK IN COR-
PORATION. 
(a) IN GENERAL.—Section 1202(c) of the Internal 
Revenue Code of 1986 is amended— 
(1) by striking ‘‘C corporation’’ in paragraphs 
(1) and inserting ‘‘corporation’’, and 
(2) by striking ‘‘and such corporation is a C 
corporation’’ in paragraph (2)(A). 
(b) QUALIFIED SMALL BUSINESS DEFINITION.—Sec-
tion 1202(d)(1) of such Code is amended by striking 
‘‘which is a C corporation’’. 
(c) CLARIFICATION OF AGGREGATION RULES APPLI-
CABLE TO S CORPORATIONS.—Section 1202(d)(3) of such 
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Code is amended by adding at the end the following new 
subparagraph: 
‘‘(C) CLARIFICATION WITH RESPECT TO S 
CORPORATIONS.—Any determination of the 
members of a controlled group of corporations 
under this paragraph shall include taking into 
account any stock ownership in an S corpora-
tion.’’. 
(d) TREATMENT
OF
PASSIVE
LOSSES.—Section 
469(g)(1) of such Code is amended by adding at the end 
the following new subparagraph: 
‘‘(D) CERTAIN
DISPOSITIONS
OF
SMALL 
BUSINESS
STOCK.—In the case a disposition 
any gain from which is excluded from gross in-
come under section 1202, subparagraph (A) 
shall not apply.’’. 
(e) SPECIAL RULES RELATING
TO S CORPORA-
TIONS.—Section 1202(e) of such Code is amended by add-
ing at the end the following new paragraph: 
‘‘(9) APPLIED AT S CORPORATION LEVEL.—In 
the case of an S corporation, the requirements of 
this subsection shall be applied at the corporate 
level.’’. 
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(f) EFFECTIVE DATE.—The amendments made by 
this section shall apply to stock acquired after the date 
of the enactment of this Act. 
Æ 
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