H.R. 1199 — Small Business Investment Act of 2025

This section establishes the short title of the Act as the “Small Business Investment Act of 2025.”

This section revises the exclusion for gain from qualified small business stock under section 1202 of the Internal Revenue Code by (1) reducing the holding period required to claim the exclusion to at least 3 years (from more than 5 years), and (2) establishing a phased exclusion schedule of 50 percent for stock held 3 years, 75 percent for stock held 4 years, and 100 percent for stock held 5 years or more. (Thus, taxpayers could exclude a larger share of gain from the sale of qualified small business stock sooner than under current law.) It also makes conforming changes so that the gain excluded under section 1202 continues to be treated as not an item of tax preference for alternative minimum tax purposes for stock acquired on or before the date of enactment of the Creating Small Business Jobs Act of 2010, and updates related cross-references and holding-period language throughout section 1202. The amendments generally apply to stock acquired after the date of enactment of this Act, except for the tax-preference amendment, which takes effect as if included in the Creating Small Business Jobs Act of 2010.

This section revises the qualified small business stock rules under section 1202 of the Internal Revenue Code by providing that stock acquired without recognition of gain solely through conversion of a qualified convertible debt instrument is treated as qualified small business stock and as held for the same period that the debt instrument was held. It defines a qualified convertible debt instrument as a bond or other evidence of indebtedness originally issued by the corporation to the taxpayer, issued by a corporation that is a qualified small business from issuance until conversion and that meets the active business requirements during substantially all of the taxpayer’s holding period, and convertible into stock in the corporation. The amendment applies to debt instruments originally issued after the date of enactment.

This section expands the gain exclusion for qualified small business stock under section 1202 of the Internal Revenue Code of 1986 by replacing references to a “C corporation” with “corporation,” thereby allowing stock in certain S corporations to qualify if the other statutory requirements are met. As background, section 1202 generally permits noncorporate taxpayers to exclude a portion of gain from the sale of qualified small business stock held for more than 5 years, subject to limits and eligibility rules. This section also revises the controlled-group and passive-loss rules to account for S corporations. It requires controlled-group determinations under section 1202(d)(3) to take into account stock ownership in an S corporation, and it provides that the passive-loss disposition rule in section 469(g)(1) does not apply to a disposition of stock when the gain is excluded under section 1202. In addition, it directs that the section 1202 eligibility requirements be applied at the corporate level for an S corporation. The amendments apply to stock acquired after the date of enactment.