Among several other sources of contributions, beginning July 4, 2026, gifts can be made to minors by contributing to a Trump account established for their benefit. In an attempt to reduce the reporting requirements that would otherwise be imposed on those making these gift contributions to Trump accounts, the IRS has recently issued guidance clarifying the Federal gift tax and Federal generation-skipping transfer tax treatment and associated reporting requirements.

Federal Gift and Generation-Skipping Transfer Tax Treatment and Reporting Requirements of Gift Contributions to Trump Accounts:

As background, the Federal gift tax is imposed on certain gratuitous transfers made during life. For 2026, each individual has a unified estate and gift tax exemption of $15,000,000, meaning that taxable lifetime gifts generally reduce the amount available to shelter transfers at death. In addition, a donor may make annual exclusion gifts of up to $19,000 per donee in 2026 without using any portion of the unified exemption, provided the gift is of a “present interest.”[2] The Federal generation-skipping transfer (GST) tax is a separate transfer tax that applies to certain gratuitous generation-skipping transfers made during life, which include transfers to grandchildren or more remote descendants. For 2026, each individual has a $15,000,000 GST exemption that may be allocated to transfers that would otherwise be subject to GST tax, allowing those transfers to pass free of GST tax to the extent of the exemption. In addition, certain gifts may qualify for the GST annual exclusion if they also qualify for the annual gift tax exclusion.  Gifts that do not fully qualify for the gift tax and GST tax annual exclusion (if applicable) must be disclosed on IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, which must be filed by the donor for the calendar year in which the transfer is made.

Generally, for Federal gift tax purposes, contributions made to a Trump account are not considered gifts of a present interest because the beneficiary cannot withdraw any funds from the account until age 18, and thus do not qualify for the annual gift tax exclusion. Thus, contributions to minors through a Trump account are generally reportable gifts subject to the Federal gift tax (and, if a generation-skipping transfer, the Federal GST tax) for which a Form 709 must be filed for the calendar year in which the transfer is made, regardless of amount contributed per donee.  However, in Revenue Procedure 2026-25, the IRS has established a safe harbor under which certain contributions to Trump accounts will be considered gifts of a present interest that qualify for both the annual gift tax and GST tax exclusion and for which the donor will not be required to file a Form 709 to report the transfers.[3]

To satisfy the safe harbor, the donor must be an individual whose only taxable gifts during the year are cash contributions to Trump accounts made before the calendar year in which the beneficiaries of the accounts turn age 18. In addition, the taxpayer’s total gifts during the year to each individual who is an account beneficiary, including gifts to their Trump account, do not exceed the annual gift tax exclusion amount per donee. A third requirement is that, if the Trump account contributions were considered reportable future interest gifts not eligible for the annual gift or GST tax exclusion, the Trump account contributions made by the donor during the year would be fully shielded by the donor’s remaining unified estate and gift tax exemption and remaining GST exemption, if applicable. A fourth (and important) requirement is that a Form 709 is not otherwise filed, either by requirement or voluntarily, for the year in which the Trump account contributions are made.

For example, assume in 2026 a grandparent (an individual donor) contributes $5,000 to a Trump account for each of her three grandchildren, A, B and C and that the grandparent contributes an additional $13,000 cash to C.  Assume that the grandparent’s remaining unified estate and gift tax exemption and remaining GST exemption would fully shield the contributions made by the grandparent during the year from both Federal gift and GST tax, and the grandparent did not make any other taxable gifts during the year and is not otherwise required to file a Form 709 for the year. Since the grandparent did not contribute more than the annual gift tax exclusion amount of $19,000 to any one beneficiary, when including the gifts to their Trump accounts,[4] the annual gift tax and GST tax exclusions apply to the Trump account contributions. The grandparent is not required to file a Form 709 to report the contributions.

However, if the grandparent contributes $14,500 cash to C instead of $13,000,[5] the safe harbor will not apply.  The grandparent would be required to report the Trump account contributions on a Form 709 and the Trump account contributions would fail to qualify for the annual gift tax and GST tax exclusions.  Additionally, even if the safe harbor requirements are otherwise satisfied, as in the example above, if the grandparent for any reason files a Form 709, even if not required to do so, the grandparent would be required to report the Trump account contributions on the Form 709 and the Trump account contributions would not qualify for either the annual gift tax or GST tax exclusions.

Therefore, for most taxpayers, Trump account contributions will qualify for the annual gift tax and GST tax exclusions. However, for those taxpayers who regularly make annual exclusion gifts to children and/or grandchildren, outside of the Trump account contributions, or who otherwise must file Form 709, Trump account contributions will not qualify for the annual gift tax or GST tax exclusions.  Those contributions must still be reported on a Form 709 and will utilize the taxpayer’s unified estate and gift tax exemption and GST exemption, if applicable (or result in gift tax and possibly GST tax to the extent the taxpayer has insufficient exemption remaining).

[1] I.R.C. § 530A.

[2] A gift is generally considered a present interest if the donee has an immediate right to use, possess, or enjoy the property or income from the property.

[3] Note, the Revenue Procedure primarily offers reporting requirement relief.  Although the Revenue Procedure frames the safe harbor as allowing contributions to Trump accounts meeting the safe harbor requirements to be considered gifts of a present interest that qualify for both the annual gift tax and GST tax exclusions, for this treatment to apply, the safe harbor requires that a Form 709 is not otherwise filed, either by requirement or voluntarily.  Thus, there is no way to claim the annual gift tax and GST tax exclusion for contributions made to Trump accounts on a filed Form 709. If a Form 709 is filed for a given year, any Trump account contributions made during the year will not be considered present interest gifts to which the annual gift and GST tax exclusions apply.

[4] Since the grandparent contributes an aggregate of $18,000 to C (when including both the cash contribution and Trump account contribution), less than the annual exclusion amount, all the Trump account contributions to A, B, and C and the $13,000 cash contribution to C fully qualify for the annual gift tax exclusion, as long as the safe harbor is otherwise met.

[5] Now, since the grandparent contributes an aggregate of $19,500 to C (when including both the cash contribution and Trump account contribution), in excess of the annual exclusion amount, none of the Trump account contributions qualify for the annual gift or GST tax exclusion, and the Trump account contributions to A, B, and C must all be reported as gifts of future interests. Note that the cash contribution of $14,500 to C would still qualify for the annual exclusion because it is less than $19,000.

The post Trump Accounts: Clarification of the Federal Gift and Generation Skipping Transfer Tax Treatment and Reporting Requirements appeared first on Kulzer & DiPadova, P.A..

Under the OBBBA,[2] Congress sought to limit income tax deductions for taxpayers in the highest marginal tax bracket by limiting the amount of “itemized deductions” a high-income taxpayer can claim against taxable income. This new rule will apply beginning in 2026. Generally, a taxpayer is entitled to either a standard deduction[3] or deductions referred to in the tax code as “itemized deductions” under Internal Revenue Code (“IRC”) Section 63(d). An itemized deduction is any deduction other than those described in IRC Section 63(b). These deductions include a standard deduction, an individual’s personal exemption, certain qualified business income (IRC 199A) deductions, a $1,000 charitable deduction, certain depreciation deductions, and two deductions new to the OBBBA: the tip deduction and the overtime deduction. Common itemized deductions include certain medical expenses, state and local taxes,[4] some home mortgage interest expenses, and gifts to charity. If the aggregate itemized deductions exceed the standard deduction, then a taxpayer benefits from claiming itemized deductions. Historically, itemized deductions have been more useful for middle- and high-income taxpayers.

Under OBBBA, these itemized deductions will now be subject to a limitation equal to 2/37^ths of their amount[5] (approximately 5%) when a taxpayer reaches the highest marginal income tax bracket. These limitations have been known as the “Pease” deductions because they were initially conceived by Congressman Pease (D-Ohio) to limit the tax benefits of deductions for higher-income taxpayers. In the past, the limitation did not apply to trusts and estates. Now, however, IRC Section 68 refers to the limitation as applying “in the case of an individual . . . .” Moreover, under the rules for taxation of trusts and estates, the tax code[6] says that taxation is to occur “in the same manner as in the case of an individual . . . .” Thus, with the new limitations, it appears that the Section 68 Pease limitation will apply to a trust or estate.

Here are the problems with this new clause when applied to an estate or a trust. The first difficulty is that a trust will be included in the highest income tax bracket when income exceeds $16,000. Thus, while the limitation will affect high earners, it will also affect nearly all trusts.

Next, as applied to an estate or trust, it had initially been unclear whether the limitation was intended to apply to trusts and estates serving as a mere conduit of trust income. Under IRC Sections 651 and 661, a trust or estate is entitled to a deduction (called a Distributable Net Income Deduction), and under IRC Sections 652 and 662, a beneficiary is required to include in income the amount of income received from the trust or estate. This merely shifts the tax burden from one taxpayer (the trust) to another taxpayer (the beneficiary), but does not result in any additional tax liability. Under a strict reading of IRC Section 63, it appears that the Section 651/661 Distributable Net Income Deduction is an “itemized deduction” and, thus, subject to this new 2/37^th limitation (also being called a “haircut,” since it limits the amount of the deduction).

A third “problem” with the limitation is that it will also apply to a trust attempting to claim a charitable deduction for payment to charity. This deduction is allowed under IRC Section 642(c) for a trust or estate. Once again, because of the limitation on deductions, contributions to charity will be limited, and 5% will remain taxable to the trust.

Immediately after the law was passed, several trust and estate professional groups advised the government of this ambiguity and requested relief. Unfortunately, on May 28, 2026, the Joint Committee on Taxation of the United States Congress released its report explaining the OBBBA (referred to as the “Blue Book”). The Blue Book now states (in Footnote 102) that the limitation is intended to apply to trusts and estates and will be enforced.

Example Suppose a trust has $1,000,000 of income. Under pre-2026 law, the $1,000,000 of income paid to the beneficiary would not be taxed to the trust or estate, but instead would be taxed to the beneficiary by virtue of this “conduit” mechanism built into the tax code. Now, however, approximately 5% is disallowed. The beneficiary would still be obligated to pay income tax on the entire $1,000,000 distributed; however, only about $947,000 can be deducted, leaving about $53,000 taxable to the trust. Since the tax is imposed at the highest income tax bracket, this would result in approximately $20,000 of income tax payable.

In summary, unless there is a legislative change, a longstanding principle of trust and estate taxation—under which a conduit approach was used—has been eliminated, and this new limitation will impose taxes on trusts and estates. In fact, it will create a double tax on 5% of the earnings because of the position taken by the government.

[1] For simplicity, the article will refer to trusts but the concept applies equally to estates of decedents.

[2] One Big Beautiful Bill Act, P.L. 119-21.

[3] For 2026, $16,100 for single taxpayers, $32,200 for married joint taxpayers and $24,150 for head of household taxpayers.

[4] Up to $40,400 (married) or $20,200 (single) in 2026. This is increased by 1% through 2029 and it reverts to a limits of $10,000 in 2030.

[5] The prior law Pease limitation took away 2% of itemized deductions and the newly formulated version, assuming the highest tax bracket is 37%, denies 2/37, as a supposedly easier way to calculate the same result.

[6] IRC Section 641.

The post Unexpected Surprise for Trusts and Estates from the 2025 One Big Beautiful Bill Tax Act appeared first on Kulzer & DiPadova, P.A..

From a historical perspective, over the course of this author’s 40-year career, there have been incredible increases in the amounts of wealth that can pass estate tax free.  When an individual passes away, their wealth (their “taxable estate,” meaning all assets which they own or control) will be subject to an estate tax unless one of three tests is met.  First, property can pass estate tax free to a charity. Second, property can pass estate tax free to a spouse (assuming the surviving spouse is a United States citizen). Third, property can pass estate tax free to the extent that the property, when combined with lifetime gifts made by the individual, is less than a certain threshold, once known as the “unified credit” (it being “unified” because it includes both lifetime transfers subject to gift tax, and testamentary transfers subject to estate tax), but now known as the Basic Exclusion Amount (the “BEA”)[1].  The effect of this BEA is that the estate tax will only apply when an individual’s wealth is significant, exceeding the BEA.  When this author began practicing in the 1980s, the “exemption” was about $60,000 and it was increased by President Reagan’s Economic Recovery Tax Act of 1981 to an amount which seemed significant at the time, $600,000. Now the OBBBA provisions increase the exemption to the sum of $15,000,000!  As a result, only the extremely affluent are subject to its provisions.

When an individual’s wealth does exceed the BEA, a tax is imposed on the excess value at a rate of 40%.  Historically, before 2012, there were graduated tax brackets leading up to as high as 55%.  However, recently, the tax rate on wealth has been fixed at a flat rate of 40%.  These recent changes to the estate and gift tax exemption threshold allow for more significant transfers of wealth, with less tax being due.

According to Kiplinger and Forbes, net worth of between $11,000,000 and $13,000,000 places an individual in the top 1% of all Americans.  Moreover, a 2024 Schwab survey revealed that Americans believe that it takes $2,500,000 in net worth to be considered “wealthy.”  Thus, the estate tax will only apply to those individuals that many Americans believe have a net worth six times the amount necessary to be “wealthy.”

So, with the new “permanent” estate tax BEA being set beyond the wealth of many individuals, how should one consider changes to their testamentary estate plan in a Will or trust?  Long ago, the band Blood, sweat & tears taught us “what goes up, must come down, spinners wheel, got to go round.”[2] Yet, some in the estate planning community feel that having enacted a high exemption, it will be hard for future Congresses to impose a reduction to the exemption. Still, some others feel that the state of the national debt may cause future legislators to look for other sources of revenue, like estate tax.

Unfortunately, unlike income taxes which are calculated annually, estate taxes are not fixed until the year an individual passes away.  Thus, unless you pass away at a time when the federal estate tax exemption is at a threshold above the value of your wealth, you can never be certain whether an estate tax may be imposed.  Moreover, the last time an estate tax threshold was set “permanently” in 2012, that “permanent” rule was changed in 2017 by doubling the exemption.  In other words, experience shows that “permanent” means five years!  While one might surmise that the 2025 changes should survive at least until 2030, for many, if not most individuals, ignoring the potential for estate tax ramifications may be premature.  Most of us hope to live well beyond 2030, 2040, 2050 or beyond.  Thus, estate tax ramifications remain unsettled.

Another aspect to the recent change in the BEA by OBBBA is that there is another separately stated tax “exemption” designed to maximize the application of the estate tax on large transfers.  This concept is contained in federal tax rules and is called the “Generation-Skipping Transfer” (GST) tax.  These rules provide that if assets are left in trust for the benefit of family over multiple generations, a tax, which is intended to be a substitute for an estate tax at each generational level, is imposed. This GST tax is imposed as if the estate tax would have been imposed at the death of the generation below the donor when funds effectively pass to the “grandchildren” beneficiary class.  Like the BEA, the Generation Skipping Transfer tax exemption amount was increased to $15,000,000 per individual beginning in 2026.  This “GST exemption” will allow an individual to leave assets in trust for the benefit of a child, leaving them with substantial powers and rights to access the funds, yet removing the inherited assets from the estate tax base upon the death of the child.

For New Jersey residents, there is also the potential exposure to state taxes.  New Jersey has always had, and continues to have, a New Jersey inheritance tax. For most families, this tax is not a factor since there are exemptions for transfers to a spouse, child, grandchild or stepchild (so called “Class A” beneficiaries).  New Jersey used to have a separate free standing estate tax which would apply at an individual’s passing.  The New Jersey estate tax was repealed effective January 1, 2018.  As we know, our state already imposes high income taxes, high sales taxes and high property taxes, thus, should the need arise, a change in the estate tax is not unforeseeable.   For our New Jersey clients, we may need to suggest that they consider there is also always the possibility that New Jersey may reinstitute an estate tax.

Complicating planning even more is the coordination of the income tax with the estate and gift tax. There is a beneficial effect of inheriting some assets from a decedent, known as the “step-up” in tax basis. As background, when someone sells an investment, the taxable gain is usually determined by deducting from the sales proceeds received the amount initially paid for the investment, called tax “basis.” [3] The difference is the gain (or loss), on which income tax is then paid. At the owner’s death, if he/she still owns the investment, this “basis” is adjusted (or “stepped up”) to the fair market value of the investment as of the owner’s date of death, allowing the heirs to sell the investment without the imposition of the income tax that would have been due to the decedent. Unfortunately, this beneficial rule does not apply for tax-qualified retirement funds (IRAs, 401ks, 403bs). Nevertheless, given the large estate tax exemption amount, much of current estate planning will now focus more on income-tax saving strategies, rather than estate tax.

In sum, while the increase in the estate tax exemption is a significant and welcome development for wealthy families, some prudent residents may continue to take appropriate steps to plan for potential estate tax as part of their long-range strategy. While these developments may make tax planning easier for some, it also may make the planning options more complex for others.

[1] For a brief period of time, it was called the “applicable exclusion amount.”

[2] Spinners Wheel, by David Clayton-Thomas, EMI Blackwood Music, Inc. Bay Music Ltd, (1968).

[3] In some cases, like investment real estate, tax “basis” is reduced by depreciation deductions allowed to the owner.

The post Estate Tax Planning Impacts of the OBBBA appeared first on Kulzer & DiPadova, P.A..

IRC § 1202 allows individuals to potentially exclude all, or a significant portion, of the capital gains realized from the sale of shares of a U.S. C corporation that meet specific requirements set forth under IRC § 1202, as amended by the federal One Big Beautiful Bill Act (OBBBA), which became effective on July 4, 2025. OBBBA, made several significant changes to IRC § 1202. See: QSBS Tax Benefits Enhanced Under the OBBBA.

As modified by OBBBA, QSBS stock is issued by a domestic C corporation with gross assets of $75 million or less at the time the stock is issued. The corporation must be engaged in a qualified trade or business, excluding certain industries like personal services, banking, finance, hotels, or restaurants. active business and cannot be a holding company. Additionally, the stock must be acquired directly from the issuing corporation (not from another shareholder) and must be held for a minimum holding period—generally at least three years. To be QSBS, stock issued before July 4, 2025, must meet the stiffer qualifications of pre-OBBBA IRC § 1202.

P.L. 2025, Chapter 67 (A4455) incorporates in the New Jersey Gross Income Tax Act (the “GIT”) the federal exclusion of I.R.C. § 1202. The new law provides an exemption from New Jersey gross income for capital gains derived from the sale or exchange of QSBS to the extent that such gains are exempt for the purposes of federal taxation pursuant to IRC § 1202. The New Jersey change applies to taxable years beginning on or after January 1, 2026. Beginning in 2026, all gains excluded under IRC § 1202 for federal tax purposes are also excluded under the GIT, even if the shares were issued before 2026. New Jersey does not exclude IRC § 1202 gains realized before 2026. Aciu v. Director, Div. of Taxation, 26 N.J. Tax 532 (2012).

The new law was approved on June 30, 2025, shortly before passage of OBBBA. Informally, the Division of Taxation confirmed the OBBBA changes to the federal exemption should apply to the exclusion to be allowed under the GIT. Website guidance from the Division of Taxation regarding the application of IRC § 1202, as amended by the OBBBA, is expected.

The GIT incorporates federal principles of gross income only in those instances where the Legislature specifically refers to federal principles. Smith v. Dir., Div. of Tax’n, 108 N.J. 19, 527 A.2d 843 (1987); Tischler v. Director, Div. of Taxation, 17 N.J. Tax 283 (1998). Specific references in the GIT to the IRC are generally dynamic, meaning federal tax changes to specifically referenced sections of the IRC “flow through” to the GIT. For example, the Legislature specifically amended the GIT to uncouple from changes to the federal depreciation and expensing rules of IRC §§ 168 and 179 which otherwise would have applied to the GIT after the federal change. Compare: N.J.S.A. §§ 54A:5-1.2a (1) and (2) which anchor the federal depreciation and expensing rules to the IRC as in effect on December 31, 2001 or 2022, respectively.

The drafting history of A4455 supports the view that the New Jersey Legislature intended the bill’s specific reference to IRC § 1202 to be dynamic. As originally proposed, A4455 included a comprehensive New Jersey counterpart to IRC § 1202. While largely patterned after the federal exclusion, the GIT 1202 counterpart provision would have limited the state gain exemption to “New Jersey QSBS,” stock of qualified small business corporations meeting a New Jersey based payroll test. The Assembly Appropriations Committee amended A4455, substituting the comprehensive New Jersey 1202 counterpart provision simply with a specific reference to “section 1202 of the federal Internal Revenue Code of 1986 (26 U.S.C. s.1202)” and that reference was not anchored to the IRC in effect on a particular date.

The House version of OBBBA, which passed the House on May 22, 2025, did not include any provisions affecting IRC § 1202. The OBBBA provisions addressing QSBS were first included in the Senate Finance Committee proposal released on June 16, 2025. The A4455 substitute was adopted by the Assembly Budget Committee 10 days later on June 26, 2025. Oddly, the June 26, 2025 statement of the Assembly committee to the substitute for A4455 describes only the pre-OBBBA provisions of IRC § 1202, without reference to the Senate’s proposed changes.

The statutory language of A4455 suggests that by adopting IRC § 1202 without reference to a specific date, the Legislature intended a dynamic reference that would incorporate the changes from OBBBA into the GIT. Website guidance from the Division of Taxation confirming the application of IRC § 1202, as amended by OBBBA, to the GIT is anticipated.

The post New Jersey GIT Adds IRC § 1202 Exclusion for QSBS Gains appeared first on Kulzer & DiPadova, P.A..

To qualify as QSBS, the stock must be from a United States C corporation with assets not exceeding $50 million before and after issuance. The C corporation must be engaged in an active trade or business during substantially all of a stockholder’s holding period that is not a disqualified business. Disqualified businesses include specified personal service businesses, certain finance businesses, farming, extraction and hotel, restaurant, and similar businesses. The shares must be acquired directly from the C corporation in exchange for cash, property or as compensation for services. and the issuer must actively conduct business outside of disqualified industries.

Depending on the QSBS issuance date, up to 50%, 75%, or 100% of gains may be excluded, subject to a per-issuer limitation.

On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law. OBBBA makes significant enhancements to the QSBS regime which will benefit growing companies, their founders, investors, and employees. The enhancements shorten the holding period for eligible stock, increase the maximum exclusion allowed and allow larger companies to issue QSBS.

What are the Changes?

Tiered Gain Exclusion

The OBBBA replaces the five-year “cliff” holding period with a tiered exclusion for stock acquired on or after July 5, 2025. The exclusion percentage depends on the taxpayer’s holding period for the QSBS.

Increased Per-Issuer Gain Exclusion Limitation

The per issuer limitation sets a cap on the amount of gain an individual taxpayer can exclude under Section 1202 with respect to the stock of any single qualified small business. This means that no matter how much QSBS an investor acquires and sells in a particular company, there is a maximum aggregate gain exclusion per issuer (i.e., per company) that can be claimed by a taxpayer.

The per issuer limitation was the greater of:

• $10 million, reduced by the amount of eligible gain taken in prior years from the same issuer by the same taxpayer, or
• Ten times the taxpayer’s aggregate adjusted basis in the QSBS issued by the corporation and disposed of during the taxable year (the “10x basis” rule).

The OBBBA increases the per-issuer gain exclusion cap from $10 million to $15 million. The cap amount will be indexed annually for inflation from 2027. The alternative 10x basis rule remains unchanged.

Expanded Company Eligibility

To qualify as a “qualified small business” before the OBBBA changes, the issuing corporation could not have aggregate gross assets exceeding $50 million at any time before or immediately after the issuance of the stock. “Aggregate gross assets” are defined as the amount of cash and the adjusted basis of other property held by the corporation. If the corporation’s assets exceed the threshold, the stock does not qualify as QSBS, and investors cannot claim the Section 1202 gain exclusion.

The OBBBA increases the aggregate gross asset threshold from $50 million to $75 million. The aggregate gross assets amount will be indexed annually for inflation from 2027.

When do the Changes Apply?

• The OBBBA changes apply only to QSBS issued after July 4, 2025.
• QSBS issued before July 5, 2025 remains subject to the pre-OBBBA five-year holding period and $10 million cap.

Implications & Recommendations

• The tiered exclusions benefit investors by providing early-stage QSBS with more favorable liquidity if QSBS is sold before the five-year mark.
• Raising the aggregate gross asset threshold from $50 million to $75 million significantly broadened the pool of companies eligible for qualified small business status under IRC Section 1202. This higher limit enables more growing businesses—particularly those in capital-intensive sectors such as technology, manufacturing, and life sciences—to attract investments by offering potential tax benefits to investors.
• Raising the per-issuer cap allows investors to exclude more gains from federal tax on QSBS sales, boosting after-tax returns and encouraging investment in these growth companies.
• For QSBS acquired after September 27, 2010, the excluded Section 1202 gain continues to be exempt from alternative minimum tax (AMT) calculations. However, if the QSBS was acquired before September 28, 2010, and held for more than five years, a portion of the gain was excluded under IRC Section 1202. For QSBS acquired before February 18, 2009, Section 1202 allows a 50% exclusion. For QSBS acquired between February 18, 2009, and September 27, 2010, the exclusion rate increases to 75%. For AMT purposes, 7% of the excluded amount when using the 50% or 75% exclusion is treated as a preference item. This means that even though a portion of the gain may be excluded from regular income tax, it can still increase a taxpayer’s AMT liability.
• Consider the potential application of IRC Section 1045, a companion provision for QSBS, which allows holders of QSBS to defer recognizing capital gains if they sell their QSBS before satisfying the required holding period by reinvesting proceeds from the sale of QSBS in new QSBS within 60 days. This rollover provision enables investors to preserve their opportunity to eventually qualify for the Section 1202 exclusion on capital gains, provided the new QSBS is held for the remainder of the required holding period.
• The IRS is expected to examine QSBS claims closely. Comprehensive documentation from issuing corporations is recommended to substantiate eligibility. Stock must still be acquired at original issuance from a domestic C corporation engaged in active business. The issuing corporation and investors must maintain records which clearly document the qualifications of the issuing company and the issuance of the stock. The investor must maintain records confirming their holding period for the stock. Proper documentation and adherence to reinvestment timelines are essential for taking advantage of Section 1045 benefits.

State Tax Considerations

A majority of states which tax personal income allow an exclusion for IRC Section 1202 gain. New Jersey recently incorporated the provisions of IRC section 1202 into its Gross Income Tax Act for tax years beginning in 2026. However, not all states fully align with IRC Section 1202. For instance, Alabama, California, Mississippi, and Pennsylvania are nonconforming, while other states, including Hawaii, Massachusetts, and New York, have only partial conformity.

Conclusion

The OBBBA represents the most significant expansion of QSBS tax benefits in over a decade. By shortening the required holding period for partial exclusions, raising exclusion caps, and expanding company eligibility, it delivers substantial incentives for investment in domestic startups. Effective tax planning, particularly in light of state-level difference, is critical to maximizing these new benefits.

The post QSBS Tax Benefits Enhanced Under the OBBBA appeared first on Kulzer & DiPadova, P.A..