BILL NUMBER: S8921
SPONSOR: GOUNARDES
 
TITLE OF BILL:
An act to amend the tax law, in relation to modifications increasing
federal adjusted gross income of a resident individual
 
PURPOSE OR GENERAL IDEA OF BILL:
This bill would decouple the state of New York from the federal partial
exclusion for gain from certain small business stock
 
SUMMARY OF PROVISIONS:
Section one adds a new paragraph 44 to subsection (b) of Section 612 of
the Tax Law to require personal income tax (PIT) filers to add back any
exclusions they may have taken at the federal level for the qualified
small business stock tax exemption.
Section two provides for the effective date.
 
JUSTIFICATION:
For decades, states have conformed their income tax systems to federal
law in order to simplify compliance for taxpayers and administration for
revenue agencies. One example of such conformance is the qualified small
business stock (QSBS) tax exemption, which was created at the federal
level but New York allows to flow through to its own state tax code.
The QSBS exemption was enacted in the 1990s with the goal of encouraging
investment in emerging companies that might otherwise struggle to raise
capital. It allowed all taxpayers who had invested in a C corps business
with $50 million or less in gross assets (a "small business") to
purchase shares in the C corps and pay no capital gains tax when they
sold their shares for profit, so long as they had held the shares for at
least five years. The exclusion applies only to the first $10 million of
profit from a taxpayer's sale of the shares, or an amount equal to ten
times what the shareholder first paid for the shares (known as the "cost
basis"), whichever is higher. Certain C corps in the hospitality, fossil
fuel, health, law, engineering, architectural, accounting, actuarial
sciences, performing arts, consulting, athletics, financial services,
banking, insurance, leasing, investing, brokerage, and agricultural
sectors were not eligible, and at least 80% of the company's assets had
to be used in the actual operation of its trade or business.
At the time, the QSBS was relatively modest and rarely used. Over the
past decade, however, a combination of federal expansions and aggressive
tax planning has transformed this provision of federal tax law into a
major tax avoidance tool primarily benefiting multimillionaire and
billionaire investors, particularly venture capitalists in the technolo-
gy sector.
New data from the U.S. Treasury Department shows that QSBS exclusions
exceeded $42 billion in 2021 alone and now account for more than 2.5
percent of all capital gains realized nationwide. The benefits of this
exclusion are overwhelmingly concentrated among the wealthiest house-
holds: approximately 94 percent of QSBS exclusions flow to households
with annual incomes exceeding $1 million. Trusts and estates claim
billions more. Very few small business owners or middle-class investors
ever qualify.
The One Big Beautiful Bill Act made matters worse by vastly expanding
and accelerating the QSBS exemption. For shares issued on or after July
4, 2025, it raised the company gross asset limit from $50 million to $75
million, increased the per-taxpayer gain exclusion cap from $10 million
to $15 million, and introduced a phased-in exclusion that begins after
just three years of holding (50% at three years, 75% at four years, and
100% at five years).
Despite its name, QSBS does not meaningfully support small businesses as
they are commonly understood. Eligibility is limited to C corporations,
a business structure used by fewer than five percent of businesses
nationwide and generally reserved for firms seeking venture capital
investment or eventual public offerings. Virtually all small businesses
are structured as LLCs, S corporations, or sole proprietorships and are
thus categorically excluded from the benefit - nor does a $75 million
asset test capture only "small" businesses under any commonly understood
definition of the term.
Furthermore, the QSBS resoundingly fails the "but for" test, which
requires policymakers to call the question of whether the investment
would have occurred despite the massive revenue loss that a state must
incur. One New York Times investigationl, for example, found that one
sizable cohort of QSBS beneficiaries have been the partners at Andrees-
seen Horowitz, a $90 billion, San Francisco-based venture capital firm
that has branded itself as an angel investor firm for tech startups
since its founding in 2009. To claim that a group like Andreesseen
Horowitz would not otherwise invest in tech companies absent something
like the QSBS would be absurd. In fact, the Institute for Taxation and
Economic Policy (ITEP) reports that California's full decoupling from
the QSBS had no discernible impact on small businesses or investing, as
it remains the nation's biggest source of venture capital dollars and
its taxpayers report more capital gains than anywhere else.2
Thirdly, even if the QSBS did incentivize new investment dollars at the
federal level, it most certainly fails to do so at the state level. This
is because, in permitting this income exclusion to flow through to our
state tax code, we are allowing a federal deduction for a capital gains
investment that could have been made anywhere in the country to essen-
tially be replicated at the state level, despite the fact that the
company in which the shareholder invested may be out of state. Explains
ITEP "...QSBS investments don't have to be in-state to qualify for the
state tax break, and venture capital firms regularly invest across state
lines. A Georgia-based venture capitalist, for example, might claim QSBS
exemptions on her investments in startups anywhere in the U.S., reducing
revenue for the state treasury but providing no guarantee of economic
benefit to Georgia."3
Thirty-eight states and the District of Columbia are projected to lose
approximately $1.2 billion annually by 2031 due to QSBS conformity, with
ITEP calculating a loss of $177.1 million to New York State for the year
2026, including $152.1 million to the state and $24.2 million to locali-
ties. By 2031, this foregone revenue will grow to $261.7 million and
$41.4 million, respectively, for a total hit of $303.1 million. These
losses directly reduce funding available for schools, health care,
infrastructure, housing, and other essential public services.
Decoupling from the QSBS exemption is a simple and targeted solution.
States can preserve critical revenue by disallowing the federal exclu-
sion for state income tax purposes, without raising tax rates or creat-
ing new taxes. Several states, including California, Alabama, Mississip-
pi, and Pennsylvania, and Washington, DC, already take this approach.
 
PRIOR LEGISLATIVE HISTORY:
None
 
FISCAL IMPLICATIONS:
This bill saves the state $152.1 million in 2026 and $261.7 million in
2031.
 
EFFECTIVE DATE:
This act shall take effect immediately.
1 Drucker, Jesse, and Maureen Farrell. "A Lavish Tax Dodge for the
Ultrawealthy Is Easily Multiplied." The New York Times, 28 Dec. 2021,
www.nytimes.com/2021/12/28/businessitax-break-qualified- smallbusiness-
stock.html.
2 Johnson, Nick, and Sarah Austin. "Quite Some BS: Expanded "QSBS" Give-
away in Trump Tax Law Threatens State Revenues and Enriches the Weal-
thy." ITEP, Institute on Taxation and Economic Policy (ITEP), 2 Oct.
2025, itep.org/qsbs-trump-tax-law-threatens-state- revenues-enriches-
wealthy/. Accessed 15 Jan. 2026.

Statutes affected:
S8921: 612 tax law, 612(b) tax law