New York lawmakers are proposing to decouple New York tax law from the federal Qualified Small Business Stock (QSBS) exclusion under §1202. The proposal, if enacted, would bring New York in line with a small minority of states that do not follow the federal QSBS rules, and would materially increase the New York state tax burden on taxpayers that sell QSBS, bringing the tax rate from zero to a maximum tax rate of 10.9%, and up to 14.7% for residents of New York City. The change could prompt some residents to reassess the timing or structure of QSBS sales, including possible relocation or transfers to exempt resident trusts.
What’s Driving New York’s QSBS Proposal
The proposal likely reflects New York’s continuing effort to balance revenue considerations against the policy goal of encouraging investment in emerging and growth stage businesses. It also seems to be a direct response to the recent expansion of federal QSBS benefits, including increased exclusion caps and reduced holding periods for a partial exclusion.
Notably, the proposed decoupling from the federal QSBS rules would be retroactive to January 1, 2025. This would trigger a large and unexpected tax burden for taxpayers who sold stock last year and thought their gain would not be subject to New York tax.
The statutory budget deadline is April 1, 2026, but negotiations are expected to continue for at least a few weeks. It is unclear whether Governor Kathy Hochul will sign off on this proposal.
Next Steps for Founders and Investors
While the proposal remains subject to revision, it is important for founders and investors to begin evaluating how potential changes could affect long term exit planning. Taxpayers contemplating future sales, redemptions or restructurings should view the proposal as an opportunity to reassess existing QSBS positions and to identify potential exposure before a transaction occurs. There is no imminent need to leave the state, but for those considering a relocation, this may push them over the edge. Remember that changing domicile requires planning and can be complicated, particularly because New York is known to be aggressive in residency audits.
Contact Us
If you have questions about this proposal and how it might impact you, please reach out to Withum’s Business Tax Services Team.
