How Republicans Supersized Silicon Valley’s Favorite Tax Break

The prospect of earning millions of dollars would, at first blush, seem like reason enough to want to start a successful company. Yet Congress has for years sweetened the deal, offering start-up founders and early investors the added incentive of making much of their money completely tax-free.

Tucked into the huge set of tax cuts that Republicans passed into law this month was an expansion of the unusually valuable tax break. The generosity of the change came as a surprise to even some in Silicon Valley, where the tax measure is popular.

“Everyone was like: ‘Are you joking?’” Christopher Karachale, a San Francisco lawyer who helps people claim the tax break, said. “These founders and early employees, they’re already getting a huge benefit. So if anything people are thinking: ‘Wow it’s remarkable the statute got opened up all this more.’”

The tax break, known as the qualified small business stock exclusion, is a decades-old element of the tax code that Congress has repeatedly made more generous. It allows investors and founders to skip out on paying taxes when they cash out their shares in start-ups. For early owners of stock in a business that started as a shoestring operation and became a major publicly-traded company, like Lyft or LinkedIn, or was bought out by another firm, that could mean millions in tax savings.

After warding off an attempt by Democrats to narrow the tax break under former President Joseph R. Biden Jr., trade groups representing venture capitalists saw an opportunity to hitch their own tax cut to the broader G.O.P. effort.

“Every once in a while you get lucky,” said Bobby Franklin, the chief executive of the National Venture Capital Association who has been pitching lawmakers on expanding the tax break for years. “And somebody that it resonates with is in a position to advocate for its inclusion at the right place, at the right time.”