Colorado follows the section 1202 100% tax exclusion on capital gains from the sale of QSBS. Therefore, capital gains on the sale of QSBS will not only be excluded from federal income taxes, but also state income taxes if all of the guidelines are followed. Learn more about Colorado’s Qualified Small Business Stock conformity, entrepreneurship, and Opportunity Zones here.
Federal QSBS Exclusions and State Tax Implications
Allowing capital gains tax exclusions for Qualified Small Business Stocks (QSBS) encourages investment in US small business. QSBS laws help provide capital for these businesses while offering a savvy tax strategy for investors who want to minimize capital gains taxes.
Investors who hold qualified small business stock for at least 5 years can exclude up to $10,000,000 or more of their recognized capital gains from their taxable income if certain criteria are met.
Each state has its own treatment of QSBS gains at the state income tax level. There are three ways in which states typically address the exclusion.
- Some states fully conform to the Federal QSBS guidelines, and therefore allow a full exemption if the stock meets the Section 1202 QSBS criteria. States conform to the federal tax code on either a static or rolling basis. “Static” conformity means the state starts conforming to the Internal Revenue Code as of a specific date. “Rolling” conformity means that the state adopts IRC changes as they occur. Alternatively, certain states do not have state income taxes and therefore there is no QSBS implication at the state level.
- Some states partially conform to the Federal QSBS guidelines, whereby the capital gains from QSBS are exempt if additional criteria beyond the Federal guidelines are met, such as only allowing exemptions if the QSBS gains were from a company doing business in that state.
- Lastly, certain states do not allow any capital gains exclusions for QSBS.
Colorado QSBS Exemptions
Colorado follows the section 1202 100% tax exclusion on capital gains from the sale of QSBS. Therefore, capital gains on the sale of QSBS will not only be excluded from federal income taxes, but also state income taxes if all of the guidelines are followed.
Colorado follows the “Rolling” conformity–as stated in the previous paragraphs. Colorado does, at the Corporate level, conform to the federal treatment of capital gains under section 1202. See Colo. Rev. Stat. § 39-22-304(3)(c). The state does, at the Individual level, conform to the federal treatment of section 1202. See Colo. Rev. Stat. § 39-22-104; see also Section 1202.
Colorado Capital Gains Tax Rates
Capital gains in Colorado are taxed at the same rate as regular income. The state has a flat income tax rate of 4.63%
In comparison, federal capital gains tax rates have 3 brackets for single taxpayers which are:
- 0% for $0 to $39,375
- 15% for $39,376 to $434,550
- 20% for $434,551 or more
Key Industries in Colorado
According to the Colorado Office of Economic Development and International Trade, “a new tech company is born in Colorado every 72 hours.” They have a strong economy with many high-tech sectors. Telecommunications, software development, and advanced manufacturing are key industries which bring a high concentration of high-tech workers to the state.
Among other industries, the following industries in particular thrive in the state:
- Outdoor Recreation
- Renewable Energy
Support for Entrepreneurship in Colorado
Startup Colorado is an organization that helps startups connect with educational, financial, and collaborative resources. They are passionate about rural Colorado and the exciting business opportunities coming out of these areas. Their goal is to cultivate entrepreneurial growth within a culture of creativity and innovation.
Another champion for entrepreneurship in the state of Colorado is the Colorado Small Business Development Network. They provide free consulting and low-cost training in order to help new and existing small businesses throughout the state. They can guide entrepreneurs to create and retain jobs, secure loans, increase sales, win government contracts, and obtain certifications.
Colorado Tax Credits besides QSBS
One tax credit offered by the state of Colorado to encourage investment in advanced industries is the Advanced Industries Investment Tax Credit. Under this law, investors can earn a 25% state tax credit on their investment up to $50,000 for an investment of $200,000 or more.
Additionally, for businesses in a Colorado enterprise zone, including advanced industries businesses, investors can regain 3% of their investment as a tax credit.
Several notable companies in Colorado are included in our “potentially QSBS eligible” Company Directory, such as:
Colorado Opportunity Zones
Colorado is home to approximately 126 Opportunity Zones.
Opportunity Zones (OZ) were created to help economically distressed areas by giving investors preferential tax treatment with new investments in these “specified” areas. Similar to QSBS, if the investment meets eligibility criteria and is held for at least 5 years, the investor can defer or be exempted from capital gains taxes (i.e. if held for at least 5 years, the taxpayer can exclude 10% of the gain and the percentage increases (or “steps up”) to 15% after 7 years).
Opportunity Zone investments can be in the stock of an OZ Qualified Business, an OZ partnership interest or an OZ business property.
To be a Qualified Opportunity Zone Business, the business must meet requirements such as at least 50% of the business’s total gross income being derived from within the Opportunity Zone. To learn more about Opportunity Zone qualifications, please refer to Opportunity Zones and QSBS article.
Under the Tax Cuts and Jobs Act of 2017, 26 USC 1400Z-2, Colorado made Opportunity Zones, is also home to the associated tax relief incentives that accompany these zones which are effective for tax years beginning on or after December 31, 2017. Refer to this map for the Opportunity Zones in the state and here for all Opportunity Zones in the United States.
Some examples of Opportunity Zones in Colorado include:
- Campfire Ranch
- Evans Early Childhood: Roseanne Evans
- Col Food & Wine: Jeffrey Noffsinger
- See more at Colorado Office of Economic Development & International Trade.
Additional news on Colorado and QSBS:
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.