Georgia 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. Also, The state of Georgia offers an Angel Investor Tax Credit for accredited investors who are funding early-stage innovative qualified businesses in Georgia. What is the Georgia Angel Investor Tax Credit?
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.
Georgia QSBS Exemptions
Georgia 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.
Georgia follows a “Static” conformity–as stated in the previous paragraphs. Georgia does conform to the federal exclusion on the gain from certain small business stock for both the Corporate and Individual level (effective for the taxable years beginning on or after January 1, 2020). See Ga. Code Ann. § 48-1-2(14), as amended by 2021 Ga. H.B. 265. The amendment moved the conformity of the I.R.C from January 2019 to January 2020.
Georgia Capital Gains Tax Rates
Georgia taxes capital gains as income. For a single taxpayer, rates range from 1% for those with less than $750 in income up to 5.75% for those making over $7,000.
In comparison, federal capital gains tax rates only 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
Entrepreneurship in Georgia
According to Made by Tribe, the leading startup incubator in the state is Intelligent Systems which has been growing technology businesses in Georgia for 35 years with a specialty in financial technology.
Additionally, the Small Business Sector of the Georgia Department of Economic Development offers both educational and networking services to entrepreneurs in the state of Georgia while having a huge impact on women-owned, minority-owned and veteran-owned businesses.
Another institution feeding the entrepreneurial ecosystem of the state is Georgia State University and its Entrepreneurship and Innovation Institute. In 2019, they launched a $300,000 grant titled the Main Street Entrepreneurship Seed Fund in order to provide both funding and mentoring to underrepresented entrepreneurs.
Among other industries, the following industries in particular thrive in the state:
Other Tax Incentives in the State of Georgia
The state of Georgia offers an Angel Investor Tax Credit for accredited investors who are funding early-stage innovative qualified businesses in Georgia. The credit provides up to a $50,000 annual tax credit for accredited investors funding early-stage innovative qualified businesses in Georgia. To be a qualified investment it must be a transaction involving cash for stock, equity interest, or subordinated debt in a corporation, partnership, or LLC.
Georgia Opportunity Zones
Georgia is home to approximately 260 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, Georgia 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 Zone funds in Georgia include:
- 100 Edgewood Office Redevelopment
- Old Fourth Ward Commercial Mixed-Use Project
- Old Fourth Distillery
See more at Georgia Department of Community Affairs.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.