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Illinois 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 offers the Illinois Angel Investment Tax Credit Program. What is the Illinois Angel Investment Tax Credit Program?
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.
Illinois QSBS Exemptions
Illinois 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.
Illinois follows the “Rolling” conformity–as stated in the previous paragraphs. Illinois does, at the Corporate level, conform to the federal exclusion under section 1202 for gain from certain small business stock. See 35 ILCS 5/102. The state does, at an Individual level, conform to the federal exclusion of gain for gain from certain small business stock. See 35 ILCS 5/102; see also I.R.C §1202.
Illinois Capital Gains Tax Rates
Illinois taxes capital gains as income. The Illinois state income tax is a flat rate of 4.95%.
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
Entrepreneurship in Illinois
TechNexus Venture Collaborative is one of the top incubators in the state of Illinois offering to their partners an opportunity for capital, incubation, and collaboration. They boast over 600 ventures that have raised over $1.5B.
The Illinois Department of Commerce and Economic Development hosts the Illinois Office of Entrepreneurship, Innovation & Technology. Here, entrepreneurs, innovators, and small businesses can find concierge services, information, and technical support. Their trade centers, technical centers, and environmental programs provide access to all of the tools that new business owners need to know to start a successful business in Illinois.
The University of Illinois outlines a thriving entrepreneurial ecosystem that offers resources like maker labs, offices, centers, organizations, facilities, and more. They also have the Technology Entrepreneur Center with many programs like the Chicago Entrepreneurship Workshop and Illinois Innovation Prizes.
Among other industries, the following industries in particular thrive in the state:
- Business Services
- Advanced Manufacturing
Illinois Tax Credits other than QSBS
The state of Illinois offers the Illinois Angel Investment Tax Credit Program to boost the amount of capital injected into the working capital needs of innovative startups. For those who invest in a qualified business, QNBV, the tax credit is equal to 25% of the investment up to $2 million.
Illinois Opportunity Zones
Illinois is home to approximately 327 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, Illinois 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 Illinois include:
- America’s Central Port, Roadwork – Granite City
- City of Dekalb, Neighborhood Revitalization
- City of Du Quoin, Industrial Park Electrical Extension
See more at Illinois.gov.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.