Indiana 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 Indiana Venture Capital Investment Tax Credit. What is the Indiana Venture Capital Investment 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.
Indiana QSBS Exemptions
Indiana 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.
Indiana follows the “Static” conformity–as stated in the previous paragraphs. Indiana does, at both the Corporate and Individual level, conform to the federal treatment of exclusion under section 1202 for gain from certain small business stock . Ind. Code Ann. § 6-3-1-11, amended by 2021 Ind. H.B. 1001 (effective March 31, 2021). The amendment assured that “Internal Revenue Code” will be defined as the Internal Revenue Code enacted in 1986.
Indiana Capital Gains Tax Rates
Indiana taxes capital gains the same as regular income at a flat rate of 3.23%.
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 Indiana
The NIIC, or the Northeast Indiana Innovation Center, is one of the top incubators in the state of Indiana. They help entrepreneurs through launching their business and beyond. Their selection process is quite competitive but they claim a 92% success rate on the companies they work with.
The Indy Chamber focuses on economic development within the state by offering services through their three programs: the Business Ownership Initiative, the Central Indiana Women’s Business Center, and the Hispanic Business Council. They partner with businesses, new and old, from all industries to help build the entrepreneurial ecosystem in Indiana.
Not only is Indiana the orthopedics capital of the world but they are also home to the second-largest automotive industry according to the Indiana Economic Development Corporation.
Among other industries, the following industries in particular thrive in the state:
- Aerospace and aviation
- Advance manufacturing
- Life sciences
Other Tax Credits in the State of Indiana
Indiana offers a Venture Capital Investment Tax Credit to bring capital to Qualified Indiana Businesses. The tax credit is worth 20% of the investment with a $1 million cap for investments made after July 1, 2020. The investment can be in the form of equity or debt capital. The tax credit can be sold or assigned to another person. The state can award up to $12.5 million in credits a year. See the requirements.
Indiana Opportunity Zones
Indiana is home to approximately 156 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, Indiana 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 Indiana include:
- Hotel Momentum (a 7,259 room hotel)
- Waterside (will provide office, commercial and retail space)
- Tarkington Park
See more at Indy Chamber.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.