Iowa 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 Iowa offers an Angel Investor Tax credit to stimulate capital investments from accredited investors. What is the Iowa 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.
Iowa QSBS Exemptions
Iowa 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.
Iowa follows the “Static” conformity–as stated in the previous paragraphs. Iowa does generally, at both the Corporate and Individual level, conform to the federal treatment of exclusions under section 1202 for gains from certain small business stock. See Iowa Code Ann. § 422.3; see also I.R.C §1202. The section states that for tax years beginning and after January 1, 2020, the term “Internal Revenue Code” will be defined as Internal Revenue Code enacted in 1986 which was amended into effect as of March 24, 2018.
Iowa Capital Gains Tax Rates
Iowa’s state tax on capital gains is equivalent to the income tax. The state has 9 tax brackets that apply to all filing statuses and range from .33% for income under $1,676 up to 8.53% for income over $75,420.
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 Iowa
One of the top incubators in Iowa is the Iowa State University Research Park. “ISURP is a growing technology community and incubator for new and expanding businesses, providing access to the vast array of resources available at Iowa State University: from talent pipeline management, to specialized equipment, to access to the research infrastructure.”
Among other industries, the following industries in particular thrive in the state:
- Renewable Energies and Fuel
- Health Insurance
Iowa Tax Incentives Besides QSBS
The state of Iowa offers an Angel Investor Tax credit to stimulate capital investments from accredited investors that is worth 25% of the investment up to $100,000 per year.
Iowa Opportunity Zones
Iowa is home to approximately 62 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, Iowa 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 Iowa include:
- The River (133 apartments, 20 townhomes, and 78 underground parking stalls)
- Home2 Suites Des Moines at Drake University
See more at Iowa Economic Development.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.