Kansas 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 Kansas offers an Angel Investor Tax credit to stimulate capital investments from accredited investors to a Qualified Kansas Business. What is the Kansas 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.
Kansas QSBS Exemptions
Kansas 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 Kansas offers an Angel Investor Tax credit to stimulate capital investments from accredited investors to a Qualified Kansas Business.
Kansas follows the “Rolling” conformity–as stated in the previous paragraphs. Kansas does, at the Corporate level, conform to the federal treatment of exclusions for gain from certain tax-exempt income. See Kan. Stat. Ann. § 79-32,109(a)(1); see also Kan. Stat. Ann. § 79-32,138(a). The statutes state that the term “federal internal revenue code” under these provisions will refer to the Federal Internal Revenue Code of 1986. Kansas does, at the Individual level, conform to the federal treatment of partial exclusions for small business stock gains under section 1202. See Kan. Stat. Ann. § 79-32,109(a)(1); see also Kan. Stat. Ann. § 79-32,117(a).
Kansas Capital Gains Tax Rates
Kansas taxes capital gains as regular income with rates ranging from 3.1% for single taxpayers earning up to $15,000 to 5.6% for those making over $30,000.
In comparison, federal capital gains tax rates are lower than regular income tax rates and are split into 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 Kansas
Wichita Technology Corporation also known as NetWork Kansas is one of the top incubators in the state for entrepreneurial development and investment, according to madebytribe.com. They are a state-wide network of nonprofits who seek to connect entrepreneurs with “Expertise, Education and Economic Resources.”
The Kansas State University Institute for Commercialization is “dedicated to the start-up and expansion of technology-based, high-growth enterprises and enabling the commercialization of university and under-utilized corporate intellectual property.” They offer opportunity assessment, strategic design, licensing, and more in order to help entrepreneurs turn Kansas State research into commercialization intellectual property.
Top Performing Industries According to the Kansas Department of Commerce
Among other industries, the following industries in particular thrive in the state:
- Advanced manufacturing
- Corporate and professional services
- Logistics and distribution
- Food processing and manufacturing
- Aerospace and defense
- Animal health
- Energy and natural resources
Kansas Tax Incentives Other than QSBS
The state of Kansas offers an Angel Investor Tax credit to stimulate capital investments from accredited investors to a Qualified Kansas Business. The tax credit is 50% of the investment up to $250,000 per year, but limited to $50,000 for each company invested in. The program allots $6 million in tax credits a year through 2021. Below are guidelines for the investment.
Read more about Qualified Kansas Businesses.
Kansas Opportunity Zones
Kansas is home to approximately 74 Opportunity Zones census tracts.
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 K.S.A. 2012 Supp. 79-32,267, Kansas 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 July 1, 2011 and prior to January 1, 2022. See Kansas Notice 15-09for the amended dates.
Refer to this map for the Opportunity Zones in the state and here for all Opportunity Zones in the United States.The Sunflower State, Kansas, states that the opportunity zones are open to new housing projects, new business, or even an expansion on a successful business. See more at Kansas Department of Commerce.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.