Missouri follows 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.
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.
Missouri QSBS Exemptions
Missouri follows 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.
Missouri follows the “Rolling” conformity–as stated in the previous paragraphs. Missouri does, at the Corporate level, conform to the federal treatment of capital gains and losses, and at Individual level, conforms to the federal exclusions for small business stock under section 1202. See Mo. Rev. Stat. § 143.121; see also I.R.C. § 1202.
Missouri Capital Gains Tax Rates
The state of Missouri taxes capital gains at the same rate as regular incomes. State rates are the same for every filing status and range from 0% for income up to $106 to 5.4% for income over $8,584 across 10 brackets.
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 Missouri
Within the state of Missouri, there are 28 venture capital and accelerator funds focused on early-stage startups. One of the most well-known venture capital funds is Cultivation Capital, which has a fund solely focused on Midwest Seed Stage startups. The moSourceLink website has a page with a list of resources for various types of funding opportunities available to entrepreneurs in Missouri. The Missouri Department of Economic Development also has a page for various innovation centers and influencers within Missouri’s startup ecosystem.
Other Programs Offered Besides QSBS that Support Entrepreneurship
Beyond following the Section 1202 tax exclusion, Missouri offers five different tax credit programs to businesses and investors in the state of Missouri.
- Enhanced Enterprise Zone Tax Credit
- Wine and Grape Tax Credit
- Rebuilding Communities Tax Credit
- Small Business Incubator Tax Credit
- Quality Jobs Program Tax Credit
Missouri Opportunity Zones
Missouri is home to approximately 161 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 the Tax Cuts and Jobs Act of 2017, 26 USC 1400Z-2, Missouri 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. Approximately 72% of the opportunity zones are located in the Urban Tract; meanwhile, roughly 28% of the opportunity zones are located in the Rural Tract.
Some examples of Opportunity Zone funds in Missouri include:
QSBS Experts in Missouri
Additional Information on Missouri and QSBS
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.