Montana 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.
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.
Montana QSBS Exemptions
Montana 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.
Montana follows the “Rolling” conformity–as stated in the previous paragraphs. Montana does, at the Corporate level, generally conform to the federal exclusion of gains from certain small business stock. See Mont. Admin. R. 42.15.318(1)(c) (discussing that in Montana there is a net operating loss if the taxpayer’s taxable income, recomputed with the adjustments provided in section 172(d) of the IRC, is less than zero). After recomputing the taxpayer’s taxable income, “…any gain excluded from the sale or exchange of qualified small business stock pursuant to section 1202 of the IRC…” must be added back. See Mont. Admin. R. 42.15.318(1)(c). Montana does, at the Individual level, conform to the federal partial exclusion for gain from certain small business stock. See Mont. Code Ann. § 15-30-2101(13); see also Mont. Code Ann. § 15-30-2301 (discussing the individual capital gains tax credit the state of Montana offers).
The tax credit statute, Mont. Code Ann. § 15-30-2301, states that “a ….taxpayer is allowed a credit against the taxes imposed by Mont. Code Ann. § 15-30-2103 in an amount equal to 1% of the taxpayer’s net capital gains for tax years 2005 and 2006 and 2% of the taxpayer’s net capital gains for tax years beginning after 2006, as shown on the taxpayer’s individual income tax return filed pursuant to Mont. Code Ann. § 15-30-2602. The credit allowed under this section may not exceed the taxpayer’s income tax liability.”
Montana Capital Gains Tax Rates
Montana taxes capital gains at the same rates as regular income, but there is a 2% capital gains credit. The highest income tax rate is 6.9%, which makes the highest capital gains tax rate 4.9%. These rates are uniform for every filing status.
In comparison, federal capital gains tax rates are lower than regular income rates and 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 Montana
406 Labs is an accelerator house at Montana State University. According to their website, “406 Labs houses a business incubator and accelerator. Our current industry focus is on the clusters already thriving in Bozeman such as Photonics, Biotech, Consumer Packaged Goods (CPG), Saas and Outdoor Technology.”
According to Montana Business Quarterly, the state is a fantastic ecosystem for entrepreneurs with high rankings in entrepreneurs per capita and business survival rate.
Among other industries, the following industries in particular thrive in the state:
- Energy Production
Other Programs Offered Besides QSBS that Support Entrepreneurship
Innovate Montana has published an extensive list of Angel Investors and Venture Capital Funds who are willing to invest in new small businesses in the state, both technology-based and non-tech businesses.
Additionally, the Montana Department of Commerce has developed an In-State Loan program with, “The objective to diversify, strengthen, and stabilize the Montana economy. Specifically, Montana law 17-6-305, MCA states that ‘the Board shall endeavor to invest 25 percent of the state’s Coal Tax Trust Fund in the Montana economy, with special emphasis on investments in new or expanding locally owned enterprises.’”
Montana Opportunity Zones
Montana is home to approximately 25 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 the Opportunity Zones and QSBS article.
Under the Tax Cuts and Jobs Act of 2017, 26 USC 1400Z-2, Montana 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.
The state of Montana wants investors to manage development in conjunction with local community standards. Learn more about the communities next steps with Opportunity Zones in Montana at Montana.gov.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.