New Hampshire only taxes interest and dividends for state income tax purposes; therefore, the section 1202 capital gains tax exclusion is irrelevant for New Hampshire state income tax.
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.
New Hampshire QSBS Exemptions
New Hampshire does not have a capital gains state income tax for individuals; therefore, if you receive capital gains in New Hampshire there is no tax regardless if Section 1202 100% tax exclusion on capital gains from the sale of QSBS applies.
New Hampshire only taxes interest and dividends for state income tax purposes, not capital gains. See N.H. Rev. Stat. Ann. § 77:3.
Entrepreneurship in New Hampshire
The state of New Hampshire has a surplus of incubators, accelerators, and other small business resources conveniently listed at Live Free and Start.
They also have a startup concierge to help you
“harness the power of New Hampshire’s collaborative community of business leaders and entrepreneurs to help drive your businesses’ growth.”
Among other industries, the following industries in particular thrive in the state:
- High Technology Manufacturing
- Health Care
Non-QSBS Tax Incentives that Support Entrepreneurship
The Community Development Finance Authority offers a tax credit program to business donors. CDFA’s Tax Credit Program awards approximately $5 million in tax credits annually in a competitive grant round. The program aims to support organizations that are engaged in community economic development initiatives that show a high degree of community support, build partnerships and leverage other resources.
The state also offers multiple tax incentives for job creation that are listed on the New Hampshire Division of Economy Development website.
New Hampshire Opportunity Zones
New Hampshire is home to approximately 27 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, New Hampshire 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 New Hampshire Opportunity Zone Funds include:
- KindCare Assisted Living (Residential, Senior Housing)
- Ozone Capital North Country Growers QOZ Fund (Farmland)
- Strategic Rivermont OZ Fund, LLC (Commercial, Energy Development, Hotel, Mixed-Use, Residential, Stadiums and Arenas, Student Housing)
See more at Opportunity Zones Database.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.