Pennsylvania does not offer any tax credits or exclusions for investments in qualified small businesses. The state of Pennsylvania taxes capital gains at the same rate as regular income which is a flat rate of 3.07%.
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.
Pennsylvania QSBS Exemptions
Pennsylvania does not offer any tax credits or exclusions for investments in qualified small businesses.
Pennsylvania Capital Gains Tax Rates
The state of Pennsylvania taxes capital gains at the same rate as regular income which is a flat rate of 3.07%.
In comparison, federal capital gains tax rates 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 Pennsylvania
Small Business is highly valuable in the state of Pennsylvania as they bring new ideas, technology, and job opportunities while fueling the entrepreneurial ecosystem. In 2018, Governor Wolf established the Pennsylvania Business One-Stop Shop as a resource for the small businesses and startups which created nearly 24,000 jobs in the second half of 2015.
“Serving as the first point of contact for Pennsylvania business development concerns, the Pennsylvania Business One-Stop Shop connects and guides businesses through all stages of development — from planning and startup to operating and expanding.”
Ideagist has a comprehensive list of startup accelerators and incubators in the state of Pennsylvania.
Among other industries, the following industries in particular thrive in the state:
- Natural Gas
- Life Sciences
Pennsylvania Opportunity Zones
Pennsylvania is home to approximately 300 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, Pennsylvania 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 mapfor the Opportunity Zones in the state and here for all Opportunity Zones in the United States.
Some Examples of Opportunity Zones in Pennsylvania include:
- Mosaic Opportunity Zone Fund LP (Mixed-Use)
- Strategic Rivermont OZ Fund, LLC (Commercial, Energy Development, Hotel, Mixed-Use, Residential, Stadiums and Arenas, Student Housing)
- Urban Array Opportunity Fund (Commercial, Office, Residential)
See more at Opportunity Zone Database.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.