Tennessee does not have a capital gains state income tax for individuals; therefore, if you receive capital gains in Tennessee there is no tax regardless if Section 1202 100% tax exclusion on capital gains from the sale of QSBS applies. 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.
Tennessee QSBS Exemptions
Tennessee does not have a capital gains state income tax for individuals; therefore, if you receive capital gains in Tennessee there is no tax regardless if Section 1202 100% tax exclusion on capital gains from the sale of QSBS applies.
Tennessee taxes only certain income from interest and dividends, not capital gains. See Tenn. Code Ann. § 67-2-102. Refer to Tenn. Code Ann. § 67-2-124(c), which notes the effective date of the elimination of state income taxes
Entrepreneurship in Tennessee
Entrepreneurs in the state benefit from valuable resources such as Launch Tennessee, a network in the state that offers mentor networks, virtual programs, and internship programs.
According to their website,
“LaunchTN works closely with our Network Partners throughout the state to support Tennessee entrepreneurs and innovators. Whether you’re an entrepreneur, a seasoned founder or a researcher, our Network Partners can help you reach your next milestone. Browse the training programs, workshops and funding opportunities below to take your startup to the next level.”
The state department of economic and community development also offers business resources to, “support the successful growth and expansion of DBEs, small businesses, microenterprises and aspiring entrepreneurs.”
Among other industries, the following industries in particular thrive in the state:
- Advanced Manufacturing
- Adventure Tourism
- Health Care
Other Programs Offered Besides QSBS that Support Entrepreneurship
The state of Tennessee, like many others, offers an Angel Investor Tax Credit. This program incentives and benefits investors who support pre-qualified, Tennessee-based companies up to $50,000 applicable against their Hall income tax liability.
Tennessee Opportunity Zones
Tennessee is home to approximately 176 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, Tennessee 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 Tennessee Opportunity Zones include:
- Cookeville Assisted Living Facility
- Sterick Building
- South Malloy Lane
See more at Mastered in Tennessee.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.