Maine 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.
Learn more about the criteria for Qualified Small Business Stock.
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.
Find out how QSBS is recognized by each state here.
Maine QSBS Exemptions
Maine 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.
Maine follows the “Static” conformity–as stated in the previous paragraphs. Maine does, at the Corporate level, conform to the federal treatment of capital gains and losses. See Me. Rev. Stat. Ann. tit. 36, § 111(1-A), as amended by 2021 Me. H.P. 155 (effective retroactively to tax years beginning on or after Jan. 1, 2018). Maine does, at the Individual level, conform to the federal partial exclusion for gain from certain small business stock under section 1202. Me. Rev. Stat. Ann. tit. 36, § 5121 see also section 1202.
Maine Capital Gains Tax Rates
Maine taxes capital gains at the same rates as regular income. The state has three tax brackets ranging from 5.8% for those making up to $22,199 annually up to 7.15% for individuals making more than $52,600.
In comparison, federal capital gains tax rates are also divided into 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 Maine
The UpStart Center for Entrepreneurship is an incubator that provides services, resources, as well as physical space to new small businesses within the state. Some of their support programs include coaching, networking events and ongoing training.
The MCE is another program dedicated to the growth and development of Maine’s economy. They build opportunities for clients, sponsors, and mentors to collaborate and generate growth within the state’s entrepreneurial ecosystem.
Key Industries According to Invest in Maine
Among other industries, the following industries in particular thrive in the state:
- Advanced materials and composites
- Environmental technology
- Food and beverage
- Forest products
- Hospitality and tourism
- Life sciences
- Marine construction and technology
- Renewable energy
Other Programs that Support Entrepreneurship in Maine
In 1995, the Maine Legislature enacted the Small Enterprise Growth Fund which serves the purpose of providing capital to new small businesses that demonstrate potential for both high levels of growth as well as public benefit.
The Maine Department of Economic & Community Development has also launched a program to support small businesses creating innovative technologies called the Early Adopter Pilot. The program allows for the state to receive pitches from companies who apply and for which the state of Maine will potentially be a “lighthouse customer” for these emerging businesses.
Maine Opportunity Zones
Maine is home to approximately 32 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 the Opportunity Zones and QSBS article.
Under the Tax Cuts and Jobs Act of 2017, 26 USC 1400Z-2, Maine 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 Opportunity Zone projects in Maine include:
- A 250-unit apartment building on Clarks Pond Parkway in South Portland
- Rehabilitation of the Odd Fellows building on Water Street in Augusta
See more at the article found on the Press Herald.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.