Minnesota 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.
Minnesota QSBS Exemptions
Minnesota 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.
Minnesota follows the “Static” conformity–as stated in the previous paragraphs. Minnesota does, at both the Corporate and Individual level, conforms to the federal treatment and exclusion for gain of small business stock. Minn. Stat. § 290.01(19); see also I.R.C. § 1202
Minnesota Capital Gains Tax Rates
The state of Minnesota taxes capital gains at the same rates as regular income. They have four tax brackets which range from 5.35% for income up to $27,230 to 9.85% for income over $166,040 for single taxpayers.
In comparison, federal capital gains tax rates 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 Minnesota
One of the largest incubators in the state is the Owatonna Area Business Development Center which offers a variety of services for free to entrepreneurs and small businesses including consulting, training, and loans.
Among other industries, the following industries in particular thrive in the state:
- Medical devices
- Health IT
- Data centers
- Water technology
- Agricultural production and exports
Non-QSBS Programs that Support Entrepreneurship
The state of Minnesota offers an Angel Tax Credit which provides a 25% tax credit to both investors and investment funds who make equity investments in startups focused in one of the following areas: high technology, new proprietary technologies, and new proprietary products, processes or services. The credit has a max of $125,000 per person, per year and is available for investors who are residents in other states or countries.
Minnesota Opportunity Zones
Minnesota is home to approximately 128 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 Opportunity Zones and QSBS article.
Under the Tax Cuts and Jobs Act of 2017, 26 USC 1400Z-2, Minnesota 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 funds in Minnesota include:
- Manna Foods Co-op Expansion
- V3 Center
- Riverfront Redevelopment Property
See more at Minnesota Opportunity Collaborative.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.