Nebraska 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.
Nebraska QSBS Exemptions
Nebraska 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.
Nebraska follows the “Rolling” conformity–as stated in the previous paragraphs. Nebraska does, at the Corporate level, generally conform to the federal exclusion for gain from certain small business stock. See Neb. Rev. Stat. § 77-2714; see also Neb. Rev. Stat. § 77-2734.04(6); Neb. Rev. Stat. § 77-2716. Nebraska does, at the Individual level, conform to the federal exclusion for gain from certain small business stock under I.R.C. section 1202. See Neb. Rev. Stat. § 77-2714.01(1).
Nebraska Capital Gains Tax Rates
The state of Nebraska taxes capital gains at the same rate as regular income.There are four tax brackets that range from 2.46% for income up to $3,340 to 6.84% for income over $32,210 for single taxpayers.
In comparison, federal capital gains tax rates are lower than regular income and 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 Nebraska
NMotion is one of Nebraska’s premier startup accelerators. They are mentor-driven and education-focused. They, “bring together capital, connections, and most importantly community to help your startup grow and thrive.”
NUTech Ventures is another resource for startups and entrepreneurs at the University of Nebraska–Lincoln. They evaluate, protect, market, and license intellectual property coming out of the university as well as promote entrepreneurship through programming and sponsored events.
Among other industries, the following industries in particular thrive in the state:
- Agribusiness and Food Processing
- Advanced Manufacturing
- Renewable Energy
- Financial Services
- IT and Data Services
- Health and Medical Services
- Business Services
- Tourism and Hospitality
- Transportation and Logistics
- Call Centers and e-commerce
Other Tax Incentives Besides QSBS that Support Business Development
Before 2019, the state had an Angel Investor tax credit which allowed, “Individuals, trusts, or pass-through entities are eligible for a refundable income tax credit equal to 40% of an investment in an eligible Nebraska business.” The state identified 87 qualifying small businesses.
Now the state has the ImagiNE Nebraska Act which is the newest tax incentive program, designed to meet the needs of expanding and re-locating businesses. It is a tiered incentive program that rewards investment and job creation within the state.
Nebraska Opportunity Zones
Nebraska is home to approximately 44 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 Opportunity Zones and QSBS article.
Under the Tax Cuts and Jobs Act of 2017, 26 USC 1400Z-2, Nebraska 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.
In Nebraska, Opportunity Zones are not the only incentive that can be found within specific locations. Some other incentives for investors are Enterprise Zones, New Market Tax Credits, TIFs, LIHTC, land donations, fast-tracked permitting, and many other programs. Learn more at Nebraska Opportunity Zones.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.