New Jersey does not conform to the federal Qualified Small Business capital gains tax exemption. Senate Bill, S2265, which would have allowed the deduction of certain capital gains from sale or exchange of New Jersey qualified small business stock held for more than five years, passed in the Senate with a 38-1 vote on September 27, 2018. The bill crossed over since the introduction to the Assembly Appropriations Committee but was confirmed dead/failed as of January 8, 2020. The bill never reached the Governor’s desk for a signature or a veto.
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.
New Jersey QSBS Exemptions
New Jersey does not conform to the federal Qualified Small Business capital gains tax exemption.
New Jersey Capital Gains Tax Rates
New Jersey taxes capital gains at the same rate as regular income. There are 7 tax brackets that range from 1.4% for income up to $20,000 to 10.75% for income over $5,000,000 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
History of QSBS in New Jersey
Senate Bill, S2265, which would have allowed the deduction of certain capital gains from sale or exchange of New Jersey qualified small business stock held for more than five years, passed in the Senate with a 38-1 vote on September 27, 2018. The bill crossed over since the introduction to the Assembly Appropriations Committee but was confirmed dead/failed as of January 8, 2020. The bill never reached the Governor’s desk for a signature or a veto.
An identical bill, A4393, was introduced on September 13, 2018, with hopes it would be enacted because the law would be in effect that same day, unlike S2265. However, the bill never crossed over since the introduction to the Assembly Appropriations Committee and was confirmed dead/failed as of January 8, 2020. This bill also never reached the Governor’s desk for a signature or a veto.
Entrepreneurship in New Jersey
Ideagist has a comprehensive list of startup accelerators and incubators in the state of New Jersey.
Among other industries, the following industries in particular thrive in the state:
- Life Sciences
- Clean Energy
- Film and Media
- Advanced Manufacturing
- Food and Beverage
- Financial Services
Programs Besides QSBS that Support Small Business in New Jersey
The New Jersey Economic Development Authority offers foundational support to businesses of all sizes in order to foster the state economy. Their services included but are not limited to jobs-based tax credits, real estate and development tax credits, community development programs, main street technical assistance, innovation economy programs, clean energy programs, and low-interest business financing.
Another state incentive for investors is the popular Angel Investor Credit which replaced the Small New Jersey Based High Technology Business Investment Credit. This credit incentivizes high net worth individuals to back high-risk technology start-up ventures which are based in New Jersey and have less than 225 employees. Taxpayers can receive a credit up to 10% of their investment in a qualified business.
New Jersey Opportunity Zones
New Jersey is home to approximately 169 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, New Jersey 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 New Jersey Opportunity Zones include:
- Elizabeth General Hospital Redevelopment
- Refrigerated Seafrigo Warehouse
- Tern Landing Redevelopment
See more at nj.gov-New Jersey 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.