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New York 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. N.Y. Tax Law § 612.
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 York QSBS Exemptions
New York 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.
New York follows the “Rolling” conformity–as stated in the previous paragraphs. New York does, at the Corporate level, conform to the federal treatment of partial exclusion for gain from certain small business stock. See N.Y. Tax Law § 208(9); N.Y. Tax Law § 208(9)(l)(1); N.Y. Comp. Codes R. & Regs. tit. 20, § 4-8.3. New York does, at the Individual level, conform to the federal partial exclusion for gain from certain small business stock. See N.Y. Tax Law § 612(a); see also I.R.C. § 1202.
New York City does, at the Corporate level, generally conform to the federal treatment of capital gains and losses. See N.Y. City Rules tit. 19, § 11-27(b). New York City does, at the Individual level, generally conform to the federal partial exclusion for gain from certain small business stock. See N.Y. Tax Law § 1303; see also N.Y. City Admin. Code § 11-1711(a); N.Y. City Admin. Code § 11-1712(a)
New York Capital Gains Tax Rates
New York taxes capital gains at the same rates as regular income across 8 brackets which range from 4% for income up to $8,500 to 8.82% for income over $1,077,550 for single taxpayers.
In comparison, federal capital gains tax rates are lower than regular income taxes and 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 New York
VilliageOne has put together a list of 10 top incubators and accelerators in the state which range from industries such as innovative health to venture capital funds.
Additionally, “The START-UP NY program* provides tax benefits to approved businesses that locate in vacant space or land of approved New York State public and private colleges and universities, approved strategic state assets, and New York State incubators affiliated with private universities or colleges that are designated as tax-free NY areas. This program will promote entrepreneurialism and job creation by creating tax-free communities across the state.”
Among other industries, the following industries in particular thrive in the state:
- Financial Services
- Health Care
- Professional and Technical Services
- Retail Trade
- Educational Services
New York Business Tax Benefits Besides QSBS
There are equipment, research, and job creation tax credits available to businesses in the state of New York.
New York Opportunity Zones
New York is home to approximately 514 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 York 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 Opportunity Zone Funds in New York include:
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.