North Dakota 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.
North Dakota QSBS Exemptions
North Dakota 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.
North Dakota follows the “Rolling” conformity–as stated in the previous paragraphs. North Dakota does, at the Corporate level, conform to the federal treatment of capital gains and losses. See N.D. Cent. Code § 57-38-01(5); N.D. Cent. Code § 57-38-01(12); N.D. Cent. Code § 57-38-01.3(1). North Dakota does, at the Individual level, conform to the federal partial exclusion for gain from certain small business stock. See N.D. Cent. Code § 57-38-30.3; N.D. Admin. Code § 81-03-01.1-02; see also I.R.C. § 1202.
North Dakota Capital Gains Tax Rates
North Dakota taxes capital gains at the same rates as regular income, but allows taxpayers to deduct 40% of capital gains from their taxable income.
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 North Dakota
Entrepreneurs in the state of North Dakota can find resources at the NDSU Startup Incubator. “We work hard to create an entrepreneurial culture that fosters innovation and encourages ingenuity. As startups and entrepreneurs seek to start their first or next venture, the NDSU Startup Incubator provides them with access to the programs and services they need to quickly succeed.”
There is also the UND Center for Innovation, “which is a part of the vibrant, local entrepreneurial ecosystem, helping entrepreneurs turn ideas into viable businesses through its incubator and programs.”
Among other industries, the following industries in particular thrive in the state:
Investment Incentives other than QSBS
North Dakota Opportunity Zones
North Dakota is home to approximately 25 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, North Dakota 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. North Dakota, unlike most states, elected to designate a majority of the opportunity zones with 52% of zones located in urban areas.
Some examples of Opportunity Zones in North Dakota include:
- Connect UP! Integrated Capital Fund (Affordable Housing, Commercial, Infrastructure, Workforce Housing)
See more at North Dakota Commerce.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.