Oregon 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.
Oregon QSBS Exemptions
Oregon 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.
Oregon follows the “Static” conformity–as stated in the previous paragraphs. Oregon does, at the Corporate level, conform to the federal exclusion for gain from certain small business stock. See Or. Rev. Stat. § 317.013. Oregon does, at the Individual level, conform to the federal partial exclusion for gain from certain small business stock. See Or. Rev. Stat. § 316.048; see also I.R.C. § 1202.
Oregon Capital Gains Tax Rates
Oregon taxes capital gains at the same rates as regular income. There are four tax brackets ranging from 4.75% for income up to $3,600 to 9.9% for income over $125,000 for single taxpayers.
In comparison, federal capital gains tax rates are lower than regular income rates 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 Oregon
The Oregon Entrepreneur Network is a nonprofit, membership-driven organization with a 28-year track record that supports scalable startups from every industry across the state. They help entrepreneurs start up and scale by connecting them to peers and mentors, funding opportunities, and hands-on training.
See a comprehensive list of incubators and accelerators in the state at Business Oregon.
Among other industries, the following industries in particular thrive in the state:
- Advanced Manufacturing
- Business Services
- Food and Beverage
- Forestry and Wood Products
- High Technology
- Outdoor Gear and Apparel
State Programs Offered Besides QSBS that Support Entrepreneurship
The Oregon Investment Advantage is a tax exemption for qualified companies who establish new operations in an eligible county, create 5 full-time permanent jobs, and pay at least the county’s minimum wage. These companies can enjoy a 10-year state income tax holiday.
Oregon Opportunity Zones
Oregon is home to approximately 86 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, Oregon 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 Oregon include:
- Ceeley OF LLC Premium Listing (Mixed-Use, Multi-Family Housing, Residential)
- Galena Opportunity Fund (Residential)
- HR Capital Opportunity Fund I, LLC (Industrial, Residential, Workforce Housing)
See more at The Opportunity Zones Database.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.