Virginia follows the tax exclusion (100%) on capital gains from the sale of Qualified Small Business Stock (QSBS) (as per IRC Section 1202). Therefore, any capital gains that might have occurred on QSBS sales will not only be excluded from federal income taxes but also state income taxes if all of the guidelines are followed.
Over the years, Virginia has had a moderated growth rate in its economy. This can primarily be attributed to its proximity to Washington D.C. For the most part, Virginia relies on federal and military funds to run the state. This has hindered significant investments and a competitive edge. Currently, Virginia is ranked 24 in terms of its economic growth rate. In 2019, Virginia reported a gross state product of $556,000,000, representing a slack growth rate of 1.7%.
What Kind of Innovations Flourish in Virginia?
For any economy to grow, diversify, and compete fairly, innovation has to take place. This kind of growth, in turn, leads to productivity and increased welfare among workers. The recent past has witnessed Virginia grow in different sectors, and unemployment rates have fallen as a result.
Ambitious young minds now have open opportunities to access starting capital and are now turning to IT and robotics. Some of the leading startups in Virginia at the moment include IT firms such as the Crypsis Group with annual average revenues of $30.0M; ExecVision that uses Conversation Intelligence to radicalize how executives perceive their businesses; and ThreatQuotient, a leading private tech startup that accelerates security through automation, context, and prioritization.
We also have proud, smart players in the local food delivery scene such as Territory, private health care providers and services such as Envera Health, and upcoming visual analytics firms such as Zoomdata.
Crunchbase has compiled a detailed list of the top startups in Virginia, indicating their source of funding.
Entrepreneurs have comprehensive access to angel investors ready to invest in young, ambitious minds or may be able to obtain SBA microloans or grants from government programs.
However, things are about to get spicy. After the government amended section 1202 of the internal revenue code in the September of 2010, individual investors and entrepreneurs can now boast tax exemptions to the tune of $10,000,000 on capital gains. This move aimed at spurring local investments in small businesses with reduced risks/losses. In doing so, more job opportunities for the growing population mean lesser unemployment and increased economic growth.
But exactly how does Virginia treat QSBS, and what do you need to qualify for these tax exemptions?
Qualifying for QSBS in Virginia
Consider Qualified Small Business Stock (QSBS) as a form of investment to encourage investments. QSBS goes way back to 1993, and with time, various amendments have been made to offer better tax terms to upcoming investors. On August 10, 1993, congress passed the Omnibus Budget Reconciliation Act of 1993. Any stocks purchased between this date and 17th February 2009 would only accrue 50% tax exclusions for QSBS.
The first amendment was made on 17th February 2009. The tax exclusions for QSBS in Virginia rose to 75%. Any QSBS purchased between this period, and 27th September 2010 would accrue 75% tax exclusions. The stakes changed when in September 2010, the code was amended to include 100% tax exclusion on capital gains.
Sounds appetizing, right?
The government has set up specific stipulations to define the QSBS requirements for investors and entrepreneurs.
Requirements to Access QSBS Tax Exemptions in Virginia
To qualify for the 100% tax exemptions (for qualifying stock purchased on or after September 27, 2010) in Virginia as stated in section 1202 of the IRC;
- The stock need to belong to a QSBS Qualified Entity type (i.e. domestic C-corporation.
- The corporation needs to pass the QSBS Gross Asset Test, whereby the asset base of the company was less than $50,000,000 before and immediately after your investment.
- The stock is of a company in a QSBS Qualified Industry.
- Walk through the comprehensive QSBS requirements for the additional QSBS qualifying criteria and note that particular redemptions and other actions taken by the corporation can retroactively eliminate QSBS status.
In addition to the Company qualifying as a Qualified Small Business (QSB), the shareholder also must meet certain qualifications, such as:
- The taxpaying investor acquired the stock directly from the firm using such means as money, property other than stock, or through services provided.
- The investor must have held the shares for more than five years after this date.
Note that limitations apply, whereby you are eligible to exclude as much as $10 million in gains or 10-times of the shares sold in the tax year.
In 2015, former president Barack Obama passed the Protecting Americans from Tax Hikes Act (PATH), making tax exclusions for QSBS permanent. This should act as an assurance for investors hoping to put their money in startups – it’s worth the gains!
Valentine Milner is a freelance writer covering various topics in tax, accounting and corporate law.
She has experience in article and blog writing, copywriting, technical writing and marketing communications.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.