On December 20, 2021, New Jersey’s State Senate passed a bipartisan bill (S. 4127) allowing for deductions to individual income tax from the sale of certain Qualified Small Business Stock (QSBS). To qualify for the deduction in New Jersey, the stock has to satisfy the federal Section 1202 requirements plus the Qualified Small Business needs to have fewer than 225 employees and have payroll at least 80% attributable to employment located in New Jersey. This bipartisan bill was sponsored by both Republican State Senator Steven Oroho and Democratic State Senator Paul Sarlo. The legislation passed with a vote of 37-1.
What Does the Future Hold with New Jersey’s Capital Gains Deduction Bill?
This is not New Jersey’s first time trying to pass a bill that included the tax benefit found under Section 1202. Senate Bill S2265 passed with a 38-1 vote in 2018. An identical bill, A4393, was introduced but never voted on. Both bills would have incorporated QSBS incentives into New Jersey law but were never signed by the governor and enacted into law. Learn more about New Jersey’s QSBS history here.
However, the previous bills were introduced during September 2018 where the discussion surrounding Section 1202 was not necessarily in a state of uncertainty. The passing of the Capital Gains Deduction Bill and the previous attempts indicate that the state sees the value encouraging investments in innovation can bring to New Jersey. NJ’s Office of Legislative Services found that the bill will not negatively impact state income until 2027 at the earliest because the bill conditions eligibility for the deduction on taxpayers holding QSB stock for at least 5 years which is originally issued after the effective date of the bill.
With the NJ State Senate voting to expand QSBS, might New Jersey’s US Senators, Cory Booker and Robert Menendez (both in the Democratic party), reverse course on the Build Back Better Act’s provision curtailing QSBS to match the will of their constituents?
Benefits of Capital Gains Deduction Bill in New Jersey
This new state policy will enrich the incentives for investments in small and midsized businesses across the state. The policy will incorporate a more constructive capital gains tax on state filings by giving tax exemptions on the sale of QSBS. In a recent press release, New Jersey Senator Oroho said,
“The establishment of new businesses, corporate growth, and new job opportunities will more than compensate for the deductions with revenue for the state.”
Senator Oroho also added,
“So many states are already utilizing the strategy because it makes good business and financial sense.”
Only 6 out of 43 states that have a personal income tax do not provide a Section 1202 tax incentive at the state level.
QSBS Uncertainty in the BBBA
If the BBBA was to pass, it could make significant cuts to QSBS tax exemptions. Currently, the proposed BBBA legislation would reduce the QSBS capital gain exclusions from 100% to 50%, for any exchanges or sales happening after September 12, 2021, with the reduced exclusion applying to individuals with over $400,000 in Adjusted Gross Income.
As of now, the BBBA is at a standstill after Democratic Senator Joe Manchin of West Virginia voted against the proposed legislation in the Senate. There is anticipation on the side of the Democrats to potentially scale back, compromise, and restructure the proposed bill in hopes of a new vote after the beginning of the year. While there isn’t a clear direction over possible changes to the QSBS amendment, there has historically been bipartisan support of the economy-boosting benefits of QSBS tax exemption policies at both state and national levels. This solid support of jumpstarting the nation’s economy and job market has many wondering if lawmakers will revise the original cuts to QSBS in the proposed bill.
Many states, like New Jersey, are vocal in their support of QSBS and reaping the benefits of these significant tax exemptions as it spurs innovation, job growth, and economic rebirth. But the dissonance occurs at a federal level where many Senators are actively supporting legislation that will ultimately cut this benefit for their states and their citizens.
As the BBBA continues to be debated, many will be interested to see if Senators Booker and Menendez take an active role supporting QSBS given the actions taken by their state. Join our coalition as we spread support in backing a thriving startup ecosystem
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.