On October 25, 2023, Wisconsin Governor Tony Evers signed Assembly Bill 406 updating Wisconsin to conform to Federal QSBS regulations, retroactive to January 1, 2019. Previously, Wisconsin had followed section 1202, but at a 50% tax exclusion on capital gains from the sale of QSBS, for stock acquired after December 31, 2013.
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.
Wisconsin QSBS Exemptions
As of October 25, 2023, Wisconsin allows for the full QSBS exclusion!
On October 25, 2023, Governor Tony Evers signed Assembly Bill 406 which modified Wisconsin’s conformity to Federal QSBS, retroactive to QSBS gains realized after December 31, 2018. See the Governor’s office press release here.
Wisconsin State Legislature Statutes Chapter 71 and its subchapter XVI address how Section1202 of the IRC is followed. Prior to Assembly Bill 406, “for stock acquired after December 31, 2013” Wisconsin followed the “Static” conformity–as stated in the previous paragraphs and only conformed to 1202 as of a specific date, December 31, 2013. See Wis. Stat. § 71.98(5). Although the federal treatment of QSBS allows for a progressive 50%, 75%, or 100% exclusion on QSBS capital gains depending on the date of acquisition starting in 1993, the Wisconsin Department of Revenue previously only recognized the exclusion for QSBS acquired after December 31, 2013 and held for at least 5 years (at the 50% exemption level).
Because the 100% Federal QSBS exclusion was not made permanent until the PATH Act during 2015, Wisconsin had never adopted the 75% or 100% exclusion levels until the change with Assembly Bill 406.
How are Capital Gains Taxed in the State of Wisconsin?
Let’s take a look at how capital gains not covered under 1202 are taxed in the state.
Before 1982, all capital gains income was taxed at the same rate as ordinary income, but starting in that same year, a 60% exclusion of capital gains from taxable income was phased in. It started out as a 20% exclusion and increased to 40% in 1983 and finally to 60% in 1984.
Today, “Wisconsin law generally allows a deduction for 30% of the net capital gain from assets held more than one year,” according to publication 103.
In comparison, federal capital gains tax rates only 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 Wisconsin
The WEDC, or the Wisconsin Economic Development Corporation, describes the actions the state has taken to create a “vibrant entrepreneurial ecosystem.” In order to continue to foster this environment, the WEDC calls on its partner network to fuel entrepreneurs with “direct capital infusions and incentivizing investments through angel and venture tax credits, mentoring, training and other important resources.”
The WEDC provides particular support / resources for minority-owned startups.
In addition, they pool their expertise within foundational Wisconsin industries such as water technology, energy, and power to share proven strategies through their nationally and internationally recognized centers of excellence.
The University of Wisconsin also has the Institute for Business & Entrepreneurship which works with local institutions and organizations in order to serve the state’s new and established small businesses. Their mission is to use consulting, education, and data analysis to increase entrepreneurial and business capabilities with the goal of furthering success for small businesses.
Key Industries in Wisconsin
Among other industries, the following industries in particular thrive in the state:
- Aerospace Manufacturing
- Energy / Power
- Food & Beverage
- Forest Products
- Water Technology
Notable Wisconsin Businesses
Several notable companies in Wisconsin are included in our potential QSBS Company Directory include:
Additional Programs Supporting Wisconsin Entrepreneurship
The 2011-12 Wisconsin Statutes & Annotations which was updated through the 2013 Wisconsin Act 49, specifically chapter 238, defines the elements and purposes of the Wisconsin Economic Development Corporation and its several supporting structures for small business including the early stage business investment program, angel investment tax credits, and qualifying new business ventures.
Wisconsin provides for a capital gains tax exemption similar to QSBS for entities other than C-Corporations. According to the Wisconsin DOR, “for taxable years that begin on or after January 1, 2016, Wisconsin law (sec. 71.05(25), Wis. Stats.) provides for a capital gain exclusion when an investment is held for at least five years in a “qualified Wisconsin business.”
“The exclusion is only available to individuals, including individual partners or members of a partnership, limited liability company, or limited liability partnership, and individual shareholders of a tax-option corporation.”
Qualified Wisconsin Businesses have different requirements than Qualified Small Businesses but there may be some overlap in qualifications. See the eligibility and registration requirements for a Qualified Wisconsin Business here.
Wisconsin Opportunity Zones
Wisconsin is home to approximately 120 “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, Wisconsin 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. Unlike other states, Wisconsin has a good portion, 39% of the Opportunity Zones, are in rural tract
Some examples of Opportunity Zone projects in Wisconsin include:
- Office Space
- Residential Investment
- Vacant Land/Industrial Site
See more at Wisconsin Economic Development Corporation.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.