Alabama does not offer a tax exclusion for investing in QSB stock. Although Alabama does not offer the QSBS tax exclusion, under the Alabama Jobs Act, Act 2015-27 there is a tax credit up to 1.5% annually of a qualified capital investment in a qualifying project. The tax credit can be elected for up to 10 years on each project. The tax credit is offered based on the discretion of the Governor.
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.
Learn more about the criteria for Qualified Small Business Stock.
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.
Find out how QSBS is recognized by each state here.
Alabama QSBS Exemptions
Alabama does not offer a tax exclusion for investing in QSB stock. Although Alabama does not offer the QSBS tax exclusion, under the Alabama Jobs Act, Act 2015-27 there is a tax credit up to 1.5% annually of a qualified capital investment in a qualifying project. The tax credit can be elected for up to 10 years on each project. The tax credit is offered based on the discretion of the Governor.
Alabama Capital Gains Tax Rates
The state of Alabama taxes capital gains at the same rate as income. There are three tax brackets that range from 2% for income up to $500 to 5% for income over $3,000 for single taxpayers.
In comparison, federal capital gains tax rates also 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
The Alabama Capital Investment Tax Credit
Section 40-18-376 defines a discretionary credit for those who meet certain qualifications and have projects approved by the Alabama Department of Commerce. Qualifying projects give businesses eligibility to claim the tax credit.
The credit is equivalent to 1.5% of annual qualified capital investments for qualified projects for up to 10 years, or 15 years for investments in a targeted or jumpstarted county. The credit can be utilized against income taxes, financial institution taxes, insurance premiums, utility taxes, or any combination of these.
Entrepreneurship in the State of Alabama
The Alabama Small Business Development Center Network has gathered a comprehensive list of startup accelerators and incubators in the state. The network serves entrepreneurs by assisting them in finding an incubator or accelerator that will best fit their needs.
The Alabama Department of Commerce offers a Small Business Development Divisionwhich partners with universities state-wide as well as local development organizations in order to fuel and support the entrepreneurial ecosystem within the state.
Among other industries, the following industries in particular thrive in the state:
- Aerospace and Aviation
- Agricultural Products and Food Production
- Automotive
- Bioscience
- Chemicals
- Forestry Products
- Metal and Advanced Materials
The Growing Alabama Tax Credit
Sections 3-9 of the Legislative Act 2021-2 define a tax incentive which serves the purpose of funding Economic Development Organizations in order to stimulate economic growth. Taxpayers in the state of Alabama can make contributions to qualifying projects approved by the EDO.
The incentive to invest in the state economy is a tax credit that can offset up to 50% of income tax, excise tax, insurance premium tax, or state utility tax. Taxpayers will receive a Growing Alabama Tax Credit equal to their donation when contributed toward an approved project, and can carry the credit forward up to 5 years. The credit can be passed through to individual owners, shareholders, partners, or members of an LLC.
In order to qualify, the EDO must apply through the Department of Commerce before receiving any cash contributions and must be approved by the Renewal of Alabama Commission.
Alabama Opportunity Zones
Alabama is home to approximately 158 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 Opportunity Zones and QSBS.
Under the Tax Cuts and Jobs Act of 2017, 26 USC 1400Z-2, Alabama 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.
According to Opportunity Alabama,
“If you have capital gains, you can deploy those gains to your own project through your own Opportunity Fund and receive some very favorable tax incentives for doing so. For those without gains, third-party Opportunity Funds can provide you with access to capital – potentially on favorable terms for you, if you have the right opportunity for investment.”
The two major industries for potential Opportunity Zones opportunity lies in:
- Real Estate
- Active Businesses
See more at Opportunity Alabama for what makes a Opportunity Zone project qualify.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.
