Idaho 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.
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.
Idaho QSBS Exemptions
Idaho 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.
Idaho follows the “Static” conformity–as stated in the previous paragraphs. Idaho does, at a Corporate level, conform to the federal partial exclusion under section 1202 for gain from certain small business stock. See Idaho Code § 63-3004, as amended by 2021 Idaho H. 58(effective as of January 1, 2021). The amendment changed the conformity of the I.R.C from January 1, 2020, to January 1, 2021. There is a correlation of amendments, there was an amendment in 2018 Idaho H. 355, that changed the conformity of the I.R.C from January 1, 2017, to December 21, 2017. The state, at the Individual level, conforms to the federal partial exclusion for gain from certain small business stock. Idaho Code § 63-3011B; see also I.R.C. § 1202.
Idaho Capital Gains Tax Rates
Idaho taxes capital gains at the same rate as regular income. For a single taxpayer, the rate ranges from 1.125% for income of $1,567 and below up to 6.925% for income $11,759 and up.
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 Idaho
The Idaho Innovation Center was named the top startup incubator for offering services to entrepreneurs and brand new businesses so they can achieve growth with the support of collaboration, education, mentoring and shared resources.
Among other industries, the following industries in particular thrive in the state:
- Advanced manufacturing
- Aerospace
- Technology and Innovation
- Food Production
- Outdoor Recreation
- Back office and Shared Services
- Tourism
- Energy
Idaho was named one of the top 10 states to launch a new business and entrepreneurs can also seek support at The Idaho Small Business Development Center which empowers small business owners to achieve success by offering no-cost, confidential consulting and low-cost training to entrepreneurs throughout the state.
The Idaho Global Entrepreneurial Mission is a grant fund which partners with research universities in the state including Boise State University, Idaho State University, and the University of Idaho in an effort to bring new technologies to market. Their pursuit of commercialization of these technologies and the creation of new, high-paying jobs has stimulated the growth of Idaho’s economy.
Idaho Tax Incentives Besides QSBS
The Idaho Tax Reimbursement Incentive encourages the creation of well-paying jobs by offering a reimbursement of 30% of employee withholding for up to 15 years.
There are also tax credits in the state for businesses that invest in tangible property and facilities and those that create jobs above certain salary thresholds.
Idaho Opportunity Zones
Idaho is home to approximately 28 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 article.
Under the Tax Cuts and Jobs Act of 2017, 26 USC 1400Z-2, Idaho 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 Idaho include:
- Lumber Industry
- Residential Use
- Agricultural
See more at Idaho Department of Commerce.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.
