Texas does not have a state income tax for individuals; therefore, if you receive capital gains in Texas there is no tax regardless if Section 1202 100% tax exclusion on capital gains from the sale of QSBS applies. 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.
Texas QSBS Exemptions
Texas does not have a state income tax for individuals; therefore, if you receive capital gains in Texas there is no tax regardless if Section 1202 100% tax exclusion on capital gains from the sale of QSBS applies. 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.
Entrepreneurship in Texas
According to the Texas Economic Development department,
“Texas takes the initiative to invest in its future by offering competitive incentives to companies who are creating jobs and driving innovation in Texas”
The state offers a range of resources and incentive funds to businesses looking to build in the Lone Star State.
Ideagist has a comprehensive list of incubators and accelerators in the state of Texas which serve the purpose of supporting and growing small business and entrepreneurship in the state.
Among other industries, the following industries in particular thrive in the state:
- Advanced Manufacturing
- Aerospace, Aviation, and Defense
- Biotechnology and Life Science
- Energy
- Information Technology
Texas Opportunity Zones
Texas is home to approximately 628 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, Texas 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 Funde in Texas out of the 29 include:
- 3LB Equities Opportunity Zone Fund (Affordable Housing, Multi-Family Housing, Residential)
- Alliant Strategic Opportunity Zone Fund I, LLC (Affordable Housing, Mixed-Use, Workforce Housing)
- Community Outcome Fund (Commercial, Infrastructure, Mixed-Use, Residential)
See more at the Opportunity Zone Database.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.
