Kentucky 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.
Kentucky QSBS Exemptions
Kentucky 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.
Kentucky follows the “Static” conformity–as stated in the previous paragraphs. Kentucky does, at the Corporate level, conform to the federal enhanced exclusion of small business stock gains under section 1202. See Ky. Rev. Stat. Ann. § 141.010(20) (effective for tax years on or after Jan. 1, 2018). Kentucky does, at the Individual level, conform to the federal enhanced exclusion of small business stock gains. See Kentucky Schedule KNOL: Net Operating Loss Schedule (at the current tax year).
Kentucky Capital Gains Tax Rates
Kentucky taxes capital gains as regular income at a flat rate of 5%. In comparison, federal capital gains tax rates 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 Kentucky
One of the biggest incubators in the state, according to madebytribe.com, is the Kentucky Innovation Network which, “helps courageous entrepreneurs, creative business founders, high-growth startups and savvy investors” by connecting them with resources and capital.
KY Innovation has modernized support for entrepreneurs by developing state wide hubs across 120 counties to allow individuals to find regional support no matter where they are.
Top Industries in Kentucky according to the Kentucky Cabinet for Economic Development
Among other industries, the following industries in particular thrive in the state:
- AgriTech
- Automotive
- Manufacturing
- Aerospace
- Primary Metals
- Food and Beverage
- Logistics
- Chemicals
- Plastics and Rubber
- Health Care
Other Tax Incentives that Support Small Business
Kentucky offers the Kentucky Small Business Tax Credit (KSBTC) which rewards small businesses for creating jobs by allowing an income tax credit up to $25,000.
Kentucky Opportunity Zones
Kentucky is home to approximately 144 Opportunity Zones in 84 counties.
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 26 USC 1400Z-2, Kentucky 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 projects in Kentucky include:
- Indian Hills Rock & Clay
- Boone County Opportunity Zone
- Wilson St Duplex
See more at, and others found at KYOZ.org.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.
