North Carolina 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.
North Carolina QSBS Exemptions
North Carolina 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.
North Carolina follows the “Static” conformity–as stated in the previous paragraphs. North Carolina does, at the Corporate level, conform to the section 1202 federal exclusion for gain from QSBS. See N.C. General Statute § 105-228.90(b). At the individual level, North Carolina partially conforms to the federal exclusion from certain QSBS. See generally N.C. General Statute § 105-153.4(a); see also IRC §1202.
North Carolina Capital Gains Tax Rates
In North Carolina, capital gains are taxes the same as regular income at a flat rate of 5.25%.
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 North Carolina
There is no lack of support for entrepreneurship in North Carolina. Both the NC IDEA and the CED are organizations with missions focused on the success of local small businesses and the associated economic growth while the EDPNC aims to bring in new business to the state.
The NC IDEA offers grants and programs to business owners at all stages of development. In partnership with the NC BEC, they will also focus on addressing the challenges for Black entrepreneurs in the state.
The North Carolina Council for Entrepreneurial Development also aims to build up the entrepreneurial ecosystem. The CED fosters connections between emerging business owners and investors and/or mentors to build a network of shared resources and support.
The Economic Development Partnership of North Carolina is an organization focused on bringing and building new businesses to the state. Their land incentives and support programs are built with the purpose to help businesses succeed.
Among other industries, the following industries in particular thrive in the state::
- Aerospace & Defence
- Automotive Truck & Heavy Machinery
- Biotechnology & Pharmaceuticals
- Business & Financial Services
- Food Processing & Manufacturing
- Furniture
- Information Technology
- Corporate Headquarters
- Plastics & Chemicals
- Textiles
- Tourism
North Carolina Tax Incentives other than QSBS
The North Carolina Qualified Business Tax Program is a state specific program that rewards individuals and businesses that invest in a qualified business venture, qualified grantee business, or a qualified licensee business. The company must first complete an application that registers them as a Qualified Business as well as meeting other criteria, linked below. The program offers a tax credit equal to 25% of the purchase price of the securities up to $50,000. See North Carolina’s qualifications for the tax credit.
North Carolina Opportunity Zones
North Carolina is home to approximately 252 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, North Carolina 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. North Carolina has over 50,000 business establishments and $580 million in received public and private investments over the past 5 years for the 252 Opportunity Zones throughout the state.
Some examples of Opportunity Zones Funds in North Carolina include:
- GTIS Qualified Opportunity Fund Premium Listing (Residential, Industrial, Student Housing)
- Origin Investments QOZ Fund Premium Listing (Commercial, Residential)
- Allagash Opportunity Zone CRE Fund I (Affordable Housing, Residential, Workforce Housing)
See more at The Opportunity Zones Database.
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This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.
