Exploring the Nuances of State Taxation of Qualified Small Business Stock
- 6.15.2023
- Julie Rodgers
This blog post was co-authored by Matthew D. Schnall and Meghan M. Walsh.
Many investors in early-stages companies plan to take advantage of the exclusion from federal taxable income of gain realized from the sale or of “qualified small business ” (QSB ) under Section 1202 of the Internal Code (the Code). The Section 1202 exclusion for QSB provides a powerful federal tax incentive and can be a significant factor in investment decisions by venture capitalists and other non-corporate investors. Section 1202 permits non-corporate to exclude from federal taxable income a portion of the gain realized from the sale or of QSB held for more than five years, subject to certain caps described in this blog post. Even though gain may be excluded for federal income tax purposes, should be aware that the state tax treatment may differ, and a might be subject to state taxes on the sale or of QSB even where federal income taxes do not apply.
This blog post highlights important takeaways for planning to take advantage of the exclusion from federal taxable income of gain realized from the sale or of QSB and discusses notable irregularities in state tax laws that investors should watch out for. We are happy to answer questions you have about eligibility for QSB treatment and state tax treatment of QSB .
