18 Oct How is Qualified Small Business Stock taxed in New Jersey?

Q. How are proceeds from the sale of Qualified Small Business Stock (QSBS) taxed in New Jersey?
— Investor

A. Changes could be coming to how this kind of stock is taxed in New Jersey.

First, some background.

Internal Revenue Code Section 1202, also known as the “Small Business Stock Gains Exclusion,” allows capital gains from select small business stock to be excluded from federal tax.

Section 1202 of the IRS Code only applies to qualified small business stock acquired after Sept. 27, 2010 that is held for more than five years, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

He said not all small business stocks are qualified for tax breaks under the code.

The code defines a small business stock as qualified if:

· It was issued by a domestic C-corporation other than a hotel, restaurant, financial institution, real estate company, farm, mining company, or business relating to law, engineering, or architecture;
· It was originally issued after August 10, 1993, in exchange for money, property not including stocks, or as compensation for a service rendered;
· On the date of stock issue and immediately after, the issuing corporation had $50 million or less in assets;
· The use of at least 80% of the corporation’s assets is for the active conduct of one or more qualified businesses.

If you meet the requirements you can exclude up to $10 million in capital gains from your federal income tax return, Kiely said.

But how is it treated on your New Jersey income tax return?

On March 8, 2018, S2265 was introduced into the New Jersey Senate.

“This bill is similar to IRS Code Section 1202,” Kiely said. “One difference is that S2265 further identifies a `Qualified Small Business’ as one who has fewer than 225 employees with at least 80 percent of the corporation’s payroll attributable to employment within New Jersey.”

This bill was passed by the New Jersey Senate on Sept. 27, 2018. On Oct. 15, 2018, the bill was received in the New Jersey Assembly and referred to committee, where it now waits for approval, Kiely said.

“Once the Appropriations Committee approves the bill it will then go up for a vote by the entire state Assembly,” Kiely said. “After that it must be signed by Governor Murphy. When signed by the governor into law you will be able to exclude up to $10 million in Qualified Small Business Stock gains from your New Jersey income taxes.”

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This story was originally published on Oct. 18, 2019.

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