Special Wisconsin Tax Breaks for Sales of Stock - Part II 

Lynn Keller, CPA, Tax Senior Manager   email
September 2011
 
 
Wisconsin's recently passed 2011 budget bill contained various tax changes, including several new provisions for Wisconsin capital gains. As mentioned last month in Part I of this series, Part II contains more detailed information on two of those incentive provisions.

Deferral of Capital Gain Reinvested in Wisconsin Businesses. The new law creates an individual income tax deferral for any amount of a long-term capital gain, if the taxpayer:

• deposits the gain into a separate account in a financial institution;
• invests the entire proceeds from the sale in a qualified Wisconsin business within 180 days of the sale that created the capital gain; and
• notifies the Wisconsin Department of Revenue (WDR) that the capital gain has been reinvested and, therefore, will not be included on the individual's Wisconsin income tax return.

The taxpayer's basis in the reinvested businesses would, in turn, be reduced by the gain that is not recognized.  Thus, the capital gain that is not recognized is essentially deferred; it is not permanently excluded from tax. This new Wisconsin tax deferral opportunity applies for tax years beginning on or after January 1, 2011.

The new law requires the Wisconsin Economic Development Corporation (WEDC), a new quasi-government entity, to implement a program to certify Wisconsin businesses as being eligible for this capital gains deferral.  To be eligible, a business must meet both of the following criteria:

• the amount of payroll compensation paid by the business in Wisconsin is equal to at least 50 percent of the amount of all payroll compensation paid by the business; and
• the value of real and tangible personal property owned or rented and used by the business in Wisconsin is equal to at least 50 percent of all such property owned or rented and used by the business.

While the effective date of this provision was January 1, 2011, the budget bill was not enacted until June 26, 2011.   As such, we are awaiting guidance from the WDR and the WEDC as to how this provision will be handled for the 2011 tax year and what transition rules may apply. 

Capital Gain Exclusion for Wisconsin Businesses.  The new law also creates an individual income tax exclusion for a taxpayer's qualifying gain from the sale of a Wisconsin capital asset that was purchased after December 31, 2010, and must be held for at least five years.  The new law defines qualifying gain as a long-term gain realized from the sale of any asset that is:

• a Wisconsin capital asset in the year that it is purchased by the taxpayer and for at least two of the subsequent four years; and
• is held for at least five uninterrupted years.

The new law further defines a Wisconsin capital asset as:

• real or tangible personal property that is located in this state and used in a Wisconsin business; or
• stock or other ownership interest in a Wisconsin business.

Under the new law, the WEDC would be responsible for implementing a program to certify Wisconsin businesses for the purposes of the new exclusion.  The criteria to be employed by the WEDC are similar to those noted above for the deferral of capital gain reinvested in Wisconsin businesses.

The earliest this exclusion could be claimed by a taxpayer is January 1, 2016 (five years after property first acquired after December 31, 2010).

The new law offers tax incentives for those investors and entrepreneurs who: (1) put back capital gains they recognize into Wisconsin businesses; and (2) those who invest in Wisconsin businesses and hold these investments for a sufficient time period.  Please keep these provisions in mind, and contact your Kolb+Co adviser if you have any questions.