Welcome to Tax Tuesdays! This week, Zack Leder, a Tax Partner with Bennett Thrasher, is providing us with deeper insight into the Qualified Investor Tax Credit, more commonly known as the “Angel Investor Tax Credit.” Sounds exciting, right? Don’t dismiss us just yet. This tax credit encourages individuals to directly invest into early-stage, startup companies – like many of you. Last week, the Georgia legislature extended the credit an additional three years to allow investments made through 2018 to qualify for the credit. That is great news! In this post, Zack reveals the important rules to know to ensure any potential tax-savings opportunity goes unmissed.
The Article: Angel Investor Tax Credit
In June of 2010 Georgia Governor Sonny Perdue signed into law the Angel Investor Tax Credit, Georgia House Bill 1069, which provides a Georgia income tax credit of up to $50,000 annually for angel investors who invest in startup technology companies headquartered in Georgia. The law allocates $10 million worth of state income tax credits annually for investments made in 2011, 2012, and 2013, and provides $5 million worth of state income tax credits annually for investments made in 2014 and 2015. The recently passed credit extension, House Bill 237, provides $5 million worth of the credits for each year through 2018. The Angel Tax Credit provides a credit against an investor’s Georgia state income tax liability equal to 35 percent of the amount of the qualified investment, beginning in the second year following the year in which the qualified investment was made. For example, a $100,000 investment made in 2013 would make a qualified investor eligible for up to a $35,000 credit against its Georgia income tax liability in the 2015 tax year.
The Angel Tax Credit is available to “qualified investors” that make “qualified investments” in “qualified businesses” headquartered in Georgia during 2011 through 2018. The following summarizes the requirements.
A “qualified investor” is an accredited investor as defined by SEC rules who is (i) an individual Georgia resident or nonresident with Georgia state income tax liability; or (ii) a pass-through entity organized as a partnership, S corporation or LLC with less than $5 million under management and formed for investment purposes only. Venture capital funds, commodity funds and hedge funds with institutional investors do not qualify.
According to SEC rules an accredited investor includes the following:
- Any person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1 million;
- Any person who had individual income in excess of $200,000 in each of the prior two years, or joint income with that person’s spouse in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year;
- Any trust, with total assets in excess of $5 million, not formed for the specific purpose of acquiring the securities offering; and
- Any entity in which all of the equity owners are accredited investors.
It is important to note that because the credit is limited to qualified investors, non-qualified investors (i.e. non-accredited investors) making investments through the Invest Georgia Exemption do not qualify for the Angel Investor Tax Credit.
In order for a business to qualify as an eligible investment, it must file Form IT-QBR with the Georgia Department of Revenue and receive approval from the state. Once this approval is granted, an investor may make a qualifying investment in the business. Approval is only granted for 12-month periods, but qualifying businesses can renew their registration annually assuming they continue to meet the following qualifications:
- A corporation, LLC or partnership located in Georgia;
- Organized no more than 3 years before the qualified investment is made;
- Headquartered in Georgia;
- Employ 20 or fewer people at the time of registration;
- Has annual gross revenues of no more than $500,000;
- Has not yet raised an aggregate of $1 million in cash proceeds from equity or debt investments (not including commercial loans);
- Primarily engaged in technology or manufacturing – cannot be engaged substantially in retail sales, real estate and construction, professional services, gambling, natural resource extraction, investment activities and insurance, or activities where admission or membership is charged; and
- Cannot have utilized the Georgia film tax credit.
A “qualified investment” is a cash investment for stock, an equity interest, or Qualified Subordinated Debt (with a maturity of less than 5 years). Further, no broker fee, commission or similar remuneration can be paid in connection with the investment.
Application and Approval
In order to apply for the credit, an investor must file Form IT-QI-AP between September 1st and October 31st two years after the year the investment is made. For example, if an investment was made on January 1, 2012, the investor must file Form IT-QI-AP between September 1, 2014 and October 31, 2014. During this period, the credits will be approved for taxpayers up to the annual limit. If the annual limit is reached, the credits will be allocated to all timely qualified applicants on a pro-rata basis. An investor claims the credit by attaching Form IT-QI and an approved Form IT-QI-AP to his or her tax return for the tax year that the credit is claimed. Using the above example, the forms would be attached to the investor’s 2014 Georgia tax return filed in 2015.
Investors receiving the credit must follow certain provisions after the credits are obtained. Credits must be recaptured in the following situations:
- The investor transfers any of the securities or subordinated debt received to another person or entity within two years of the transaction. However, recapture is not triggered if the investor dies, transfers to a spouse incident to divorce, or if a merger, conversion, or sale of the business occurs where the investor does not receive cash or tangible property;
- The qualified business redeems the investor’s securities or pays any subordinated debt within five years of the date the investment was made; or
- The qualified investor participates in any operation of the business for compensation within two years of the date the investment was made. However, an investor can provide uncompensated professional advice as an officer, director or manager.
To recap, the Angel Investor Tax Credit is limited to $50,000 annually per individual, whether made directly or through a pass-through entity. The annual maximum of $50,000 can therefore be obtained by investing $142,857 into one or more eligible businesses per year. At this level, the credit will offset $833,333 in Georgia taxable income. If the taxpayer does not have a sufficiently large tax liability to use the entire credit, it may be carried forward for five years. Finally, any credit actually used by a taxpayer will reduce the taxpayer’s basis in the invested security for purposes of Georgia income taxes only.
Zack Leder is a Tax Partner with Bennett Thrasher providing tax consulting and compliance services to large and middle market corporate taxpayers. He also has experience in individual, partnership and S corporation taxation. He is a Certified Public Accountant (CPA) licensed in the states of Florida and Georgia and is a member of the America Institute of Certified Public Accountants (AICPA) and Georgia Society of CPAs (GSCPA) within its Taxation Sections.