Last year, legislation was passed in Georgia creating the “Angel Investor Tax Credit” to encourage direct investment from individuals into early-stage, startup companies. This credit is available for investments made beginning this year. While a number of requirements must be met in order for an investor to qualify for the credit, it is important to know the rules to ensure that a potential tax-savings opportunity is not missed.
Angel Investor Tax Credit
In June of 2010, Georgia Governor Sonny Perdue signed into law 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 a three-year period beginning with investments made in 2011.
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 2011 will make a qualified investor eligible for up to a $35,000 credit against its Georgia income tax liability in the 2013 tax year.
The Angel Tax Credit is available to “qualified investors” that make “qualified investments” in “qualified businesses” headquartered in Georgia during 2011, 2012 and 2013. 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 most recent 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
- Any entity in which all of the equity owners are accredited investors
In order for a business to qualify as an eligible investment, the business must register with the tax commissioner using Form IT-QBR prior to receiving the investment capital. Upon approval, the business is eligible for investment for the credit for 12 months.
To qualify, a business must be the following:
- A corporation, LLC or partnership in Georgia
- Organized no more than three years before the 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 of financing
- 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
- 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 five years). Further, no broker fee, commission or similar remuneration can be paid in connection with the investment.
Application and Approval
An original application must be filed by the qualified investor by June 30 of the year following the investment. Also, the qualified investor must submit an application between Sept. 1 and Oct. 31 of the year for which the credit is claimed. During this period, the credits will be approved for taxpayers up to the $10 million annual limit. If the annual limit is reached, the credits will be allocated to all timely applicants on a pro-rata basis.
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
- 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 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.
Timothy S. Oberst is a principal with Bennett Thrasher, an ATDC sponsor company.