Georgia House Approves Renewal of Georgia Angel Investor Tax Credit
My tax partner, Julian Fortuna, pulled together this primer on the Georgia Angel Investor Tax Credit program and its pending extension in the Georgia House of Representatives.
On March 11, 2015, the Georgia House of Representatives voted unanimously to approve HB 237, a bill to renew the “angel investor tax credit” that is currently set to expire at the end of 2015. If passed by the Senate and signed by the Governor, the bill would extend the tax credit for another five years. Since 2011 when the tax credit law was first enacted, 225 qualified startups and early-growth companies have registered with the Georgia Department of Revenue to receive qualified investor tax credits. The program has created more than 200 net new jobs in Georgia with a payroll of about $10 million. Currently, 26 other states offer some form of tax credit for accredited investors who take a stake in early-stage companies. Advocates claim that renewal of Georgia’s qualified investor tax credit law is important to attracting business and maintaining the health of the state’s economy.
Here are answers to some frequently asked questions about the Georgia angel investor tax credit.
Georgia Angel Investor Tax Credit Benefits for Investors
Qualified investors are entitled to claim angel investor credits against their Georgia state income tax liability equal to 35 percent of the amount of a qualified investment, beginning in the second year following the year of the qualified investment. For example, a $100,000 investment made in 2015 will make a qualified investor eligible for up to a $35,000 credit against its Georgia state income tax liability in the 2017 taxable year. The tax credit is limited to $50,000 annually per individual, whether made directly or through a pass-through entity. The tax credit may be carried forward for five years (but may not be carried back) and any credit actually used by a taxpayer will reduce the taxpayer’s basis in the invested security. The credit is non-refundable (i.e., it cannot exceed the investor’s Georgia net tax liability after other credits are applied). The maximum credit to be allowed in for all investments made in 2015 and allowed in 2017 is $5 million. The same limit credit percentages and limits will apply for the next 5 years if HB 237 becomes law.
Which Types of Investors Qualify?
The tax credits are available to certain “qualified investors” that make “qualified investments” in “qualified businesses” headquartered in Georgia. A “qualified investor” is an accredited investor (as defined by the SEC’s Regulation D rules) who is (a) an individual resident of the state of Georgia or a non-resident with Georgia state income tax liability; or (b) a pass-through entity organized as a partnership, S corporation or limited liability company with less than $5 million under management, formed for investment purposes only and is not capitalized with funds raised or pooled through private placement memoranda directed to institutional investors. Venture capital funds, commodity funds and hedge funds, for example, are generally ineligible for the tax credit.
Which Businesses Are Eligible for Georgia Angel Investor Tax Credits?
A “qualified business” is one carried on by a business entity that a) is either a corporation, limited liability company, or a general or limited partnership; b) was organized no more than three years before the qualified investment was made; c) maintained its principal central administrative office in Georgia at the time the investment was made and maintained such presence for the entire time the qualified business benefited from the tax credit; d) employs 20 or fewer people in Georgia at the time it is registered as a qualified business; e) has not had more than $500,000 annual gross revenue in any one fiscal year; f) has yet not obtained more than $1 million in aggregate gross cash proceeds from the issuance of its equity or debt investments, not including commercial loans from chartered banking or savings and loan institutions; and g) is primarily engaged in manufacturing, processing, online and digital warehousing, online and digital wholesaling, software development, information technology services, research and development, or a business providing services other than those businesses other than certain types of non-qualified services.
Which Forms of Investment Qualify?
A “qualified investment” is either an equity investment of cash or the provision of cash for unsecured subordinated debt with a maturity date of at least five years. An investment will not qualify for the tax credit if a broker fee, commission or similar remuneration is paid in connection with the investment.
What is the Process for Application and Approval?
A qualified business must register with the Department of Revenue to be certified annually by filing Form IT-QBR. Qualified investors must submit an application for tentative approval between September 1 and October 31 of the year for which the credit is claimed on Form IT-QI-AP. By December 31 of each year the credits are approved for taxpayers up to the $5 million annual limit. If the annual limit is reached, the credits are allocated to all timely applicants on a pro?rata basis.
Are the Tax Credits Transferrable or Subject to Recapture?
The tax credits are not transferrable (except to the heirs and legatees of the qualified investor upon his or her death and to his or her spouse or incident to divorce) and could be subject to recapture in the following situations:
a) If, within two years after the investment was made, the investor transfers any of the securities received to another person or entity, except for certain estate planning transfers or in connection with the merger, consolidation, sale of the business’ assets or similar transaction where the approval of the business owners is required and the investor does not receive any cash or tangible property in such transaction;
b) except as provided in section a) above, if within five years after the investment was made, the business redeems the equity securities received in the investment or pays any principal on the subordinated debt; or
(c) if within two years after the investment was made, the investor (or any family member or a business controlled by any family member) participates in the operation of the business. An investor that provides uncompensated professional advice as an officer, director or manager or participates in an equity incentive plan will still qualify for the tax credit.
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