Georgia Angel Investment Tax Credit
In Georgia, start-ups and new businesses are often able to attract investors, in part, because of Georgia’s “angel tax credit” program. Georgia’s angel tax credit program provides early investors in certain start-ups and new businesses (often called “angels”) a credit against their Georgia State income tax based upon their investments in certain qualified Georgia businesses.
There have been two significant changes to the Georgia angel tax credit program in the past year. First, the Georgia legislature, through House Bill 237, adopted into law in 2015, extended the angel investment tax credit for 2016, 2017, and 2018. The maximum credit to be allowed for all investments made in 2016, 2017, and 2018 and allowed in 2018, 2019, and 2020, respectively, is $5 million for each year. Second, on May 2, 2016, the Georgia Department of Revenue issued Notice IT-2016-2, amending Georgia Rule 560-7-8-.52, conforming the program to amended law and making some administrative changes as well.
Georgia Angel Investor Tax Credit for Investors (Before House Bill 237 and Notice IT-2016-2)
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 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.
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 certain types of non-qualified services.
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.
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.
Transferability and 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.
The Department of Revenues’ Notice IT-2016-2 updates Rule 560-7-8-.52 to be in conformity with House Bill 237. Specifically, to update the rule for the extension of the angel investment tax credit through 2018 and to express the maximum tax credit of $5 million.
The Notice also changes the manner in which the application process is to be conducted. The Notice requires that the Form IT-QBR, the form that registers the business as a qualified business with the Department of Revenue, must be electronically submitted to the Department of Revenue through the Georgia Tax Center website. The Department of Revenue will not process any Form IT-QBR for registration that is submitted or filed in any other manner.
The Notice also requires that the Form IT-QI-AP, the form for qualified investors to get preapproved from the Department of Revenue for the angel investment tax credit, must be electronically submitted to the Department of Revenue through the Georgia Tax Center website. The Form IT-QI-AP must be electronically submitted between September 1 and October 31 of the year for which the angel investment tax credit is claimed and allowed. The Department of Revenue will not pre-approve any qualified investor tax credit where the Form IT-QI-AP is submitted or filed in any other manner.