New "angel tax credits" reward investment in Georgia-based US startups

Emerging Growth and Venture Capital News

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Georgia Governor Sonny Perdue has signed into law Georgia House Bill 1069, which gives a Georgia income tax credit – dubbed the Angel Tax Credit – of up to $50,000 annually for angel investors who invest in startup technology companies headquartered in Georgia. 

 

The new law allocates $10 million worth of state income tax credits annually for a three-year period beginning with investments made in 2011.

 

The nuts and bolts of the law

 

The Angel Tax Credit provides a credit against an investor’s Georgia state income tax liability equal to 35 percent of the amount of a qualified investment, beginning in the second year following the year in which the qualified investment was made.  For example, a $100,000 angel investment made in 2011 will make a qualified investor eligible for up to a $35,000 credit against its Georgia state income tax liability in the 2013 taxable year.  The Angel Tax Credit is limited to $50,000 annually per individual, whether made directly or through a pass-through entity.  The Angel 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.

 

Who is eligible

 

The Angel Tax Credit is available to certain “qualified investors” that make “qualified investments” in “qualified businesses” headquartered in Georgia during the 2011, 2012 and 2013 calendar years.  That’s a lot of qualifiers, so we’ve provided below a brief overview of how each term is defined:

 

A “qualified investor” is an accredited investor (as defined by the SEC’s Regulation D rules) who is (i) an individual resident of the state of Georgia or a non-resident with Georgia state income tax liability; or (ii) 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.  Venture capital funds, commodity funds and hedge funds, for example, are generally ineligible for the Angel Tax Credit.

 

A “qualified business” is a business primarily engaged in technology or manufacturing, headquartered in Georgia, which employs 20 or fewer people, was organized no more than three years prior to the date the investment was made, has annual gross revenues of no more than $500,000 and has not yet raised an aggregate of $1 million of financing.

 

A “qualified investment” is either an equity investment of cash or the provision of cash for unsecured subordinated debt.  An investment will not qualify for the Angel Tax Credit if a broker fee, commission or similar remuneration is paid in connection with the investment.

 

Risk of recapture

 

Any applicable Angel Tax Credit could be subject to recapture in the following situations:

 

(i)  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;

 

(ii)  except as provided in section (i) 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

 

(iii)  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.  However, 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 Angel Tax Credit.

 

Summary

 

The passage of this tax credit is a credible, quantifiable and exciting step designed to help facilitate more investment in Georgia’s earliest entrepreneurial ventures and enhance the returns of the investors who support them.  Our expectation is that this law will spur greater interest and participation by investors in new Georgia businesses beginning in 2011, and lead to broader government support for this type of tax incentive as the positive benefits of the law are realized in coming years.