The following post was written by Tyler Disk of Smith and Howard.
In an effort to continually increase economic activity within the state, Georgia offers numerous tax credits and incentives to help support businesses within the state. One of these credits is the Qualified Investor Tax Credit (“Angel Tax Credit”) which benefits anyone that operates or invests in a startup.
With the surge of startups and innovation centers being established in Georgia – many of which are part of the Atlanta Tech Village community – it comes as no surprise that the state recently renewed this Angel Credit for another three years. What is surprising is the dearth of businesses and investors that have taken advantage of this benefit.
Although there is a limit on the amount of credits that are allowed to be issued per year, the first two years saw claims of less than 3 and 7 percent, respectively, of the total credits allowed. This is an extremely low number for the amount of activity occurring in Georgia and means that significant tax credits are being missed. We believe that part of the reason for the low claim rate is lack of awareness and understanding of what’s involved in applying for the credit.
On the bright side, the low percentage of startups applying should ease any fears of the allowed credits running out and taxpayers receiving a reduced credit.
If you are a Georgia startup that qualifies based on the conditions mentioned below, we recommend that you register your business immediately so that any potential investments would be eligible. Doing this will increase your attractiveness to potential investors and allow your business to remain qualified for one year after the date of approval.
More about the Angel Tax Credit
The Qualified Investor Angel Tax Credit is designed to incentivize investors to support startups located within the state of Georgia. The credit allows a reduction of tax owed to the state of Georgia dollar-for-dollar until the entire amount has been used or there is no longer any tax owed. Any unused credits can be carried forward and used within five years, so even if the investor doesn’t owe tax this year, the credits can benefit you in future years. The credit is equal to 35 percent of the amount invested in a qualified start-up between 2015 and 2018, with a maximum credit allowable per investor per year of $50,000. For example, an investment of $100,000 could generate a credit of $35,000, which would reduce current Georgia tax to $0 if taxable income was $583,333.
Before making an investment there are some important things that investors should know in order to retain their eligibility for the credit. An investor must be a “qualified investor that makes a qualified investment in a qualified business between 2015 and 2018.”
What is a Qualified Investor?
A qualified investor can be an individual or pass-through entity that is accredited by SEC standards. The investor cannot be compensated by the company in any way for two years after the investment; however, they are allowed to participate in a stock option plan. The investor is also allowed to serve as an officer, director, or manager of the company.
What is a Qualified Investment?
A qualified investment is cash for stock, equity interest, or subordinated debt in a corporation, partnership, or LLC. The investment cannot be subject to any commissions or other remuneration for the solicitation of the investment (no middle men).
What is a Qualified Business?
First, the business must be headquartered in Georgia, less than three years old, have no more than 20 employees, annual revenue of less than $500,000, and must not have received more than $1 million of cash from equity or debt issuance (not including commercial debt).
Also, the business must be primarily engaged in one of the following business lines: Manufacturing, Processing, Online/Digital Warehousing, Software Development, IT Services, R&D, and Online/Digital Wholesaling.
How to Plan for and Claim the Credit
In order to be an eligible qualified business the company must file an application with the state of Georgia and be approved before the investment is made. Therefore, planning is important for an investor that wants to retain their eligibility for the credit.
Investors must apply for the credit between September 1 and October 31 two years after the investment is made. For investments made during 2015, the investor would be eligible to claim the credit in 2017 to offset any tax owed in that year or the five years following. If a start-up ceases operations, dissolves, sells, or merges, the investor could still be eligible for the credit depending on the situation.
Things to Remember
A business must be approved as a ‘Qualified Business’ before the investment is made. Becoming a qualified business could make a start-up more attractive to potential investors who would like to invest in a new company but want to reduce part of their out-of-pocket risk.
While the primary qualifications for investors, investments, and businesses are listed above, there are other qualifications that must be met depending on the investor or the business. Investors should consult with their tax advisor prior to making an investment to ensure that they are taking the necessary precautions to be eligible for the credit.
If you have any questions about the Angel Investor Tax Credit, please contact the very awesome Tyler Disk. You can also reach him by phone at 404-874-6244.