Georgia House Bill 1069 was signed into law by Governor Perdue early in June. Section Two of the new law, known as the “Angel Investor Tax Credit,” provides for a Georgia tax credit of up to $50,000 annually for investors of early-stage startup companies in Georgia. Angel investors provide capital for startup businesses in exchange for equity or convertible debt and, unlike venture capitalists, typically invest their own funds.
Access to early-stage growth in young companies is often difficult to obtain, and the purpose of this tax credit is to encourage direct investment from individuals in high-tech businesses. It aims to expand the economy of Georgia by enlarging its base of wealth-creating business, thus increasing the number of quality and high-paying jobs.
Smart Business spoke to Mitchell Kopelman, chair of the Tax Group and Technology Practice, and Jeff Weinkle, an associate in the tax research group, at Habif, Arogeti & Wynne, to learn more about the credit and what it means for Georgia businesses.
What are the details of the credit?
The credit equals 35 percent of the amount invested in the startup company and is available for investments made in 2011, 2012 and 2013. However, the credit cannot be used until the second year following the year the investment is made. Investments can be made by either individuals or pass-through entities with no business operations that manage less than $5 million in capital.
The aggregate amount of credit allowed against taxable income for any number of qualified investments is $50,000 at the individual level annually. If the taxpayer does not have a large enough tax liability to use the entire credit, it may be carried forward for five years.
In short, the annual maximum credit of $50,000 can 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.
Georgia has budgeted $10 million to the credits annually. If investors apply for more than this amount in aggregate during a single year, the $10 million will be allocated to all timely applicants on a pro-rata basis.
Who qualifies for the credit?
In order for a startup business to qualify for investments eligible for the credit, it must be a corporation, LLC, or partnership located in Georgia and organized less than three years before the investment is made. At the time of registration, the business must employ fewer than 20 people, cannot have gross revenues that exceed $500,000 in any prior fiscal year, and cannot have obtained more than $1 million in gross cash proceeds from issuing debt or equity instruments (does not include commercial loans). Finally, the business cannot be engaged substantially in retail sales, real estate, professional services, gambling, natural resource extraction, investment activities and insurance, or activities where admission or membership is charged.
Investors eligible for the credit must be ‘accredited investors’ as defined by the SEC. This is limited to either individuals or pass-through investment entities that manage $5 million or less in capital. Venture capital funds, hedge funds and commodity funds with institutional investors do not qualify.
Investments in the companies that qualify for the credit must be paid for in cash by a qualified investor to a qualified business in exchange for stock, an equity interest, or subordinated debt. Further, no commissions or other remuneration may be paid directly or indirectly for solicitation of the investment.
What is the application process?
Before an investment is made, the qualifying business must register with the tax commissioner. Upon approval, the business is qualified to receive investments eligible for the credit over the next 12 months. After the qualifying investment is made, an application must be filed by the investor by June 30 of the following year. Additionally, the qualified investor must submit another application between September and October of the year the credit is actually claimed. The application and forms are not yet out but will be released before the end of 2010.
It is important to note that investors receiving the credit must follow certain provisions after the credits are obtained. Credits will be recaptured if the investor transfers any of the securities or subordinated debt received in the investment to another person or entity within two years of the transaction. Additionally, credits must be recaptured if the qualified business redeems the investor’s securities or pays principal on any subordinated debt within five years of the date the investment was made.
The Angel Investor Tax Credit is a great move taken by the Georgia legislature to promote the development of startup companies in the state. This measure, along with the other credits and initiatives available to Georgia companies, confirms Georgia’s enduring commitment to establishing the state as the center of entrepreneurship in our region.
Jeff Weinkle is an associate in the tax research group of Habif, Arogeti & Wynne, LLP. Reach him at firstname.lastname@example.org or (770) 353-3071. Mitchell Kopelman is the chair of the firm’s Tax Group and the Technology Practice. His experience includes tax planning, strategic planning, mergers and acquisitions, and analysis of transactional accounting and tax issues. Reach him at email@example.com or (404) 898-8231.