Massachusetts issues proposed regulations for the Angel Investor Tax Credit
On July 24, the Massachusetts Department of Revenue (DOR) announced proposed regulations for the Angel Investor Tax Credit (AITC).
The regulations would provide additional clarity and a reminder that potentially eligible investors and businesses must act quickly since applications for the available AITC are accepted on a rolling basis.
The AITC was one of the tax provisions included in An Act Relative to Job Creation and Workforce Development signed into law by Gov. Charlie Baker in 2016. It is offered to investors interested in funding early-stage companies engaged in life sciences research and development, commercialization, and manufacturing in Massachusetts. The goal of the AITC is to encourage investment throughout the commonwealth, and in gateway municipalities, that will create and maintain jobs including, but not limited to, those in the digital e-health, IT, and healthcare sectors.
The AITC is nonrefundable against Massachusetts individual income tax for tax years beginning on or after Jan. 1, 2017. It is equal to:
- 20% of qualifying investments in qualifying businesses made by an accredited investor
- 30% if the business is in a gateway municipality (defined under M.G.L. c. 23A, Section 3A, as “a municipality with a population greater than 35,000 and less than 250,000 with a median household income below the commonwealth’s average and a rate of educational attainment of a bachelor’s degree or above that is below the commonwealth’s average”)
Investors may contribute up to $125,000 per year and $250,000 per qualifying business. They may claim AITCs up to $50,000 per year, and the excess is carried forward to the subsequent three tax years.
A qualifying investor is an accredited investor as defined by the U.S. Securities and Exchange Commission who is not the principal owner of the qualifying business and who is not involved in the qualifying business as a full-time professional activity.
A qualifying investment is a certain type of monetary investment in a qualifying business and used for qualified purposes, is at risk, and is not secured or guaranteed. Qualifying investments may be used by a qualifying business for capital improvements, plant equipment, research and development, and working capital. Qualifying investments cannot be used to pay dividends, fund or repay shareholders’ loans, redeem shares, repay debt, or pay wages or other benefits for the qualifying investor.
A qualifying business must meet the following six requirements:
1. Its principal place of business is in Massachusetts.
2. It has 50% or more of its employees located in its principal place of business.
3. It has “a fully developed business plan that includes all appropriate long-term and short-term forecasts and contingencies of business operations, including research and development, profit, loss, and cash flow projections, and details of angel investor funding.”
4. It employs 20 or fewer full-time employees at the time of the taxpayer investor’s initial investment.
5. It has a federal tax identification number.
6. Its gross revenues are equal to or less than $500,000 in the fiscal year prior to eligibility.
The Massachusetts Life Sciences Center (MLSC) has begun accepting applications for allocations of the AITC. The total credit available for all qualifying investments made by qualifying investors in qualifying businesses is $500,000. Eligible investors and businesses should submit applications as soon as possible because application are accepted on a rolling basis.
CohnReznick can help investors and businesses determine their eligibility for the AITC, assess the cost/benefit of the AITC, apply for the AITC, and address post-application requirements.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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