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South Carolina Angel Tax Credit: What Investors and Entrepreneurs Need to Know
Summer 2015
Disclaimer
� This presentation covers complex tax,
accounting, and legal issues
� We are not attorneys or accountants, nor qualified to give legal or tax advice
� Please seek input of professional advisors for your situation
Agenda
I. What is the angel investor tax credit?
II. Who and what qualifies?
III. What are the nitty gritty details?
IV. What issues have there been?
V. Is the credit working?
VI. Questions?
I. What is the angel investor tax credit?
� High Growth Small Business Job Creation Act of 2013 � Passed by Legislature, signed by Governor in June 2013 � Took 4+ years to gain approval (and sunsets in 2019)
I. What is the angel investor tax credit?
� The General Assembly desires to support the economic development goals of this State by improving the availability of early stage capital for emerging high-growth enterprises in South Carolina. To further these goals, this chapter is intended to: � encourage individual angels to invest in high-growth, job-
creating businesses � increase high-quality, high-paying jobs in SC � expand the economy with wealth-creating businesses � help commercialize SC’s higher education inventions
-150,000
-100,000
-50,000
0
50,000
100,000
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20
09
Job
s C
re
ate
d
Net Job Creation by Firm Age
Net Jobs Created by Firms Less Than 5 Years Old
Net Jobs Created by Firms Older Than 5 Years
Startups create all
of SC’s net new jobs
Source: Business Dynamics Statistics Briefing: Jobs Created from Business Startups in the United States. US Census Bureau and Kauffman Foundation (2009)
SC’s economy needs startups…
0
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20
30
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20
05
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20
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20
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09
20
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11
20
12
20
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20
14
VC Investments by State
GA
NC
TN
SC
FL
Source: PWC MoneyTree
…but is lacking in early stage capital
Angel investor tax credit overview
� State income tax credit � No impact on federal taxes � Is a credit against tax liability (not an income deduction) � Up to 35% of the investment made in a qualified startup � Capped at $100,000 in credits per individual per year � Implies max qualified investments of $285,714
� Not refundable, but can be carried forward up to 10 years � $5 million in total credits available each year � Sunsets in 2019
� Around 20+ other states have similar tax credits
29 states have a credit (or no income tax)
> 50%
40 – 50%
25 – 35%
10 – 20%
No income tax
Refundable
MT
WY
ID
WA
OR
NV UT
CA
AZ
ND
SD
NE
CO
NM
TX
OK
KS
AK
LA
MO
IA
MN
WI
IL IN
KY
TN
MS AL GA
FL
SC
NC
VA WV
OH
MI
NY
PA
MD
DE NJ
CT RI
MA
ME VT
NH
ALASKA
HAWAII
Tax Credit Rate
Agenda
I. What is the angel investor tax credit?
II. Who and what qualifies?
III. What are the nitty gritty details?
IV. What issues have there been?
V. Is the credit working?
VI. Questions?
II. Who and what qualifies: Companies
Less than 5 years old
Headquartered in SC
Less than 25 employees
Revenues less than $2M / year
retail, real estate, construction
gambling, entertainment, recreation
investing, insurance, natural resources
Required Not Allowed
High growth industry
Stated purpose or > 25% revenue from:
no brokerage fees
II. Who and what qualifies: Investors
Accredited* individual investors, pass-throughs
Investing in debt or equity Funds > $5 million
Allowed Not Allowed
Operating businesses
SC resident or SC tax liability
*Accredited Investor Definition (per SEC): • > $1M in net worth (excluding 1st home), or • > $200K income last 2 years and this year for individuals, or • > $300K income last 2 years and this year for couples, or • Pass-through entity whose members are all accredited
Agenda
I. What is the angel investor tax credit?
II. Who and what qualifies?
III. What are the nitty gritty details?
IV. What issues have there been?
V. Is the credit working?
VI. Questions?
III. Nitty Gritty Details
� Process / Timing
� Transferability
� Recapture
Nitty Gritty - Process
Qualifying company files application with Secretary of State
Investor applies for tax credit by December 31st of investment year
Once company certified, accredited investor makes investment
Department of Revenue allocates credits by January 31st
Typically approved in 7-10 days
Investor files credit form with tax return (for 50% of allowed credit)
If oversubscribed, allocated pro-rata
Investor files credit form in following year(s) for remaining credit
Nitty Gritty - Transferability
� The credits are transferable! � They can be sold or exchanged…but only once! � Expected to be worth ~$0.80 per $1.00 � Can transfer to spouse in divorce or heirs after death
� Designed to allow/attract: � Out of state investors � Investors with wealth but little current income
� Glitch: � Only out of state pass through entities currently allowed � Non-resident individuals without SC tax liability excluded � Hope to address next legislative session
Nitty Gritty - Recapture
� As a condition for passing the bill, recapture clause was added � Intended to recover credit for gains… � And avoid double dipping if a loss � Complicated and confusing, but here’s the gist:
� If investor realizes capital gain from credit: � Charged full 7% capital gains rate until credit recovered � Then capital gains drops to normally discounted 3.92%
� If investor realizes capital loss: � May not claim deduction for credited portion of capital
Agenda
I. What is the angel investor tax credit?
II. Who and what qualifies?
III. What are the nitty gritty details?
IV. What issues have there been?
V. Is the credit working?
VI. Questions?
IV. What issues have arisen
� Process failures � Investors investing before company certified � Investors failing to file credit application by 12/31 � One time extension for 2014 through July 31, 2015
� Pass-through disallowance � Originally disallowed multiple-member pass throughs � Issue now resolved
� Out of state investors � Current language disallows out of state individuals with no
SC tax liability – which defeats purpose of attracting capital
Agenda
I. What is the angel investor tax credit?
II. Who and what qualifies?
III. What are the nitty gritty details?
IV. What issues have there been?
V. Is the credit working?
VI. Questions?
V. Is the credit working?
� Reporting requirements: � Secretary of State
� Qualified Businesses to Legislature/Governor by 1/31
� Department of Revenue � Allocation of credits to investors by January 31 � Qualified investments to Legislature/Governor by 3/31
V. Is the credit working?
24
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0
10
20
30
40
50
60
2013 2014
QB* Applications
6
13
0
2
4
6
8
10
12
14
2013 2014
Counties with QB
+113% +117%
25
23
8
4
3
11
0
10
20
30
40
50
60
70
80
Total QBs
QBs by County
Greenville
Charleston
Spartanburg
Pickens
York
Others (1 or 2)
*QB = Qualified Business
V. Is the credit working?
14
86
4
20
0
20
40
60
80
100
120
2013 2014
Investor Applications
Approved Not Approved
0.8
(56%)
2.2
(77%) 0.6
0.7
0
0.5
1
1.5
2
2.5
3
2013 2014
$M
illio
ns
Credits Approved
In State Out of State
+512%
+109%
$3.9M $8.1M Qualified
Investments
3
(60%)
10
(59%) 2
7
0
2
4
6
8
10
12
14
16
18
2013 2014
Investor Counties
In State Out of State
+240%
Agenda
I. What is the angel investor tax credit?
II. Who and what qualifies?
III. What are the nitty gritty details?
IV. What issues have there been?
V. Is the credit working?
VI. Questions?
VI. What questions do you have?
� Is it $5M of new credits each year? Or does carry-over years credit count against this year’s total? $5M begins afresh each year
� If you don’t need 50% in year 1, can you take more forward? Yes
� Can a founder claim the credit even if they are not accredited by wealth/income? Yes. Founders are automatically accredited
� Have any non-SC residents claimed the credit successfully? Yes – see
slides 23-24
� Does information on how much investment each company receives become public? No
� What happens if a qualified company mergers or is acquired? The
acquiring entity must inform the Secretary of State and Department of
Revenue, and may be able to remain qualified.
� Where can I get more information? Our website has the links to the
filing documents, or feel free to contact us any time
Thank you!
www.scangelnetwork.com