By: Ryan Beethoven-Wilson, CPA, Tax Senior Manager | Emerging & Growth Business Team
Note: The Virginia Equity and Subordinated Debt Tax Credit, also known as the Angel Investor Tax Credit, deadline is December 31, 2019.
Startups Benefiting from the Virginia Equity and Subordinated Debt Tax Credit
The Virginia Equity and Subordinated Debt Tax Credit, widely-known as the Angel Investor Tax Credit, has grown in popularity as the startup scene in Virginia has taken off in recent years. As a critical qualification deadline is approaching on December 31, this article will serve as a refresher on the tax credit and what steps are needed to claim the credit.
What is the credit?
Virginia offers a credit of up to 50% of the value of a qualified equity or subordinated debt investment in an eligible business. The maximum credit allowable per taxpayer is $50,000 or the taxpayer’s Virginia income tax liability, whichever is less. As the credits are nonrefundable, any unused credits can be carried forward up to 15 years to offset future Virginia tax. It is important to note that the maximum allowable credit state-wide is capped at $5,000,000. In recent years the eligible credits have significantly exceeded the $5,000,000 cap, so the state has pro-rated the authorized credits allocated to qualifying taxpayers.
Qualifying for the Angel Investor Tax Credit
What is a qualifying investment?
Investments qualifying for the credit are cash investments in a qualified business in the form of equity or subordinated debt. It is important to note that an investment will be disqualified if the taxpayer who holds an investment, or any of the taxpayer’s family members, or any entities affiliated with the taxpayer, receives or has received compensation from the qualified business in exchange for services provided to the business as an employee, officer, director, manager, or independent contractor within one year before or after the date of the investment.
Virginia as specified the definition of equity and subordinated debt instruments that qualify for the credit. Equity means corporate common stock or preferred stock, and a partnership or membership interest in a partnership or limited liability company, which is not subject to the taxpayer’s option or requirement to be redeemed by the issuing entity within three years from the date of issuance. An equity investment will be disqualified if it is subject to an option or a requirement to be redeemed by the issuing entity within five years of the date of issuance. Subordinated debt means indebtedness of a corporation, general or limited partnership, or limited liability company that does not require any repayment of principal for the first three years after issuance. The debt instrument also can not guaranteed by any other person or secured by any assets of the issuer or any other person and is subordinated to all indebtedness and obligations of the issuer to national or state-chartered banking or savings and loan institutions.
What is a qualifying business?
A qualifying business must meet the following criteria:
- Gross revenues must have been less than $3,000,000 in its most recent fiscal year.
- Must have a principal office or facility in Virginia.
- Primary business location or production location is in Virginia.
- Has not previously obtained more than $3 million in aggregate gross cash proceeds from the issuance of its equity or debt investments (not including commercial loans from chartered banking or savings and loan institutions).
- Is primarily engaged, or is primarily organized to engage, in the fields of advanced computing, advanced materials, advanced manufacturing, agricultural technologies, biotechnology, electronic device technology, energy, environmental technology, information technology, medical device technology, nanotechnology, or any similar technology-related field approved by the state.
What steps are needed to qualify for the credit?
- By December 31, the qualifying business must submit Form QBA to the state for prequalification. Reapplications are due each year the business desires to maintain qualification.
- Investors must file Form EDC by April 1 of the year following the investment to apply for their credit. Late applications will not be considered.
- The state to notify taxpayers of credit granted by June 30 of the year following the investment (note, credits will likely be capped by the state)
- If any credits are granted to pass through entities, the entity has 30 days from date credit granted to file Form PTE to allocate the authorized credit to its partners/members/shareholders.
- The credit will then be claimed on Schedule CR as part of the investors’ annual Virginia income tax returns. It is important to note that due to the credit authorization timeline, investors’ Virginia tax returns will need to be extended in order to claim credits.
Source: Virginia Department of Taxation
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.