United States

Tennessee enacts angel investor tax credit legislation

TAX ALERT  | 

On April 28, 2016, Tennessee Gov. Bill Haslam signed into law SB 2539, which for tax years beginning on and after Jan. 1, 2017, creates an angel investor tax credit. 

Pursuant to the bill, an angel investor may apply for a tax credit equal to the lesser of $50,000 or 33 percent (50 percent in tier four counties) of the value of qualifying investments in a qualifying business. For this purpose, an angel investor is a natural person who is an accredited investor as defined in 17 CFR section 230.501(a)(5) or (6). Further, a qualifying investment is an investment in a business of at least $15,000, and that is no more than 40 percent of the capitalization of the business at the time of the investment. Lastly, a qualifying business is any business that meets the following criteria:

  • The business must be an innovative small business with high-growth potential in the following industries: technology development and commercialization, consumer products, medical devices, life science and additive manufacturing
  • The business must not be a professional service firm or be primarily engaged in the provision of goods or services in the following industries: construction, leisure, hospitality, retail, real estate, insurance, banking, lobbying, consulting, alcohol or gambling
  • The business must have been in business for five or fewer years
  • The business must have $3 million or less in gross annual revenue in the year of the investment
  • The business must have 50 or fewer full-time employees, at least 60 percent of whom must perform the majority of their job duties within Tennessee

In order to obtain the credit, an angel investor must submit a credit application with the state within 60 days of making a qualifying investment in a qualifying business. The total credit allowable for all angel investors is $3 million for investments made in tax years beginning between Jan. 1 and Dec. 31, 2017, $4 million for investments made in tax years beginning between Jan. 1 and Dec. 31, 2018, and $5 million for investments made in tax years beginning Jan 1, 2019, and thereafter. Available credit will be allocated on a first-come, first-served basis.

An angel investor may utilize credit in the year awarded against his or her Hall income tax liability, and may carry forward any unused credit for five additional years. The credit is nonrefundable and nontransferable, and any unused credit after the five-year carryforward period will be lost.

Angel investors with projected Hall income tax liability in tax years 2017 and beyond should review this credit opportunity, consider the impact of the credit when calculating return-on-investment, and apply for the credit when making qualifying investments.

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