The New Jersey Angel Investor Tax Credit offers investors in qualified emerging technology or life science business a refundable tax credit for their qualifying investment in the underlying business. The credit equals 20% of the investor’s qualifying investment. Investors can use the credits against corporation business or gross (personal) income taxes. Qualifying emerging technology or life science businesses can utilize the availability of the credit to attract the necessary funding from angel investors to grow their business.
Could you qualify?
Investors must make a qualified investment in addition to the underlying emerging technology or life science business satisfying the following criteria:
- Operates in New Jersey by doing business, employing or owning capital or property, or maintaining an office
- Employs fewer than 225 full-time employees worldwide, at least 75% of whom work in New Jersey
- Has as its primary business in the state in one or more eligible technologies
- Performs at least one of the following activities in New Jersey:
- Conducts pilot scale manufacturing
- Commercializes one or more eligible technologies
- Incurs qualified research expenses
Pilot scale manufacturing is defined as the design, construction, and testing of preproduction prototypes or models, not for commercial sale.
Eligible technologies include the following: Advanced Computing, Advanced Materials, Biotechnology, Electronic Devices, Information Technology, Life Sciences, Medical Devices, Mobile Communications, Renewable Energy Technology, and Carbon Footprint Reduction Technology.
Qualified research expenses mean those as defined in section 41 of the Internal Revenue Code. New Jersey prohibits any of these expenses from generating a New Jersey Research and Development Tax Credit.
What types of investments qualify?
Qualified investments are non-refundable transfers of cash made directly to a qualifying company in connection with at least one of the following items:
- Stock, interests in partnerships or joint ventures, licenses (exclusive or non-exclusive), right to use technology, marketing rights, warrants, options, or any similar items
- A purchase, production, or research agreement
Investors can also make qualified investments indirectly through a holding company of an emerging technology business. Investors cannot be an individual, entity, or member of a controlled group that controls at least 80% of voting stock of the technology business.
Non-refundable transfers must be held, or not expire, for at least two calendar years from the date of the transfer of cash. The state does make some exceptions for initial public offerings (IPOs), mergers and acquisitions, or returns of initial cash outlay beyond the investor’s control.
How is the credit applied for and calculated?
Angel investor applicants have six months from the date of investment to submit an application to the New Jersey Economic Development Authority. Both the investor and a representative from the company must complete both parts of the application, but the investor is ultimately responsible for submitting the application. There are nonrefundable application fees ranging from $500 to $2,500 depending on the size of the investment. Once approved, there also is a nonrefundable approval fee of five percent of the amount of the tax credit or $2,500, whichever is greater. The application fee is credited toward the approval fee.
For investments made on or after Jan. 1, 2020, the credit equals 20% of the qualified investment made to a qualifying New Jersey business, up to a maximum allowed credit of $500,000. For businesses located in a qualified opportunity zone, New Markets Tax Credit census tract, low-income community, or that are operating as a state certified minority- or women-owned business enterprise (MBE/WBE), the credit amount is increased to 25%. For investments made prior to Jan. 1, 2020, the credit is equal to 10% of the qualifying investment.
Investors may apply the credit to their New Jersey corporation business taxes or gross (personal) income taxes. If the investor is a pass-through entity, the state issues tax credit certificates to each individual or corporate member/owner for their proportional share of the total distributive income of the pass-through entity. New Jersey Corporations with a valid S-election have the option to either pass the credits to its shareholders or have the state issue the credit directly to the S-corporation.
How RSM can help
RSM’s state and local tax professionals can help a company determine if they qualify as an emerging technology or life science business for purposes of New Jersey’s Angel Investor tax credit. We also assist investors in gathering the required information to document their investment as well as assist in navigation of the complex approval process.