TAX
Deciphering New Jersey’s Angel Investor Tax Credit BY RALPH LOGGIA, CPA, MAZARS USA LLP
The Angel Investor Tax Credit provides for a tax credit of up to 10 percent of a qualified investment in New Jersey emerging technology companies as long as certain qualifications are met. Sounds like a great investment, right? Well, let’s find out how much of an “angel” this credit actually is. A qualifying company must meet the following criteria: yy Have fewer than 225 full-time employees, at least 75 percent of whom work at least 80 percent of the time in New Jersey. yy Do business, employ or own capital or property, or maintain an office in New Jersey. yy Conduct at least one of the following activities: yy Incur qualified research expenses in New Jersey. yy Conduct pilot-scale manufacturing in New jersey. yy Commercialize one or more of the following eligible technologies in New Jersey: advanced computing, advanced materials, biotechnology, electronic devices, information technology, life sciences, medical devices, mobile communications or renewable energy technology. New Jersey will refund the credit to an individual taxpayer. A corporate taxpayer can choose to either receive a refund or carry over the excess credit for 15 years. Investors do not need to be New Jersey residents, but total investor ownership of the business must be less than 80 percent. The New Jersey Economic Development Authority (EDA), in consultation with the director of the New Jersey Division of Taxation, will approve taxpayer applications for the credit. There is a $25 million annual cap on all credits that the EDA will approve, and the credits are limited to $500,000 per investment. The application for this credit is completed online at njeda.com. The NJ-1040 tax return form does not provide a line to claim the credit. Once the tax return is filed, a copy of the return,
along with the original New Jersey Angel Investor Tax Credit Program Certificate, must be sent to the New Jersey Division of Taxation GIT Audit Branch Unit. A non-refundable credit application fee is applied as follows: yy $500 for investment amounts of $50,000 or less yy $1,000 for investment amounts over $50,000 Also, there is an approval fee for qualified investments over $50,000. This fee is 5 percent of the amount of the tax credit or $2,500, whichever is greater. The application fee is credited toward the approval fee. In addition, for individual investors, when the credit is approved, the taxpayer will receive cash. For IRS purposes, this is considered taxable income. Let’s take a look at a taxpayer who is in the top tax bracket and invests $60,000 into a qualifying New Jersey emerging technology company which qualifies for the Angel Investor Tax Credit. The taxpayer will receive a $6,000 credit (10 percent of the investment) and pay fees of $2,500 (application fee of $1,000 and an approval fee of $1,500). In addition, the $6,000 would be considered taxable income on the taxpayer’s federal income tax return. Assuming a federal tax rate of 40 percent, the tax would be $2,400. The net benefit of the 10-percent credit from the $60,000
investment is $1,100 ($6,000-$2,500$2,400). The 10-percent credit in this example actually becomes only 1.8 percent ($1,100/$60,000). Perhaps you are wondering why the full $6,000 is subject to federal income tax and not $3,500, which is the refund net of the $2,500 fee. Section 1012 of the IRC generally provides that the tax basis of property is the cost of the property. The regulation under this section defines cost as the amount paid in cash or other property. Since the state tax credit is obtained by complying with state law and is not acquired by purchase, the original recipient generally has no tax basis in the credit. It’s important to help clients understand the full benefits/requirements of the Angel Investor Tax Credit as part of providing the value-added services of a trusted advisor. Ralph Loggia, CPA, MST, is a senior tax manager with Mazars USA LLP. He is a member of the NJCPA State Taxation and Federation Taxation interest groups and can be reached at ralph.loggia@ mazarsusa.com.
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NEW JERSEY CPA | MAY/JUNE 2017
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