The New Jersey Angel Investor Tax Credit Program permits parties investing in New Jersey “emerging technology businesses” to take a partial credit for the funds used, and either offset the credit against their New Jersey income or receive the credited amount outright. The program provides an added benefit for investments in qualified companies, and additional reasons for qualified companies to establish their businesses within the state.
The New Jersey Angel Investor Tax Credit Act was signed into law on Jan. 31. The act provides qualified investors a 10 percent tax credit for their investments in New Jersey emerging technology companies. The credit is available for tax years beginning on or after Jan. 1, 2012, meaning the credit can be sought retroactively if a qualified investment was made in 2012. The maximum credit available in any given year to one taxpayer is $500,000. Investors need not be New Jersey residents, or even have a New Jersey tax liability, to receive the credit; if no tax liability exists, the amount can simply be refunded to them (as described in more detail below).
To qualify as an emerging technology company, a company must have fewer than 225 employees, with at least 75 percent of the company’s employees being in New Jersey. Employees are classified as New Jersey employees if they work full time (at least 35 hours per week), and spend at least 80 percent of their time physically working within the state.
The company must do business in New Jersey, own capital or property in New Jersey, or maintain an office within the state of New Jersey. Additionally, the company must incur qualified research expenses, conduct pilot scale manufacturing, or commercialize enumerated technologies (such as biotechnology, advanced computing, mobile communications or life sciences) within New Jersey.
The investment must be nonrefundable, and must be made either in connection with a transaction for stock, interests in a partnership/joint venture, licenses, rights to use technology, marketing rights, warrants, options or any other similar items, or in connection with a purchase, production or research agreement. For an investment to qualify, the emerging technology business must continue to qualify as an emerging technology business for the earlier of six months after the investment is made or the date the investor’s tax credit application is completed.
To qualify for the deduction, such investment must also be made by an investor who is not a related person of the business. A related person is defined generally as one with control of the entity or a member of the same controlled group. Control is defined as possessing 80 percent or more of the stock or voting power of the entity, with a controlled group existing where a chain of corporations is connected by a common parent, and where stock possessing at least 80 percent of the voting power of each of the corporations is owned by one of the corporations, and the common parent owns stock possessing 80 percent or more of the voting power of at least one of the other corporations.
Each investment made is treated separately for Angel Investor tax credit purposes. For example, if an investor contributes $500,000 to a qualified business in 2013, then contributes $1 million in 2014, the investor would be entitled to a credit of $50,000 (10 percent of the amount invested) on his 2013 return, and $100,000 on his 2014 return. For contributions made in accordance with milestones of the company being met, each investment is considered made at the time of actual contribution of the funds.
Credits may be taken against the corporate business tax or gross income tax. Excess credits are refunded to the taxpayer, with corporate taxpayers able to choose between a refund of the excess credit or a carryforward of the credit (for up to 15 years). No carryforward is available for individual taxpayers, who simply take a refund if an excess credit would exist in the year in question. Taxpayers are prohibited from combining the Angel Investor tax credit with the Research and Development tax credit available under N.J.S.A. 54:10A-5.24.
The party making the investment typically will receive the credit; however, where an investment is made by a partnership, the partners will receive the tax credit in proportion to their distributive share of partnership income. For other pass-through entities, such as limited liability companies, each member/owner is issued a tax credit certificate in the amount of their proportional share of the total distributive income of the entity.
In any given year, $25 million is allotted for Angel Investor tax credits; if cumulative claims made by taxpayers exceed this amount, credits are applied in the succeeding calendar year in which credits claimed do not exceed amounts available. An up-to-date listing of the current amount of credit available in a given year will be made available on the New Jersey Economic Development Authority’s website, allowing taxpayers to ascertain availability prior to beginning the application process. Credits are claimed in the tax year applicable to the effective date of approval of the Angel Investor credit application.
Applications are filed with the state of New Jersey to claim the credit, with applications first made available on July 1, 2013. Applications generally must be filed within one year of making the investment; however, for qualifying investments made at any time before July 1, 2013, the application must be filed within one year of July 1, 2013. Additional draft rules regarding the program weremade available the week of July 8, 2013, with such rules also being open for comments.
The business in which the investment is made is required to complete a portion of the application (and to supply its federal W-3 form or, in lieu of a W-3, a W-2 form summary or Form 941 annual summary). Upon approval, the New Jersey Division of Taxation will issue a tax-credit certificate to the taxpayer, with the certificate then attached to the taxpayer’s return for the year at issue. The nonrefundable application fee is $1,000, with an approval fee of the greater of $2,500 or 5 percent of the approved tax credit amount (with the application fee applied toward the approval fee). Where a partnership makes the investment, the partnership itself files for the credit (and not the individual partners; thus, the fees are incurred only once by the partnership, and not incurred by each individual partner). Given the fees involved, the program does little to incentivize smaller investments. However, for large investments in emerging technology companies, the program offers major rewards.
The program holds clear appeal both to investors and to the companies themselves, and can be utilized by both to provide significant benefits. For investors, while the tax breaks offered by the program are not dramatic enough to spur action in and of themselves, they can influence decisions when choosing between similar options. For example, if an investor is choosing between investing in similar emerging technology companies in New Jersey and Ohio, the program offers a clear financial benefit for pursuing the former — provided that the investor has been made aware of the program and takes all required steps to gain the tax benefits. A qualified investment of $1 million would lead to a $95,000 tax credit (after the application/approval fees are deducted).
The greatest benefits, however, likely will belong to the emergent technology businesses themselves. The businesses can take advantage of the program by actively marketing it to existing and potential investors, regardless of whether the investors reside in New Jersey (assuming, of course, that they will remain qualified for the six-month period after any given investment). As evidenced above, the program can create significant credits for investors — emerging technology businesses can use this credit to spur investment in their companies, and actively pursue additional capital to help them grow further. Companies seeking to market the program should consult with experts in the field, who can inform them of any steps they may need to take to qualify as an emerging technology business and help them facilitate getting investor applications completed. •