Investors funding early-stage life sciences companies in Massachusetts may be eligible for generous tax incentives. Learn about the Angel Investor Tax Credit and who qualifies, the amount of potential tax savings, and how to monetize those savings.
Which Investors Qualify?
Investors must be “accredited” investors. Accredited investors are defined by the U.S. Securities and Exchange Commission (SEC) and they cannot be principal owners of the business or involved with the business in a full-time, professional capacity. Investments can be made by a “pass-through” entity, such as a partnership, rather than a specific individual or corporation. However, they can’t be venture capital funds, hedge funds, or commodity index funds with institutional investors. The investor must be making a monetary investment that is at risk and that is not secured or guaranteed.
Which Companies Qualify?
Companies must have 20 or fewer full-time employees at the time of investment and less than $500,000 of revenue in the year before the investment. The principal place of business must be in Massachusetts and at least half of the employees must be based there. The business must have a written business plan, forecasts, and other financial information, and it cannot be involved in retail, real estate, professional services, gaming, or financial services.
What Are the Tax Savings?
Taxpayers may be eligible for a credit on 20% of the qualifying investment amount. Taxpayers investing in companies located in a “gateway municipality” may qualify for a 30% credit. Gateway municipalities include the following Massachusetts towns: Attleboro, Barnstable, Brockton, Chelsea, Chicopee, Everett, Fall River, Fitchburg, Haverhill, Holyoke, Lawrence, Leominster, Lowell, Lynn, Malden, Methuen, New Bedford, Peabody, Pittsfield, Quincy, Revere, Salem, Springfield, Taunton, Westfield, and Worcester.
A taxpayer’s credit is capped at $50,000 per year. The credit is calculated on the amount of the investment up to $125,000 per qualifying business per year, and up to $250,000 in cumulative qualifying investments for each qualifying business.
How Do I Monetize the Tax Savings?
The program is limited to $500,000 in tax credits for the 2022 tax year and interested investors have to apply. There is a two-step online application that is administered by the Massachusetts Life Sciences Center. The application requires information from both the investor and the qualifying business. If a company has multiple investors, the company must submit only one application. There are also annual reports that need to be submitted to ensure compliance. Applications can be filed here and must be submitted by noon on January 5, 2023, EST. The credit is monetized on the investor’s tax return with the Commonwealth of Massachusetts. The credit can be claimed in the initial year of investment and if not fully used in that year, it can be carried forward to the subsequent three tax years. If the business no longer has its principal place of business in Massachusetts during the subsequent three years, the credit must be forfeited or repaid.
For assistance with this program or any other program, please contact a member of Withum’s professional team.