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Angel Investor Tax Credit Guidance Issued by Massachusetts Department of Revenue

On July 24, the Massachusetts Department of Revenue (DOR), in collaboration with the Massachusetts Life Sciences Center (MLSC) and the Executive Office of Housing and Economic Development, promulgated Regulation 830 CMR 62.6.5 regarding the Angel Investor Tax Credit available to taxpayers who make qualifying investments in certain qualifying small businesses.

The text of the regulation is available here.

The Angel Investor Tax Credit encourages investors interested in funding early-stage life science, research and development, commercialization, and manufacturing companies in Massachusetts to invest in those companies by providing a tax credit against Massachusetts personal income tax.

A business engaged in the life sciences is disqualified from classification as a “qualifying business” if its gross revenues exceed $500,000 in the fiscal year prior to application. In addition, a qualifying business must (a) have its principal place of business in Massachusetts; (b) have at least 50 percent of its employees located in the business’s principal place of business; (c) have a fully developed business plan; and (d) employ 20 or fewer full-time employees at the time of the taxpayer investor’s initial qualifying investment in a business.

Under the program, an accredited investor may qualify for a non-refundable, non-transferable tax credit against the investor’s Massachusetts personal income tax up to an amount equal to 20 percent of the qualifying investments made on or after January 1, 2020, in a qualifying business. If the qualified investment is in a qualified business located in a “Gateway Municipality” (i.e., a municipality with a population greater than 35,000 and less than 250,000 with a median household income below the Massachusetts average and a rate of educational attainment of a bachelor's degree or above that is below the Massachusetts average), the applicable credit percentage increases to 30 percent. In general, a “qualified investment” means a monetary investment that is at risk and is not secured or guaranteed. 

Significantly, venture capital funds, hedge funds, and commodity funds with institutional investors cannot qualify for the tax credit. However, the regulations do contemplate that an entity taxed as a partnership can pass through the credit to its partners or owners. It is probable that a partnership of individuals can qualify for the tax credit if the partnership makes a single investment in a qualified business; but if there is a “promote” or other equity interest issued by the partnership to a sponsor, that might convert the partnership into a disqualified investment fund.

A taxpayer-investor is allowed an Angel Investor Tax Credit in connection with up to $125,000 of qualifying investments per qualifying business per year, and up to $250,000 in cumulative qualifying investments for each qualifying business. The total credit available to a taxpayer-investor under the regulation may not exceed $50,000 in any one taxable year (20 percent of $250,000 in total qualifying investments equals $50,000 of credit).

If the amount of the Angel Investor Tax Credit allowed exceeds a taxpayer investor’s tax due for the taxable year, the credit may be carried forward to any of the three subsequent tax years. If within the three taxable years following the taxable year of the investment, the qualifying business ceases to have its “principal place” of business in Massachusetts, the credit is subject to recapture, in which case the taxpayer would be required to repay the amount of the credit obtained back to Massachusetts.

Importantly, the Angel Investor Tax Credit can only be awarded by the MLSC, and the decision on whether or not to award the credit is in the “sole discretion” of the MLSC. However, the regulation clarifies that the MLSC must act in accordance with its statutory obligations to support economic development in the life sciences throughout Massachusetts. The determination will require, among other criteria, a demonstration by the business that it is a qualifying business; proof by the taxpayer investor that the investment meets the requirements of a qualifying investment; certification by an accountant or attorney that the taxpayer is an accredited investor; conformity with the procedures outlined in the regulation for claiming the credit after receiving MLSC approval; and observation of the annual reporting obligations required of the qualifying business once it receives qualifying investments. In addition, the taxpayer investor and the qualifying business must enter into a written agreement with the MLSC that establishes the prerequisites that must be satisfied before the credit can be claimed. 

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