Anyone can purchase a SC angel investor tax credit to save money on their SC income tax bill.
I’ve tried to create an easy-to-understand FAQ. I’ve probably failed, but hope perhaps the below is helpful anyway.
Note: We are not tax advisors or giving tax advice: consult your own advisors and don’t rely on “experts” like us before you do anything with a tax credit! And read the last question below.
I can buy a SC angel investor tax credit? Yes.
Why would I do that? To save money on your SC income tax bill.
Give me an example. If you buy $3,000 of credit, you can take $3,000 off your SC income tax liability. If you paid 85 cents on the dollar of face value, it would cost you $2,550 in cash. The difference ($450) is your spending money.
Who can buy one? Anyone. You do not need to be an accredited investor. (Unlike the original investment, anyone can purchase the credit to reduce their tax liability.) Companies can buy them too. (But check with the Department of Revenue before you buy them with an LLC because it’s possible they cannot be “passed through” if they’ve been purchased.)
How much can I buy? As much as you want. (There’s a maximum of $5 million of credit each year, and most investors want to use them rather than sell them. But if it’s available, you can buy it. You can’t use more than your total SC tax liability in any given year, but you can carry unused credits forward to use later.)
This sounds difficult. How do I learn more? It isn’t. We have helped many people (both our members and others) buy and sell credits, and are happy to help you too. Start with our guide, which we think is a pretty good overview on the tax credit. If that’s not enough, contact us.
I have a credit from being the founder of a qualified company. Can I sell mine? Yes. You can use your credit for up to 10 years, so you might want to wait a while before you decide to sell. Or a bird in hand…
How do I bid on a credit? Contact us and we’ll help you with the process.
Why is this possible? The credit is designed to encourage people to invest in early stage companies in South Carolina. Where the capital comes from is less important. If we attract risk-tolerant early stage investors to support our companies from out of state, that is OK; so the credit was deliberately available to investors outside of SC. But out-of-state investors often can’t use it because they don’t have a SC income tax liability. So to encourage them to invest anyway, the credit was made “transferable.” Essentially a non-SC person can sell it to someone that can use it.
How do I actually use the credit? Once you’ve bought the credit and have all the paperwork, you have to file a regular “tax credits” form as part of your state tax return. You’ll need a SC Form 1040TC “Tax Credits” or SC Form 1120-TC “Corporate Tax Credits”. (A transferred credit is not reported on Form TC-56, “Angel Investor Credit.”)
Some “extra credit” questions:
Can I only use 50% of the credit in the year I buy it? No, you can use 100%. (The original credit owner can use only 50% of the credit in the first year after receiving the investment. A buyer can use 100% of the credit on the taxes of the year in which the buyer bought the credit.)
Wait, what tax year do they relate to? Purchasers use the credit on the tax return for the year in which they buy the credit. So if you want to reduce your 2016 tax amount, you have to buy them before December 31. If you wait until next year, you’ll be buying to reduce your 2017 tax burden.
When do they expire? The credits must be claimed within ten years of their original date. So if a seller held it for four years then sold, you have to use it within the following six years (not ten).
Is the credit subject to recapture? Yes – but for the seller not the buyer, so a buyer doesn’t have to worry about it. (Explain that: If the original investment really pays off and generates a capital gain for the original holder of the credit, the original holder has to repay some of the original credit. That requirement stays with the seller even if they sell or transfer the credit.)
This is all too good to be true. What’s the catch? There are, of course, some wrinkles.
(1) If you make a mistake and buy credit you can’t use, that’s tough luck – you can’t sell it again because it’s transferable only once.
(2) There’s some paperwork and it’s an illiquid market so there are some expenses along the way.
(3) If the Department of Revenue invalidates the original credit, you can’t claim it. (Your recourse is against the seller, so use good transfer documents and keep good records.)
(4) There may be capital gains tax on the “spread” and if you don’t take a standard deduction on your federal taxes a change in your state tax this year might impact your federal tax next year. (There’s still a spread between a state credit and a federal deduction.) There may be other implications too. Ask your tax advisor for a full run-down before you buy or sell a credit.