When the “High Growth Small Business Access to Capital Act” was passed and created the SC angel investor tax credit, it included Section 11-44-65 which outlines what happens when an investment pays off. Essentially, if the investor recognizes a capital gain, some portion of the original credit must be repaid.
Why? The idea is this “pays for” some of the cost (in terms of reduced tax revenue) of having the credit. By penalizing investment, though, it partly undermines the point of the act.
When does this apply? When the investment made by the angel investor sees a return – typically when the company that received the investment is acquired.
How do we calculate this? This depends. The SC Department of Revenue’s Revenue Ruling #14-6 (section III) gives the ultimate guide. SC taxpayers can deduct 44% of the net* capital gain from their SC taxable income (per SC Code Section 12-6-1150). If there is a capital gain on the investment that created the tax credit, the amount of the deduction reduces.
(* Net capital gain is long term capital gain less any short term capital losses in the year.)
I need help understanding the calculation. This is probably beyond our ability to assist. You should consult your tax advisor, or one of our accounting sponsors, for more assistance on the calculation.
What about if I lost money on the investment? The same theory applies, just in reverse: the amount that a taxpayer can claim as a net capital loss is reduced. The same Revenue Ruling #14-6 is the place to start.
Does this apply if I’ve bought (or sold) a credit? This all applies to the original investor. If you bought the credit, you don’t have to worry about any of this; if you sold your credit, you do. Hopefully, it’s a nice time to do this calculation though – you received cash from your original credit sale years ago, and now you’ve made money on your investment, so you’re winning.
Bottom line: how much of the 35% tax credit am I effectively getting if I receive a nice capital gain? It depends on the multiple of return (and probably many other things). We estimate that if you make a 2x return on the investment, the effective tax credit is 32%; if you make 10x, it is closer to 20%.