Our recent series of posts about the South Carolina angel investor tax credit (summary here and video here) about the tax implications of angel investments prompted several people to email with questions. Below are our attempts at answers. As always, discuss with your tax advisor.
And do that soon. If you want to get the credit for an investment you made in 2016 you need to apply to the Department of Revenue BEFORE THE END OF DECEMBER. If you leave it until next year, you’ll be too late. (Don’t be one of the not-approveds!)
----
1. For a convertible debt investment, is the investment in the debt eligible for the credit, or is it when the debt converts into equity (even if that conversion occurs after the company is older than five years)? The investment in the debt is eligible – it does not matter when (if ever) the convertible debt converts to equity.
2. Does the five-year clock start running for the start-up when the company is first registered as an LLC in SC, or when taxes are first filed for the company? When the company is first formed by registering with the SC Secretary of State.
3. How does a founder document their investment in order to claim the angel investor tax credit? As part of forming the company, the incorporation documents should specify the kinds of shares available and who owns them. A company bank account statement showing receipt of funds and/or a personal account statement showing sending of funds is probably sensible to retain too.
4. How long does the paperwork approval process with the SC secretary of state usually take? It takes about five minutes to fill out - then you need to get it notarized - and then the SC Secretary of State takes a few days to approve
5. Does it cost anything? No, other than $12 to get the application notarized!
6. How easy is it to sell tax credits? How many angel investors have done it this year and is it a common practice? What amount of tax credit would be worth selling?
- Selling the credit is fairly easy if you have the paperwork and a buyer lined up! The transfer requires a “transfer agreement” and a filing with the Department of Revenue to approve it.
- It is still a fairly rare practice, as most people that claim the credit can use it so have no need to sell it. We don't know how many investors sold a credit this year, though we know around $30k of credit has been transferred between our members.
- You can sell as little as you like – but remember the buyer is only really getting “the spread” as benefit (e.g. 15c on the $ of credit), so it may not be worth a buyer’s effort to buy only a small amount of credit.