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Regulation

Regulation 830 CMR 62.6.5: Angel Investor Tax Credit

Date: 07/24/2020
Organization: Massachusetts Department of Revenue
Regulatory Authority: Massachusetts General Laws
Official Version: Published by the Massachusetts Register

830 CMR:  DEPARTMENT OF REVENUE
830 CMR 62.00:  TAXATION OF INCOMES
830 CMR 62.00 is amended by adding the following section:
830 CMR 62.6.5:  Angel Investor Tax Credit

Table of Contents

(1) Statement of Purpose, Outline of Topics, Applicable Tax Years

(a)  Statement of Purpose.  830 CMR 62.6.5 explains the calculation of the Angel Investor Tax Credit allowed to taxpayer investors for qualifying investments in qualifying businesses, established by St. 2016, c. 219, § 139; amended by St. 2018, c. 228, §§ 13 and 14; and codified at M.G.L. c. 62, § 6(t).

830 CMR 62.6.5 is necessary to explain how to calculate and claim the angel investor tax credit allowed to M.G.L. c. 62 taxpayers for investments in certain qualifying small businesses. An investment must be made by an accredited investor, as defined by the United States Securities and Exchange Commission, to qualify for the credit and investments must be used to support a qualifying business for purposes such as capital improvements, plant equipment, research and development and working capital.  Under M.G.L. c. 62, § 6(t), a taxpayer investor may be allowed a credit against the Massachusetts personal income tax up to an amount equal to 20% of the qualifying investments in a qualifying business. A taxpayer investor may be allowed a credit up to an amount equal to 30% of the amount of qualifying investments in a qualifying business located in a “Gateway Municipality,” as defined in M.G.L. c. 23A, § 3A.

Administration of the credit has been delegated to the Massachusetts Life Sciences Center (MLSC), in consultation with the Executive Office of Housing and Economic Development (EOHED) and the Department of Revenue (DOR).  Accordingly, 830 CMR 62.6.5 is being promulgated in collaboration with these agencies. M.G.L. c. 62, § 6(t)(6).  Angel investor tax credits awarded by MLSC are subject to the annual cap applicable to other life sciences credits.  No credit may be claimed prior to an award by MLSC.

(b)  Outline of Topics.  830 CMR 62.6.5 is organized as follows:

(1)   Statement of Purpose, Outline of Topics, Applicable Tax Years;
(2)   Definitions;
(3)   General Rule;
(4)   Proof of Qualifying Business Status;
(5)   Proof of Qualifying Investment;
(6)   Proof of Taxpayer Investor Status;
(7)   Limitations on the Amount of the Credit;
(8)   Timing of Qualifying Investment;
(9)   Annual Cumulative Cap;
(10) Process for Claiming the Credit;
(11) Carry Over of Unused Credit;
(12) Credit is Non-Refundable;
(13) Recapture;
(14) Offset Debt Collection;
(15) Special Rules Applicable to Pass-through Entities;
(16) Annual Reporting;
(17) Examples.

(c)  Applicable Tax Years.  The credit is available for qualifying investments made on or after January 1, 2020.

(2) Definitions

For purposes of 830 CMR 62.6.5, the following terms have the following meanings, unless the context requires otherwise.

Business.  A profession, sole proprietorship, trade partnership, corporation, general partnership, limited liability company, limited partnership, joint venture, business trust, public benefit corporation, non-profit entity or other business entity engaged in the life sciences as defined in M.G.L. c. 23I, § 2.

Code.  As defined in M.G.L. c. 62, § 1, which refers to the federal Internal Revenue Code, with certain modifications.

Commissioner.  The Commissioner of Revenue or the Commissioner’s duly authorized representative.

Credit.  The angel investor credit provided in M.G.L. c. 62, § 6(t).

DOR.  The Massachusetts Department of Revenue.

EOHED.  The Executive Office of Housing and Economic Development.

Gateway Municipality.  A Gateway Municipality as defined in M.G.L. c. 23A, § 3A.

MLSC.  The Massachusetts Life Sciences Center.

Qualifying business.  A business that:

(a)  has its principal place of business in the Commonwealth;

(b)  has at least 50% of its employees located in the business’s principal place of business;

(c)  has a fully developed business plan that includes all appropriate long-term and short-term forecasts and contingencies of business operations, including research and development, profit, loss and cash flow projections and details of angel investor funding;

(d)  employs 20 or fewer full-time employees at the time of the taxpayer investor’s initial qualifying investment in a business;

(e)  has a federal tax identification number; and

(f)   has gross revenues equal to or less than $500,000 in the fiscal year prior to claiming eligibility.

Qualifying investment.  A monetary investment that is at risk and is not secured or guaranteed; provided, however, that a qualifying investment shall not include venture capital funds, hedge funds or commodity funds with institutional investors or investments in a business involved in retail, real estate, professional services, gaming or financial services.

Taxpayer investor.  An accredited investor, as defined by the United States Securities and Exchange Commission pursuant to 15 USC § 77b(15)(ii), who is not:

(a)  the principal owner of the qualifying business; or

(b)  involved in the qualifying business as a full-time professional activity.

(3) General Rule

In general, a taxpayer investor making a qualifying investment in a qualifying business may be allowed a credit up to an amount equal to 20% of the qualifying investment.  A taxpayer investor who makes a qualifying investment in a qualifying business with its principal place of business located in a Gateway Municipality may be allowed a credit up to an amount equal to 30% of the amount of the taxpayer’s qualifying investment.  The credit may be applied only against tax due under M.G.L. c. 62.  Any amount of credit allowed that exceeds a taxpayer investor’s tax due for a taxable year under M.G.L.  c. 62 may be carried forward to any of the three subsequent taxable years.  M.G.L. c. 62, § 6(t) provides for recapture if the qualifying business ceases to have its principal place of business in the Commonwealth within the three taxable years following the taxable year of the investment.

Credits will be awarded by the MLSC in its sole discretion, in accordance with the MLSC’s statutory obligations to support economic development in the life sciences across the Commonwealth and which contribute to a balanced and strong portfolio of tax beneficiaries including, but not limited to, consideration of the following:

(a)  alignment with MLSC’s strategic priorities including, but not limited to, advancement of novel modalities, expansion outside of Greater Boston, and growth in manufacturing, digital health and data analytics;

(b)  ability to create and retain jobs;

(c)  wide geographic distribution of life sciences operations in the Commonwealth;

(d)  wide distribution of life sciences technologies and industries supported by the MLSC;

(e)  diversity among businesses at different stages of product development and commercialization; and

(f)  ability of the taxpayer investor and the qualifying business to verify eligibility.

(4) Proof of Qualifying Business Status

To demonstrate that a business is a qualifying business, the business must provide the MLSC with the following:

(a)   certification, in a form and substance acceptable to the MLSC, executed by the Chief Executive Officer or other authorized representative of the business, that attests to the location of the principal place of business, the number of full-time-equivalent employees (35 hours or more per week) (FTEs) working for the business, and the percentage of FTEs who work at the principal place of business;

(b)   a fully developed business plan that includes long-term and short-term forecasts and contingencies of business operations, including research and development, profit, loss and cash flow projections and details of angel investor funding;

(c)   its federal tax identification number;

(d)   a letter from the business’s certified professional accountant that makes the representation that the business has gross revenues equal to or less than $500,000 in the fiscal year prior to application;

(e)   a Certificate of Good Standing, issued by the Massachusetts Secretary of the Commonwealth within the previous six (6) months; and

(f)   a Certificate of Good Standing, issued by the DOR within the previous six (6) months.

(5) Proof of Qualifying Investment

A taxpayer investor must provide the MLSC with the executed legal instruments of the investment for verification by the MLSC that the investment meets the requirements of a qualifying investment.

(6) Proof of Taxpayer Investor Status

To demonstrate eligibility for the credit, a taxpayer investor must provide the MLSC with the following:

(a)   evidence of accredited investor status by providing a letter from the taxpayer investor’s certified professional accountant or lawyer that makes the representation that such professional has taken reasonable steps to verify the taxpayer investor’s net income or net worth and any other requirements as defined by the United States Securities and Exchange Commission to establish accredited investor status, pursuant to 17 USC § 230.501(a); and

(b)   a Certificate of Good Standing for the taxpayer investor, issued by the DOR within the previous six (6) months.

(7) Limitations on the Amount of Credit

A taxpayer investor may be allowed a 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.  In any one taxable year, the total amount of all tax credits available to the taxpayer investor making qualified investments under 830 CMR 62.6.5(7) shall not exceed $50,000.

(8) Timing of Qualifying Investment

The credit shall be allowed for the taxable year in which the qualifying investment is made by a taxpayer.  A qualifying investment is made at the time delivery is “effected” of the qualifying investment by a taxpayer investor to a qualifying business, as that term is used in Treas. Reg. § 1.170A-1(b).  Accordingly, for example, the unconditional delivery of a cash contribution or mailing of a check by a taxpayer investor, which subsequently clears in due course, to a qualifying business, shall constitute an effective qualifying investment by the taxpayer investor on the date of delivery or mailing.

(9) Annual Cumulative Cap

Taxpayer investors may invest up to $125,000 per qualifying business per year with a $250,000 maximum for each qualifying business.  The total of all tax credits available to a taxpayer investor pursuant to 830 CMR 62.6.5(9) shall not exceed $50,000 in a single calendar year.  Tax credits authorized pursuant to M.G.L c. 62, § 6(t)(1) shall be subject to the annual cumulative cap pursuant to M.G.L. c. 23I, subsection (d).

(10) Process for Claiming the Credit

Before a credit may be claimed the following must occur:

(a)   a taxpayer investor and the qualifying business they invested in shall have been approved by the MLSC’s Board of Directors;

(b)   a taxpayer investor and the qualifying business shall enter into an agreement with the MLSC, in a form and substance acceptable to the MLSC, that establishes the prerequisites to claiming the credit have been met;

(c)   if the MLSC elects to award the credit, the contract shall be finalized in a form and substance acceptable to the MLSC; and

(d)   MLSC must certify to DOR that the taxpayer investor made a cash contribution to a qualifying investment in a qualifying business during a taxable year.  No credit will be allowed in such taxable year for such contribution unless a copy of the agreement referenced in 830 CMR 62.6.5(10)(b), or such other validation as the Commissioner may require, has been received by the Commissioner, and it has been shown that all pre-requisites have been met for the taxable year in which the credit is claimed.

(11) Carry Over of Unused Credit

A taxpayer investor who is entitled to claim a credit under M.G.L. c. 62, § 6(t)(1) for a taxable year may carry over and apply against the taxpayer’s tax liability under M.G.L. c. 62 for any one or more of the succeeding three taxable years, the portion, as reduced from year to year, of the credit that exceeds the tax for the taxable year.

(12) Credit is Non-Refundable

The credit is non-refundable and non-transferable.

(13) Recapture

If a taxpayer investor is allowed a credit for an investment in a qualifying business that ceases to have its principal place of business in the Commonwealth within the three taxable years following the taxable year for which the credit was allowed, the taxpayer investor must repay the total credit amount to the Commonwealth.  Where a taxpayer investor in such a business has unused credit that has been carried forward from a prior year, the taxpayer investor shall not claim any further credits and must repay to the Commonwealth the total amount of credits already claimed.  A business will be treated as having ceased to have its principal place of business in the Commonwealth if its principal place of business moves out of the Commonwealth, or if it ceases to do business.

(14) Offset Debt Collection

The provisions of M.G.L. chs. 62C and 62D, including without limitation, provisions allowing offsets of refunds for unpaid tax assessments, child support obligations, or other applicable obligations, apply to refunds and credits under 830 CMR 62.6.5.

(15) Special Rules Applicable to Pass-through Entities

In the case of a qualifying investment by a pass-through entity such as a partnership, the credit allowed under M.G.L. c. 62, § 6(t) shall be passed through to the entity’s partners or owners pro rata or pursuant to an executed agreement among the entity’s partners or owners documenting an alternative distribution method without regard to their sharing of other tax or economic attributes of the entity.  The total aggregate amount of the credit passed through such entity and claimed by its partners or owners in any taxable year shall not exceed the credit amount allowed by the MLSC, and 830 CMR 62.6.5.

(16) Annual Reporting

(a)     Reporting Required by the Qualifying Business. On an annual basis, the Chief Executive Officer or other authorized representative of every qualifying business that receives cash contributions from taxpayer investors shall maintain records and shall certify on a form required by the MLSC the following information:

1.     each investment contribution received by the qualifying business including the name and address of the taxpayer investor making the contribution, or other claimant, if applicable, if the contribution is made by a pass-through entity, along with the dollar amount of each such contribution, and the date the contribution was made;

2.     the location of the principal place of business; and

3.     a list of the uses and dollar amounts to which any qualifying investment was applied or, alternatively, an attestation that no portion of any qualifying investment was used to pay dividends, fund or repay shareholders’ loans, redeem shares, and/or repay debt or pay wages or other benefits of the taxpayer investor.

(b)     Reporting Required by the Taxpayer Investor. On an annual basis, a taxpayer investor that has been awarded a credit for a qualifying investment shall provide any additional information as the MLSC shall require, including but not limited to the amount of the credit claimed by the taxpayer on its return filed that year.

(17) Examples

The following examples illustrate the provisions of 830 CMR 62.6.5; they are not intended to be exhaustive.

(a)   Example 1.  Qualifying Investments in Qualifying Businesses Not Located in Gateway Municipality.  On June 1, 2020, James, a Massachusetts resident, makes a $100,000 qualifying investment in X Corporation, a qualifying business not located in a Gateway Municipality within Massachusetts.  Upon approval by the MLSC’s Board of Directors, MLSC certifies to DOR that James and X Corporation entered into an agreement with the MLSC and that James is a taxpayer investor and made a qualifying investment in a qualifying business.  The total allowable credit in the agreement is $20,000. As stated in 830 CMR 62.6.5, the credit is equal to 20% of the total qualifying investment made by the taxpayer investor for the taxable year.  James may claim the $20,000 credit on his 2020 Massachusetts income tax return.

(b)   Example 2.  Qualifying Investments in Qualifying Businesses Located in Gateway Municipality.  On June 1, 2020, Julia, a Massachusetts resident, makes a $100,000 qualifying investment in X Corporation, a qualifying business located in a Gateway Municipality within Massachusetts.  Upon approval by the MLSC’s Board of Directors, MLSC certifies to DOR that Julia and X Corporation entered into an agreement with the MLSC and that Julia is a taxpayer investor who made a qualifying investment in a qualifying business.  The total allowable credit in the agreement is $30,000.  As stated in 830 CMR 62.6.5, the credit is equal to 30% of the total qualifying investment made by the taxpayer investor for the taxable year.   Julia may claim the $30,000 credit on her 2020 Massachusetts income tax return.

(c)   Example 3.  Qualifying Investments by a Nonresident Taxpayer.  On June 1, 2020, Jack, a resident of New York, with no Massachusetts source income as defined in M.G.L. c. 62, § 5A, makes a $100,000 qualifying investment in X Corporation,  a Massachusetts qualifying business located in a Gateway Municipality within Massachusetts. Upon approval by the MLSC’s Board of Directors, MLSC certifies to DOR that Jack and X Corporation entered into an agreement and that Jack is a taxpayer investor who made a qualifying investment in a qualifying business.  The total allowable credit in the agreement is $30,000.  As a non-resident with no Massachusetts source income, Jack is not able to claim the credit for the 2020 taxable year because he has no Massachusetts source income with which to offset the credit. In the following taxable year, Jack plays the Lottery in Massachusetts and wins.  Jack now has Massachusetts source income and is required to file a 2021 Form 1-NR/PY nonresident income tax return in Massachusetts.  Jack can carry forward the unused credit from 2020 to offset the amount of tax due for the 2021 taxable year.  Any unused credit may be carried forward for up to two additional years and used to offset Massachusetts source income, if any, recognized in those years.

 

REGULATORY AUTHORITY
830 CMR 62.6.5:  M.G.L. c. 62; c. 14, § 6(1); M.G.L. c. 62C, § 3; M.G.L. c. 62, § 6(t).
 

Date of Promulgation: July 24, 2020

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