Louisiana's Angel Investor Tax Credit Program Gets New Wings
Overview of Angel Investor Tax Credit
Under Louisiana's Angel Investor Tax Credit ("AITC") program, an individual who invests in certain qualified local businesses may be entitled to a tax credit for a portion of the amount(s) invested. The AITC is intended to encourage financial investments in the early stages of newly created Louisiana businesses to stimulate the growth of local entrepreneurial businesses and employment opportunities. Louisiana's AITC program was first established in 2005, and was subject to a number of amendments earlier this year, effective as of July 2020.
The tax credit is limited to unsecured, at-risk investments made by accredited investors in certified "Louisiana Entrepreneurial Businesses" that have their principal business operations in Louisiana. A Louisiana Entrepreneurial Business is any Louisiana business consisting of fifty or fewer full-time employees that has either 1) gross annual sales less than $10 million or 2) a net worth less than $2 million. The AITC does not apply to investments in businesses engaged primarily in retail, real estate, gambling, natural resources extraction, or financial services. Further, an individual may not qualify as an "angel investor" for purposes of the AITC if either the investor or the investor's spouse or relative owns 50% or more of the business and is involved in its operations as a full-time professional.
The amount of credits issued is equal to 25% of the amount invested, and is subject to a $3.6 million annual program cap, with any residual credits carried over to subsequent years. According to the Louisiana Department of Economic Development, currently there are approximately $9 million in credits available due to rollovers from previous years. Investors can invest up to $720,000 per year and $1.44 million per business over the life of the AITC program. Further, any credits obtained through the AITC program are transferrable, meaning that an angel investor can sell his or her credits. This is especially important for investors who may not have adequate tax liability to fully utilize the credits themselves (e.g., out-of-state investors with no Louisiana tax liability to reduce or Louisiana investors with insufficient taxable income).
Only certain investments may qualify for the AITC program. In addition to being unsecured and at risk, the investment must be maintained for three years, unless otherwise approved by the Louisiana Department of Economic Development. The investment must also be put towards specific uses, including capital improvements, plant equipment, research and development, or working capital. An investment is not eligible for the credit if made for the purpose of paying dividends, redeeming shares, or repaying debt or shareholders' loans. Moreover, convertible notes and similar forms of convertible non-equity investment vehicles (such as Simple Agreements for Future Equity or "SAFEs") may qualify as an investment for purposes of the AITC, but only upon conversion into an equity investment. In these cases, the credit allowance is based on the principal balance representing the equity invested into the Louisiana Entrepreneurial Business.
The 2020 Amendments
Prior to the 2020 amendments, the approved credits were applied in equal installments over the course of three years. Under the new law, approved credits are divided in half and issued over a two-year period.
The new law also doubles the total annual AITC program cap by establishing an additional enhanced tax credit of 35% for investments made to Louisiana Entrepreneurial Businesses located in federally established opportunity zones. Like the traditional AITC credit described above, the enhanced credit is issued in equal portions for two years, subject to an annual cap of $3.6 million. However, this $3.6 million cap is in addition to the $3.6 million cap applicable to the traditional AITC, increasing the annual program cap to $7.2 million.
It is important to note that the AITC program is subject to a sunset provision that prohibits the issuance of credits under the program for applications received beyond a certain date. However, the new law extends the sunset date from July 1, 2021 to July 1, 2025.
The Impact of Angel Investors on Newly Established Businesses
Angel investing has had significant impacts on newly established businesses. Studies show that companies receiving angel investments have improved employment, performance and success outcomes relative to those who do not receive angel investments. One study conducted by Harvard Business School and the MIT Sloan School of Management found that financing by angel investors is associated with improved likelihood of survival for four or more years, with a probability of survival being 25% higher for companies receiving angel financing. Companies receiving angel investments also saw increased levels of employment and more traffic on the businesses' websites. Further, evidence showed that angel-backed businesses had a higher probability of achieving successful exits from the startup phase by more than 10 percent over their non-funded counterparts.
Ultimately, angel investors can be vitally important when it comes to stimulating growth, performance and survival of startups, even those located in economies that are not generally conducive to entrepreneurial growth. An effective AITC program is a very important piece of this puzzle.
Stone Pigman lawyers are ready and available to assist businesses raising capital and investors providing capital with navigating and taking advantage of Louisiana's Angel Investor Tax Credit. Stone Pigman attorneys are experienced, creative and focused on finding the best solutions for our clients. Our goal is to help our clients advance their interests and grow their businesses, whether they are local start-ups, national businesses, or global Fortune 100 companies. We are dedicated advocates for all of our clients.