The Kentucky Angel Tax Credit, initially launched in January 2015, has been extended for 2016. The primary goal of the program is to give Kentucky startups access to capital, create jobs, and encourage development of innovative technologies and new products.
- Investors have two primary benefits: an equity interest in a small business and a tax credit.
- Individuals who make qualified investments can claim a 40 percent state tax credit on their personal return. The credit is 50 percent in counties struggling to add jobs and grow. This credit can be taken in the year of the investment.
- Up to 50 percent of the credit can be taken in any one year and unused credits can carryforward up to 15 years. However, the credit may only be used to the extent of tax liability – the credit is not refundable.
- Individuals who cannot use any portion of their credit may sell the portion to a Kentucky resident. For example a former Kentucky resident who moves to Ohio may sell their credit to another Kentucky resident. A Kentucky resident who cannot use their full credit without causing a refund may sell the remainder of their credit. Example: An Ohio investor who has a $4,000 Kentucky credit sells it to a Kentucky resident for $3,000. The Ohio investor gets cash, while the Kentucky resident reduces his or her tax bill and nets $1,000 on the deal.
- There is no minimum time requirement to maintain the investment.
An individual is a qualified investor if they hold no more than twenty percent (20%) ownership in the qualified business and are not employed by the business (close relatives must also meet these requirements). The individual must also be seeking a financial return from the Qualified Investment and must apply for and receive a Kentucky Economic Development Finance Authority (KEDFA) certification as a Qualified investor in the program.
The business must be engaged in Bioscience; Environmental and energy technology; Health and human development; Information technology and communications; Materials science and advanced manufacturing; or Other new economy knowledge based activity. To be a qualified business an entity must have fewer than 100 full-time employees, be active in the Commonwealth of Kentucky, be in good standing in the state of Kentucky and have filed an application and received a KEDFA certification as a Qualified Small Business in the program.
Businesses must also meet one of the following conditions:
- Have a net worth of no more than ten million dollars ($10,000,000).
- Have net income for the preceding two tax years of no more than three million dollars ($3,000,000).
Investment Process Overview
Once an investor has been approved as qualified investor, the following steps are taken:
- Identify a Qualified Business in which to invest.
- Complete a Qualified Investment certification application.
- Within 60 days of application approval (no later than December 31), make an investment. The minimum investment amount is $10,000.
- Send proof of the investment to KEDFA within 20 days of the investment. Upon processing, the investor is entitled to claim a Kentucky state income tax credit.
What does it mean for you?
Kentucky entrepreneurs can reduce their tax liability by understanding and utilizing the Kentucky Angel Tax Credit mentioned above. Barnes Dennig offers a variety of tax services beyond return preparation, including consulting and financial planning, which can help you and your business take advantage of this legislation.
Let one of our tax professionals help you gain access to capital, create jobs, and encourage development of innovative technologies and new products. Reach out to us online by clicking here, or call 513-241-8313 to speak with a member of our tax team.