The Tennessee Angel Tax Credit provides accredited angels and angel groups who invest in pre-qualified, Tennessee-based companies up to $50,000 applicable against their Hall income tax liability. By incentivizing investment from new and existing angel investors, the program introduces added liquidity to the critical early stages of the capital continuum.
In order to be eligible, companies must meet certain criteria and be pre-qualified by Launch Tennessee. In order to claim the credit, angels must submit an investor application within the same tax year the investment was made.
If you’re a founder interested in pre-qualifying your company for the Angel Tax Credit
Part of a multi-pronged approach to capital formation, the Angel Tax Credit (ATC) is one of many ways that LaunchTN works to create a more favorable environment for early-stage investment.
Through education and awareness of programs like the ATC, LaunchTN hopes to fill the gap in early-stage funding by incentivizing new angel investment and encouraging continued positive momentum for existing angel investors.
The Angel Tax Credit Incentive Program is applied to Hall Income Tax payers who invest their own money to support potential high-growth, early-stage companies.
The Angel Tax Credit benefits investors by connecting them with prequalified early-stage companies, which lowers risk and boosts return, and encourages early-stage capital formation where it is most needed.
The Angel Tax Credit was passed by the Tennessee General Assembly in 2016 and became active on January 1st, 2017. The ATC provides a tax credit against the Hall Income Tax for angel investors who make a direct investment in a qualifying early-stage, Tennessee-based company. In July 2018, the ATC program was expanded to include indirect investment, creating an opportunity for angel groups investing through partnerships (Special Purpose Vehicles, LLCs, and Limited Partnerships) to opportunity for their members to participate. For credits to be awarded, both the company and investor must submit applications to be approved by LaunchTN. In order to submit an investor application, the company being invested in must have already applied and been approved via the above link. The maximum amount of credits a single angel investor can use for any given tax year is limited to $50,000, though unused credits can be carried forward.
Frequently Asked Questions (FAQ)
If you don’t see answers to your questions regarding the ATC program below, please contact Launch Tennessee directly at ATC@launchtn.org.
Tax Credit Benefit
The Tennessee Angel Investor Tax Credit is a tax credit against Hall income tax liability available to any angel investor who makes a qualifying investment in a qualifying business. The tax credit is an amount equal to 33% of the amount of the investment in companies located in Tier 1, Tier 2, or Tier 3 county. The tax credit is 50% of the investment amount in companies located in a Tier 4 county. The tax credit is applicable to the angel investor’s Hall income tax liability for the year in which the qualifying investment is made and the maximum amount of tax credits that an angel investor can receive for any tax year is limited to $50,000. Any unused tax credits can be carried forward for up to five years after the year in which the investment is made. Eligible investments can be made as of January 1, 2017.
The Incentive Tier for each Tennessee county is published on the website for the Tennessee Department of Economic and Community Development. There is a drop-down menu on the right hand side of the website’s County Profile Tool page under the “Heat Maps” tab that provides this information.
To receive the Tennessee Angel Investor Tax Credit, two applications must be submitted to and approved by Launch Tennessee: (1) the company in which the investment is made must submit a Company Qualification Application on the form provided on Launch Tennessee’s website; and (2) the investor must submit a Tax Credit Application on the form provided on Launch Tennessee’s website. Upon Launch Tennessee’s approval of BOTH applications, Launch Tennessee will issue the angel Investor a tax credit certificate that he or she may attach to his or her Hall income tax return for the tax year corresponding to the date of such certificate of qualification. For more information on the application process, see Application Process and Procedures below.
For investments made in 2017, the maximum amount of tax credits available is $3,000,000. This maximum increases to $4,000,000 for 2018 and $5,000,000 for 2019 and later years.
4. What happens if Launch Tennessee receives requests for tax credits exceeding the maximum amount in a calendar year?
The tax credits are awarded on a first-come, first-served basis according to the order in which completed applications for the credits are received. An application for a tax credit is considered complete when both the Tax Credit Application and the corresponding Company Qualification Application have been submitted, together will all necessary supporting documentation.
No, the tax credits are not transferable and cannot be sold.
6. What happens to the Tax Credits if an angel investor’s Hall income tax liability is less than the amount of the credits?
The tax credits are non-refundable, but they can be carried forward for up to five years after the year in which the investment generating the credit was made.
An angel investor is a natural person who is an “accredited investor” as defined under subsections (a)(5) or (a)(6) of Section 230.501 of Regulation D under Title 17 of the CFR.
Yes, as of July 1, 2018, pass-through entities such as angel groups, LLCs, Limited Partnerships, and Special Purpose Vehicles are now included as eligible. The General Partner or Investment Group Leader is responsible for providing the partnership operating agreement for the partnership, proof of the wire of funds from partnership to pre-approved company, and the stock purchase agreement signature pages. The General Partner is also responsible for circulating individual member applications to people that make up the partnership in order to determine individual investment amounts, social security numbers, addresses etc. in order to process the tax credit.
Yes. Investors may use their IRAs to fund qualified investments but are urged to seek tax counsel to determine possible negative tax consequences of accessing such funds. Tax credits will be issued to investors in their capacities as natural persons.
Yes and No. An angel investor may not use funds held in an irrevocable trust for purposes of making a qualifying investment. However, an angel investor may use funds held in a revocable trust for such purposes so long as the investor is the beneficiary of such trust for whose benefit the trustee will pay the Hall income tax. Regardless of whether revocable trust funds will be used for purposes of making an investment, the investor must complete the Tax Credit Application in his or her individual capacity. Tax credits will be issued to investors in their capacities as natural persons.
No, but the tax credits only apply to the Hall income tax that is imposed on individuals who are domiciled in Tennessee for at least a portion of the tax year.
To be eligible for approval as a “Qualifying Business,” a company must fit into at least one of three categories:
▪ It is an innovative small business with high-growth potential; or
▪ It has received either small business innovation research (SBIR) or small business technology transfer (STTR) funding; or
▪ It is commercializing technology developed at a Tennessee-based research institution.
Launch Tennessee will use a variety of factors to determine whether a company is an “innovative small business with high-growth potential,” including business model, ability to scale, nature of innovations, market size, nature of competition, management team and the likelihood of obtaining institutional capital for later funding.
13. Are certain types of companies ineligible for tax credits even if they fit into one of the categories described in Question 12 above?
Yes. A qualifying business cannot be a professional service firm and cannot be primarily engaged in the provision of goods or services in any of the following industries: construction, leisure, hospitality, retail, real estate, insurance, banking, lobbying, consulting, alcohol or gambling. However, companies whose business models include meaningful potential innovation to those industries can qualify. The Company Qualification application provides companies involved in one or more of those industries the opportunity to describe innovation(s) they intend to bring the industry.
14. What kind of connection to the state of Tennessee must a company have to qualify for the tax credits?
At least 60% of the company’s employees must perform the majority of their duties in the state of Tennessee.
15. Must a company meet any other requirements to be eligible for approval as a Qualifying Business?
Yes. To be eligible for approval as a qualifying business, a company must also meet all of the following requirements:
▪ It has been in business for five years or less at the time of the qualifying investment;
▪ It has $3,000,000 or less in gross revenue during its fiscal year immediately preceding the year of the qualifying investment; and
▪ It has 50 or fewer full-time employees at the time of the qualifying investment.
16. Is there a way for investors to know before they make an investment whether a company meets the requirements of a qualifying business?
Companies will be able, and are encouraged, to file an application with Launch Tennessee for certification as a qualifying business prior to an investment by an angel investor. If a company elects to obtain such pre-certification, then, subsequent to an investor’s making a qualifying investment, the company must provide updated information to Launch Tennessee regarding the employment and revenue requirements discussed under Questions 14 and 15 above, both of which must be met on the date of the qualifying investment. See Application Process and Procedures below for more information on the pre-certification process.
Please apply here to see if your company is eligible.
A qualified investment is a non‐refundable transfer of cash made directly to a qualifying business in exchange for equity (which includes common or preferred stock, partnership or membership interests) or debt that is both (a) subordinated to all other indebtedness of the company for borrowed money and (b) subject to a mandatory conversion to equity. Senior debt or debt without a mandatory conversion to equity does not qualify. Each transfer of cash, including separate disbursements of tranches of funding governed by a single investment document, is considered to be, and is subject to approval as, its own qualified investment.
Yes. An angel investor must invest a minimum of $15,000 in connection with each investment for which he or she is applying for tax credits. This minimum includes individual members of a partnership, so each investor must meet the $15,000 threshold.
19. Are there any other requirements that the investment must meet to be eligible for the tax credit?
Yes. A qualifying investment by any one investor may not exceed 40% of the postmoney valuation of the company at the time of the investment.
Application Process and Procedures
There are two applications: (a) a Company Qualification Application to be completed by the company and (b) a Tax Credit Application to be completed by the investor. An investor’s Tax Credit Application is not complete until BOTH applications have been completed and submitted to Launch Tennessee.
The purpose of the Company Qualification Application is to enable Launch Tennessee to determine whether the company meets the following statutory requirements:
▪ (i) the company is an innovative small business with high-growth potential, has received SBIR/STTR funding, or is commercializing technology developed at a research institution within Tennessee;
▪ (ii) the company is not a professional service firm and is not primarily engaged in the provision of goods or services in the industries of construction, leisure, hospitality, retail, real estate, insurance, banking, lobbying, consulting, alcohol or gambling;
▪ (iii) the company has been in business for five or fewer years;
▪ (iv) the company has $3 million or less in gross annual revenue; and
▪ (v) the company has 50 or fewer full-time employees, at least 60% of whom perform the majority of their job duties in the state of Tennessee.
In the year in which a company plans to raise capital, it may apply to Launch Tennessee to be pre-certified as a qualifying business. If an investor applies for tax credits for an investment in a company that has not previously applied to be pre-certified as a qualifying business, the company must submit the Company Qualification Application within 60 days of the date of the qualifying investment. If a company has completed the Company Qualification Application before a qualifying investment, the company must either certify that there have been no changes to the information provided in the company’s application or provide supplemental information to Launch Tennessee to update that application within 60 days of a qualifying investment.
After the investment is made, the investor should submit a Tax Credit application to Launch Tennessee.
For individual angels: A submission must include the cover page and signature page(s) of the Stock Purchase Agreement, as well as proof of wire transfer or a copy of the check. Launch Tennessee reserves the right to request further legal documentation evidencing the investment (e.g., securities purchase agreement, operating agreement, convertible note, etc), as well as satisfactory evidence that the investment has been fully funded.
A Tax Credit Application must be submitted to Launch Tennessee within 60 days of the funding of the applicable investment. Unless the Company Qualification Application has previously been submitted to Launch Tennessee, the Tax Credit Application will not be considered complete until the Company Qualification Application is also submitted. Tax credit certificates are issued on a first-come, first-served basis according to the date that the application is considered to be complete, which shall be the later of the dates on which the two completed applications are submitted to Launch Tennessee with all required information and supporting documentation. If either of the Company Qualification Application or the Tax Credit Application is not submitted within 60 days of the applicable investment, the Tax Credit Application is deemed to be incomplete and will therefore not satisfy the 60-day statutory filing deadline.
For angel groups: A group of angels investing as a single entity as an LLC or Limited Partnership are now eligible to receive a tax credit. The General Partner should fill out the Investor Application form which requires the Entity Name, Federal Employer Identification Number (FEIN), Operating Agreement, proof of wire to the company and signature pages of the Stock Purchase Agreement. In order for the individual members of the partnership to receive tax credits, the General Partner must also circulate Group Member Forms for individual members to fill out themselves in order to track and apply tax credits based off each individual’s contribution to the group investment.
Both individual angels and members within an angel group must self certify as accredited investors.
Launch Tennessee will review applications and seek to notify companies if they meet the statutory requirements within 30-45 days of the date on which the company’s Company Qualification Application is deemed complete.
As a part of the certification process, the company is required to enter into an agreement with Launch Tennessee to provide basic financial information and a few key metrics for up to five years after the year in which the qualifying investment is made. This reporting enables Launch Tennessee to evaluate the success of the program as required by statute. Specific company information will be kept confidential and will be aggregated with data from other companies in analyzing the success of the program to help Tennessee determine the most effective ways to encourage entrepreneurship and capital formation in the state.