Friday, August 8, 2014

Massachusetts Lawmakers Approve Angel Investor Tax Credit

The Massachusetts legislature on August 1 approved an omnibus economic development bill that would create an angel investor tax credit as a way to encourage investment in small businesses.

The conference report of H 4377  also would restructure the state's research and development credit, create a tax credit for pre-Broadway shows, and establish a two-day sales tax holiday.

The Democrat-controlled legislature approved H 4377 as one of its final acts of this year's formal legislative session: The House enactment vote was 144 to 9; the Senate's was 40 to 0. The bill now goes to Gov. Deval Patrick (D), who has previously indicated his support for specific provisions of the bill.

In a statement issued August 1, House Speaker Robert DeLeo (D) said the bill ensures that residents, businesses, and communities "are able to compete and excel in a dynamic, global economy. I'm particularly proud and encouraged by the initiatives that will broaden the circle of economic prosperity beyond Greater Boston to all regions of the Commonwealth."

Senate President Therese Murray (D) said in the statement, "This bill makes many investments in our
emerging industries, like Big Data and advanced manufacturing, as well as programs to strengthen our growing educated workforce. Through our efforts to build a cutting-edge economy, we are directly helping many residents to succeed."

Under the angel investor tax credit provision, someone who invests in a qualifying business would be able to claim a state tax credit equal to 20 percent of the amount of the investment. If the business were located in one of the state's struggling cities, known as gateway cities, the credit would be equal to 30 percent of the investment.

An investor would be allowed to invest up to $125,000 per qualifying business per year, with a $250,000 cap for each qualifying business. The angel investor credit would be allowed against the personal income tax or the corporate income tax (also known as the corporate excise tax), within some limits.

A "qualifying business" for credit purposes would have to have its principal place of business in the state, have at least 50 percent of its employees located in the business's principal place of business, employ 20 or fewer full-time employees, have gross revenues equal to or less than $500,000, and meet other conditions.

Bill Vernon of the National Federation of Independent Business (NFIB) told Tax Analysts on August 1 that he hopes the credit would help small businesses in Massachusetts beyond the high-tech start-ups in the Cambridge and Boston areas and along Route 128. He also said he hopes the credit could support the growth of businesses that are in areas of the state outside Route 495 and have viable business plans.

Restructuring the R&D Credit

H 4377 also would restructure the state's R&D tax credit program under Mass. Gen. Laws ch. 63 section 38M, allowing for, among other things, a simplified alternative method for calculating the credit.
Michael Widmer of the Massachusetts Taxpayers Foundation, a business-backed public policy group, told Tax Analysts on July 31 that the R&D restructuring represents "one of the most important elements in the bill."

The credit as redesigned would provide more flexibility and enhance the existing credit, Widmer said. "It's tied directly to R&D spending, so it encourages additional spending on R&D," Widmer said.

H 4377 would expand the program by giving employers the option to claim a credit equal to 10 percent of any research expenses that exceed a base amount calculated over three years, according to a summary by Associated Industries of Massachusetts, which represents about 4,500 employers in the state.

A statement issued on July 31 by five business groups applauded the R&D changes in H 4377, especially for including what the group described as an alternative simplified credit (ASC) for R&D activities.

"Adopting the ASC underscores the state's commitment to R&D and places Massachusetts among the leaders in state-level R&D credits," according to the joint statement from Associated Industries of Massachusetts, the Greater Boston Chamber of Commerce, the Massachusetts Business Roundtable, the Massachusetts Competitive Partnership, and the Massachusetts Taxpayers Foundation.

"Research and development is a vital underpinning of the state's leadership in innovation. The credit will help stimulate investments in a broad array of sectors that are critical to the future of the Massachusetts economy," the groups said in the statement.

H 4377 is a compromise version of a bill previously passed by the Senate (S 2231 ) and one by the House (H 4165, since amended and republished as H 4181 ). (Previous coverage 2014 STT 128-3: News Stories.)

The bill also would:

  • Establish a "live theater tax credit" aimed at encouraging more productions in the state of pre-Broadway and pre-Off Broadway theater and Broadway tour launches. In general, the credit would equal 25 percent of the total production and performance expenses. The credit could generally be used against the personal income tax or corporate income tax.
  • Establish a job creation credit -- allowing a credit of up to $1,000 per job created, or up to $5,000 per job created in a gateway city. The credit, which comes with some restrictions, could be used against the personal income tax or corporate excise.
  • Establish a two-day sales tax holiday on August 16 and 17 for nonbusiness sales at retail of tangible personal property priced at $2,500 or less per item. Some items would continue to be taxed, including telecommunications, tobacco products, motor vehicles and meals.
  • Clarify that under the state's historic rehabilitation tax credit program, a taxpayer who acquires a qualified historic structure could receive tax credits for qualified rehabilitation expenditures previously awarded to the transferor of the structure.
  • Increase by $5 million, to $30 million, the total amount of credits that may be authorized in a calendar year under the state's Economic Development Incentive Program (EDIP) for certified projects.
  • Restructure the EDIP so that the credit would encourage an applicant to create a specific number of new jobs in the absence of sizable capital costs. The bill generally would allow EDIP credits for projects that generate "substantial sales from outside the Commonwealth and a net increase of at least 100 permanent full-time employees within 2 years after project certification," according to a Senate summary.

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