In December, President Obama signed the Tax Increase Prevention Act, which will benefit angel investments made by individuals or LLC funds in 2014. This new law will mean that angel investors will pay no taxes on gains from your investments that meet several of the criteria below:
Criteria and Limitations:
- Investments must be made by a non-corporate investor (for example, individuals or funds structured as LLCs).
- Investments must be made in 2014. There have been a variety of different levels of tax exclusions since 2010, from 50% to 100%. A listing of the dates and percentages is here.
- The company in which you invest must be a C corporation and must be a qualifying type of business (many businesses except financial institutions, farms, professional service firms, hotels, and restaurants)
- The company in which you invest must not exceed $50 million in aggregate gross assets at any time before the investment or immediately afterward. An important issue in this size is that 80% of the assets must be used in the "active conduct" of the business at all times.
- The stock must be purchased by the investor as an original issuance from the corporation, directly or through an underwriter. So, notes and warrants do not count. We're hearing that if you have an outstanding note that converts to stock before December 31st, then the stock would count for this program. (BUT TALK TO YOUR ACCOUNTANT.)
- The stock must be held for more than five years (subject to exemptions for qualifying tax-free rollovers)
- There are limitations on redeeming shares of the company's stock before and after the qualified stock is issued.
- The gains eligible for the zero taxes by any single taxpayer max out at $10 million or ten times the adjusted tax basis of stock issued by the stock
- The gains are also not subject to the Alternative Minimum Tax.
For more information, please see the article written by the Angel Capital Association here.