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Angel Investment Tax Credits: Massachusetts Considerations

In 2016, Governor Baker signed into law a Massachusetts tax credit program intended to spur angel investments in local high-tech start-ups (particularly those in the fields of digital e-health), information technology, and healthcare.

The credit is available for qualifying investments made on or after January 1, 2020.

The tax credit program is limited to $25 million annually, with the credits being given out by the Massachusetts Life Sciences Center (MLSC). Individual investors should urge companies of interest to seek qualification with the MLSC where appropriate. Companies interested in attracting angel funding can monitor developments of the program by subscribing to updates on the MLSC’s website here.

Who is Eligible to Claim Credit?
Investors must be accredited and have demonstrated eligibility with the MLSC. As defined by the Securities and Exchange Commission (SEC), an accredited investor is any natural person whose individual net worth, or joint net worth with that person's spouse, exceeds $1,000,000. However, additional definitions exist as well.

Qualifying investors cannot be the principal owner of the business and must not be involved in the qualifying business as a full-time professional activity.

Investors in qualifying businesses will be permitted to take a personal tax credit of 20% of the amount invested, or 30% if the business is in a “Gateway Municipality.” 

No single taxpayer can claim more than $50,000 in tax credits per year, but investors may carry forward any unused tax credits for up to three years.

In the case of investments made by pass-through entities, the credits are passed through to the owners.

What is a Qualifying Investment?
Qualifying investments are limited to $125,000 in any one business per year, and $250,000 total for any one business. Qualifying investments may not be used to pay dividends, repay shareholder loans, or redeem shares. Additionally, the program does not cover investments in hedge funds, venture capital funds, commodity funds, retail operations, real estate, professional services, gaming, or financial services.

Companies wishing to be qualified for the program must have the following:

  • A principal place of business in Massachusetts
  • A fully developed business plan with short and long-term forecasts including R&D, profit and loss, cash flow, and details of angel investor funding
  • 20 or fewer full-time employees (at least half of whom work out of the company’s principal place of business)
  • Less than or equal to $500,000 in gross revenue in the fiscal year prior to being eligible for the credit

Moreover, tax credits claimed are subject to forfeiture if the company moves out of Massachusetts within three years.

What is a Gateway Municipality (30% Credit)?
A gateway municipality is a municipality with a population greater than 35,000 and less than 250,000, with a median household income below the commonwealth's average, and a rate of educational attainment of a bachelor's degree or above that is below the commonwealth's average.

Gateway municipalities in Massachusetts include: Attleboro, Barnstable, Brockton, Chelsea, Chicopee, Everett, Fall River, Fitchburg, Haverhill, Holyoke, Lawrence, Leominster, Lowell, Lynn, Malden, Methuen, New Bedford, Peabody, Pittsfield, Quincy, Revere, Salem, Springfield, Taunton, Westfield, and Worcester.

If you have any questions on the Massachusetts Angel Investor tax credit, please contact a member of your advisory group at Wolf & Company.