Provides an angel investor credit against the unincorporated business tax and personal income tax in New York city for investments in certain qualified emerging companies and medical technology companies.
NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
BILL NUMBER: A2355
SPONSOR: Scarborough TITLE OF BILL: An act to amend the tax law, in relation to authoriz-
ing any city having a population of one million or more to provide an
angel investor credit against the unincorporated business tax and
personal income tax of such city for certain qualified emerging compa-
nies and medical technology companies
PURPOSE OR GENERAL IDEA OF BILL:
Provides an angel investor credit against certain taxes imposed in a
city if one million or more for investment in certain qualified emerging
companies.
SUMMARY OF SPECIFIC PROVISIONS:
Section 1 enables any city with a population of one million or more to
allow an angel investor credit to an eligible taxpayer against the unin-
corporated business tax.
Such credit would be allowed to an eligible taxpayer that 1) is an
accredited investor; 2) makes a qualified investment in a company
located in the city that engages in biotechnology or medical technology;
3) has no more than 100 full-time employees, of which at least 75% are
employed in the city of New York, has a ratio of research and develop-
ment funds to net sales, as referred to in section thirty-one hundred
two-e of the public authorities law, which equals or exceeds six percent
during its taxable year, and has gross revenues, along with the gross
revenues of its affiliates and related members, not exceeding $20
million for the taxable year immediately preceding the year the taxpayer
is allowed a credit under this subdivision; and 4) own less than 50% of
the qualified emerging technology company ("QETC") or medical technology
company. after their qualified investment.
Eligible taxpayers granted an angel investor credit for a qualified
investment against the city personal income tax shall be ineligible for
an angel investor credit against the unincorporated business tax for
such investment.
Sets forth definitions for 1) a "qualified investment"; 2) "related
member"; and 3) "affiliates".
The percentage of the credit shall be 2% per each qualified investment
made during a taxable year and the next succeeding 4 years, up to
$20,000 per taxable year, and $100,000 in the aggregate for all years
taken. If the taxpayer is a partner in a partnership or member in an
unincorporated business, then such limits shall be applied at the entity
level.
Such credit shall be refundable and allowed against the unincorporated
business tax paid on or after January 1, 2013.
If, during the 5 year period, there is an recapture event (the QETC or
medical technology company no longer qualifies as such; the taxpayer
sells the QETC or medical technology company or investment withdrawal),
then the unincorporated business tax owed by the taxpayer shall be
increased by the credit recapture amount, which is the aggregate
decrease in the angel investor credit provided for all prior taxable
years which would have resulted if no such credit had been determined
with respect to such qualified investment, plus interest.
No later than October 1, 2012, the NYC Department of Finance shall
establish by rule procedures for the allocation of the angel investor
credit to eligible taxpayers.
Any local law adopted pursuant to this Act may provide for a credit for
a maximum of 3 consecutive calendar years, but shall not apply to taxa-
ble years beginning on or before January 1, 2013 or after January 1,
2016.
Section 2 mirrors the provisions of section 1, except that:
1. Such section applies to the city personal income tax;
2. Eligible taxpayers granted an angel investor credit for a qualified
investment against the unincorporated business tax shall be ineligible
for an angel investor credit against the city personal income tax for
such investment;
3. In the case of a resident taxpayer, the credit provided shall be
allowed against the city personal income tax for the taxable year
reduced by the credits already taken against the PIT. If the credit
exceeds the tax as so reduced, the credit shall be refundable;
4. If a taxpayer changes residency status during the taxable year from
resident to nonresident, or from nonresident to resident, the credit
shall be prorated according to the number of months in the period of
residence; and
5. In the case of a husband and wife who file a joint return, but who
are required to determine their city personal income taxes separately,
the angel investor credit may be applied against the tax of either or
divided between them as they may elect. In the case of a husband and
wife who are not required to file a federal return, the credit under
this subsection shall be allowed only if such taxpayers file a joint
city personal income tax return.
Section 3 provides that the aggregate amount of tax credits allowed
under this act in any calendar year shall be up to $3 million. Such
aggregate amount of credits shall be allocated by the New York City
department of finance among taxpayers in order of priority based upon
the date of filing an application for allocation of the angel investor
credit with such department. If the total amount of allocated credits
applied for in any particular year exceeds the aggregate amount of tax
credits allowed for such year, such excess shall be treated as having
been applied for on the first day of the subsequent year.
Section 4 provides that a certified copy of the local law enacted pursu-
ant to this act shall be mailed by registered mail to the state depart-
ment of taxation and finance at its office in Albany within fifteen days
of its enactment. However, the state department of taxation and finance
may allow additional time for such certified copy to be mailed if it
deems such action to be consistent with its duties under this act.
Section 5 provides that the Act will take effect immediately.
JUSTIFICATION:
The Angel Investor Tax Credit would provide an incentive for investment
in small, early stage biotech and medtech businesses in New York City.
It is designed to aid the formation of promising firms by lowering their
cost of capital. It would provide accredited investors with a credit of
up to 10% of their investment. Angel Investors look for fast growing
firms and as a result Angel Credits can be a significant source of job
growth over time.{1}
Who would be eligible?
Accredited investors who invest in eligible firms could receive the
credit. The investments would have to be for a period of at least five
years. Investments would have to be at arm's length; in other words the
firm's founders, principal owners, and their families would not be
eligible.
What could they invest in?
Eligible businesses would be small early stage startups with the majori-
ty of their employment within the City in the biotech and medtech
sectors.{2}
Small biotech firms in the City tend to be focused on the early stage
development of new drugs and similar products. The sector is complemen-
tary to the City's university/hospital-based research sector.
Medtech consists of firms involved with the research and manufacturing
of various medical devices.{3} The City has approximately 287 firms in
the industry, with around 2,200 employees who were paid an average sala-
ry of $52,000. Like biotech, the medtech sector is complementary to the
City's university/hospital based research sector.
What would investors receive?
Investors would receive a refundable credit equal to 10% of eligible
investment. Credits would be limited to a maximum credit of $100,000
payable over 5 years (about $20,000 per year). Given that nationally the
typical angel's investment in a single firm is around $325,000, we
expect most credits to be well under the limit.{4} The credit would be
against the City's personal income tax, or for partnerships, against the
unincorporated business tax. The total credits that the City could issue
in a given year will be capped at $3 million.
Why an Angel Credit?
Like the City's Biotech Tax Credit, an angel investor tax credit for
biotech and medtech would attract capital to a promising sector in the
city and could be viewed as part of a long term effort to diversify the
City economy. Nationally, this is a rapidly growth export sector that
makes use of growing demand in the world economy.
BACKGROUND
Angel Investors
An angel investor is an affluent individual who provides personal capi-
tal to start-up companies, often through a trust, fund, or business.
They are distinct from venture capitalists who invest other persons'
capital through a professionally-managed fund. Angel investors are
particularly critical for small start-ups seeking capital, because most
venture capital funds are not interested in investments of less than $1
million. Indeed, angel investments are highly sought after by high-
growth start-ups, particularly after spending their own personal
resources.
Angel investments in the United States account for almost as much in
aggregate as those of venture capitalists. In 2010 angel investors
provided $20.1 billion in capital.{5} Angel investors however, furnish
capital to 20 times as many businesses as do venture capitalists. In
2010 61,900 firms were served by angel investors versus 3,047 businesses
by venture capitalists.{6} According to the Center for Venture Research,
there were 258,000 angel investors in the United States in 2007. In 2010
healthcare/medical firms accounted for 30% of angel investments. In
comparison, software, biotech and industrial/energy firms comprised 16%,
15%, and 8% of angel investments respectively.{7}
Angel Credits in Other States.
Currently, more than 20 states have some form of an Angel Investor Cred-
it. New Jersey is among them, but New York is not. However, the capital
component of the Qualified Emerging Technology Companies (QETC) Credit,
while not specifically targeted to angels, may apply to some investors
in this group.
PRIOR LEGISLATIVE HISTORY:
New Bill. 2012: Referred to Ways and Means.
FISCAL IMPLICATIONS FOR STATE AND LOCAL GOVERNMENTS:
The credit will have no impact on the New York State Budget. The New
York City Council Finance Division estimates that the credit will reduce
City personal income tax and unincorporated business tax revenues by
$600,000 in City Fiscal Year 2014, rising to $1.8 million in City Fiscal
Year 2016.
EFFECTIVE DATE:
This act shall take affect immediately.
{1} National Governor's Association Center for Best Practices, "Slate
Strategies to Promote Angel Investment for Economic Growth",
http://www.nga.org/files/live/sites/NGA/files/pdf/0802ANGELINVESTMENT.PD
F;jsessionid=B5A866F063B8961F11DD0414DCF29A09
{2} Firm size and New York employment requirements would be similar to
the City's existing biotech credit.
{3} In the Census North American Industrial Classification system
(NAICS) medtech is sectors 3345 and 3391.
{4} New York City Council Finance Division calculations based on: Volpe,
Deborah (Q2 2011). "Second Quarter 2011 MoneyTree Report Summary". The
Money Tree Report.PriceWaterhourseCoopers.
{5} Sohl, Jeffrey (2011-04-12). "Full Year 2010 Angel Market Trends".
University of New Hampshire Center for Venture Research.
http://wsbe.unh.edu/sites/default/files/2010_angel_market_press_release.
pdf.
{6} Volpe, Deborah (Q2 2011). "Second Quarter 2011 MoneyTree Report
Summary". The Money Tree Report.PriceWaterhourseCoopers.
https://www.pwemoneytree.com/MTPublic/ns/moneytree/filesource/exhibits/M
oneyTree%20Q2%202011_Final.pdf
{7} Sohl, Jeffrey (2010-03-31). "Full Year 2009 Angel Market Trends".
University of New Hampshire Center for Venture Research.
http://wsbe.unh.edu/files/2009_Angel_Market_Press_Release.
