Investor Tax Credit Needs New Wings

Opinion

By Scott Foster

Last August, Gov. Charlie Baker signed the 2016 version of the annual economic-development bill for Massachusetts. Significant to the startup community thriving in the Boston/Cambridge area and growing steadily throughout the Commonwealth was the inclusion of a new angel investment tax credit.

This tax credit looked to be a boon to startups seeking capital in 2017 and beyond, allowing investors to take an immediate tax credit (not a deduction, but an actual credit) of up to 30% of an investment made in a Massachusetts startup.

Lawyers, accountants, and angel investor groups in the startup community happily touted the new tax credit and praised all involved in its creation. In everyone’s excitement, no one seemed to realize that a mistake had been made. In the definition of the term “taxpayer investor,” which governs who is eligible for the tax credit, one three-letter word was moved at some point in the legislative process, completely altering the meaning of the term.

As most of us in the startup community know, angel investors are independently wealthy individuals, most of whom have full-time engagements elsewhere. A typical angel investor could be a doctor, college professor, or entrepreneur who had a successful exit. These angel investors are not expecting to be employed by the startup receiving their investment. In fact, I can only think of a handful of instances where an angel investor was brought on as an employee of a startup, and none of them were working for the startup full-time. Angel investors are contrasted with founders in this way: while both may make an initial investment in the startup, founders will be working full-time (sometime double time) for the startup.

Back to the definition — in an earlier draft of the legislation, a taxpayer investor is defined as one who is an accredited investor “and who is not the principal owner of the qualifying business who is involved as a full-time professional activity.” Thus, in startup terms, a taxpayer investor is not a founder, but is a typical angel investor. This makes sense for a bunch of sound policy reasons, and is entirely consistent with the goal of the legislation — to encourage more angel investment in already launched startups.

However, in the final legislation, the word ‘and’ was mysteriously moved. Now a taxpayer investor is defined as one who is an accredited investor “who is not the principal owner of the qualifying business and who is involved in the qualifying business as a full-time professional activity.” This definition creates an interesting, and I hope unintentional, paradox — only those individuals with enough money to make an angel investment AND with enough time to work full-time for the startup BUT without enough ownership to be considered a ‘principal owner’ qualify for the tax credit.

Out of the countless angel investors that I have worked with, precisely none would meet this definition. I suspect the same is true of any professional in the startup community.

Let’s hope our legislators quickly realize the impact of this error and make the necessary correction to an otherwise excellent addition to the Commonwealth’s sustained support of the startup community. Until then, don’t get too excited about the angel investment tax credit.

Scott Foster is a business and entrepreneurial attorney with Bulkley Richardson in Springfield.