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Angels in the Big Apple?

Just over a week ago I wrote about New York’s poor ranking as a state for entrepreneurship and small businesses. State Assemblymaker Micah Kellner is making an effort to change that, especially for newer businesses.

Mashable is reporting a bill titled the Angel Investor Income Tax Credit is making its way through both houses in the state. Read here the current version of A09958, the State Assembly bill.

The bill allows up to a 25% tax credit for angel investors who invest from $25,000 to $1 million in a “qualified business” in New York State.

The colloquial definition of an angel investor is a high net worth individual who puts up funds for a start-up in exchange for some equity or other interest.

Of course, this bill defines the term, stating an angel investor is someone who qualifies as an “accredited investor” under Rule 501 of Regulation D of the Securities Act of 1933.

Accredited investors range from certain companies to charities to high net worth individuals. Read the list of accredited investors here.

The bill, however, exempts some accredited investors, including investors controlling at least fifty percent of the qualified business and venture capital firms.

So to what types of businesses should angel investors consider giving their money to obtain the credit?

The business, whether a sole proprietorship, partnership, or corporation, is a “qualified business” as long as it

  • (i) did not generate more than $1 million in gross revenues in the year immediately preceding the year the investor seeks to claim the credit;
  • (ii) does not have more than twenty-five full-time employees, at least sixty percent of which must be employed in the state;
  • (iii) has operated in the state for no more than seven consecutive years; and
  • (iv) has received no more than $2 million in investments eligible for the credit from one or more angel investor.

The credit would apply against New York State income tax. An angel investor with no New York State income tax for the year the investment is made cannot make use of the credit that year. The bill, however, does allow an investor to carry over an unused portion of the credit to a subsequent tax year.

In the Mashable piece, Kellner is quoted for saying “[t]he last thing I want is the next Twitter or Facebook being developed in New York, only to be commercialized and have their company headquarters end up in Connecticut. [Startup jobs] are good jobs and I want them here in New York.”

I don’t see how passage of this bill would keep a booming start-up in New York for the long-term. An angel tax credit isn’t why Twitter has kept its headquarters in San Francisco. A controversial measure extending an exemption from San Francisco’s payroll tax is why.

The bill was introduced in the State Assembly on April 26 and referred to the Committee on Ways and Means. The bill’s Senate equivalent was introduced on May 9 and referred to the Committee on Investigations and Government Operations.

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