Overview
Title
To amend the Internal Revenue Code of 1986 to allow a credit against income tax for equity investments by angel investors.
ELI5 AI
The bill is about giving a special money-saving coupon, called a tax credit, to people who help new and small tech companies by giving them money, but there are rules about how much they can get, who can get it, and which companies can use it.
Summary AI
S. 4809 proposes changes to the Internal Revenue Code of 1986 to introduce a tax credit for angel investors who invest in small, high-tech businesses in the U.S. This bill allows qualified investors to receive a credit of 25% of their investment, capped at $250,000 per year. The eligible businesses must be relatively new, have low revenue, employ less than 25 people, and operate in specific high-tech industries. The bill also establishes a national cap of $500 million in credits each year from 2025 to 2029, with unused amounts carried over to future years until 2034.
Published
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AnalysisAI
Summary of the Bill
The Angel Tax Credit Act, introduced as S. 4809, aims to amend the Internal Revenue Code of 1986 to provide a tax credit for angel investors who make equity investments in qualifying small businesses. The bill allows these investors to receive a tax credit equal to 25% of their investments, with a cap of $250,000 per taxpayer annually. Qualified businesses must be small, innovative, and new, with specific restrictions on revenue and size. The bill also outlines a national cap on the total credits available per year, set at $500 million from 2025 to 2029.
Significant Issues
One of the primary concerns is the financial limitation on the angel investment tax credit, which might either be too restrictive or excessively generous without proper analysis to justify these figures. Additionally, the exclusion of certain investor types, like venture capital funds and banks, from qualifying might unnecessarily narrow the pool of potential investors, potentially stifling investment in startups.
The categorization of eligible businesses under strict high-technology sectors might lead to confusion or exclusion of deserving businesses that do not neatly fit these categories. Moreover, the complexity of the bill's language and structure could present difficulties for both business owners and potential investors in navigating the tax credit system effectively.
Impact on the Public
Broadly, the bill seeks to encourage investment in small, early-stage companies, which could lead to more innovation and economic growth. By offering a tax incentive, it aims to attract more investors willing to support startups, potentially leading to job creation and technological advancements.
However, the national cap on the credits could mean that available funds might be concentrated in certain areas, leaving others underserved. If the allocated $500 million per year is not sufficient to meet national demand, deserving startups might miss out on necessary capital to grow.
Impact on Stakeholders
Startups and Small Businesses
The bill could greatly benefit startups, particularly those in high-technology fields, by increasing their access to capital from angel investors. However, businesses outside these specified categories might feel unfairly left out from receiving the benefits of such investments.
Angel Investors
For individual angel investors, the bill provides a clear financial incentive to invest in startups, potentially increasing their participation in early-stage financing. Yet, the $250,000 cap may not fully incentivize larger investments, which could be pivotal in sectors requiring significant capital.
Venture Capital and Banking Sectors
By excluding venture capital funds and banks from qualifying as investors for the purposes of the tax credit, these sectors might find their traditional role in startup financing diminished. This exclusion could reduce the capital available from these sources for new businesses looking to scale rapidly.
Government and Tax Administrators
For government bodies tasked with administering this program, ensuring transparency and equity in allocation presents a challenge. They must ensure that the designation process is clear and fair and that the credits are distributed without favoritism.
In conclusion, while the Angel Tax Credit Act holds promise for fostering innovation and investment in U.S. startups, it also requires careful consideration and potentially further refinement to address the highlighted complexities and ensure broad-based benefits.
Financial Assessment
The bill titled "Angel Tax Credit Act," introduced to amend the Internal Revenue Code of 1986, proposes financial incentives for angel investors who support small, high-tech businesses in the United States. These incentives are structured to encourage financial backing for emerging companies in critical technology sectors while setting specific financial boundaries and qualifications.
Financial Allocations and Caps
The bill outlines a tax credit of 25% for qualified equity investments made by angel investors, limited to a maximum of $250,000 per taxpayer, per year. This cap may be perceived as inadequate for investors interested in larger investments, particularly within high-cost industries such as biotechnology or aerospace. The notable cap might limit the motivation for more substantial financial commitments which could substantially benefit small businesses with significant capital needs.
Additionally, the bill establishes a national limitation of $500 million in credits available each year from 2025 to 2029. Unused amounts can be carried over to future years, up until 2034. This aspect of the bill requires thoughtful administration to prevent potential misuse or misinterpretation of credit carryovers. The national cap's adequacy could raise questions, such as whether it aligns with the anticipated demand from investors and market needs or whether its distribution mechanism adequately ensures fairness. Concerns about favoritism or bias in credit allocation by the Secretary of the Treasury are also notable.
Designation and Eligibility Issues
The bill specifies that investments can only be made in qualifying business entities, which are defined as small, domestic enterprises with low gross revenues (under $1,000,000), fewer than 25 employees, and a focus on specified high-tech industries. The broad categorization of "high technology" might result in confusion or unfair exclusion of certain enterprises that donât neatly fit the specified sectors, potentially limiting opportunities for diverse innovative ventures.
Regarding investors, the bill restricts qualified investor status by excluding entities like venture capital funds and banks, potentially limiting the pool of capable investors. While this aims to target individual angel investors, it could decrease investment capital available to startups, particularly for those with higher funding needs.
Complexities and Compliance
The billâs provisions include sophisticated language around related parties, basis adjustments, and recapture of credits if investments are held for less than three years. These complexities could impose a burden on investors who may find compliance challenging without substantial legal or financial advice. Simplifying these provisions could enhance accessibility and attract a broader base of potential investors.
In summary, the financial references in the "Angel Tax Credit Act" aim to incentivize investment in crucial high-tech sectors through structured tax credits, with specific limitations and designations, yet the proposed financial thresholds and exclusions pose potential issues in accessibility, fairness, and adequacy.
Issues
The limitation of the angel investment tax credit to $500,000,000 for each of the calendar years 2025 through 2029 in Section 2(f) might be perceived as either insufficient or excessive without clear justification or analysis, raising concerns about the adequacy of funding and allocation fairness.
The exclusion of certain entities such as venture capital funds and banks from the definition of 'qualified investor' in Section 2(e) could unnecessarily limit the pool of potential investors for small startups, which could potentially reduce investment opportunities.
The broad inclusion of high-technology sectors under 'qualifying business entity' in Section 2(d)(1)(F) might lead to ambiguity and difficulties in determining eligibility, potentially excluding businesses that do not fit the high technology categories specified.
The credit cap of $250,000 per taxpayer in Section 2(b) might not provide sufficient incentive for larger investments that could significantly benefit small businesses, particularly in industries with higher capital needs.
The complexities associated with related parties and recapture mechanisms in Section 2(h) might be burdensome for individual investors to understand and comply with, posing compliance challenges.
The complexity and lack of clarity in the language and structure of the bill, especially within Section 2, may make it difficult for small business owners and new investors to effectively access and utilize the tax credit.
Without transparent metrics or clear evaluation criteria, the designation process by the Secretary of the Treasury in Section 2(f)(2) might lead to perceptions of favoritism or bias in the allocation of credits, especially if certain regions or entities are favored.
The provision allowing for carryover of unused credit limitations up to 2034 in Section 2(f)(3) requires careful administration to avoid potential misuse or misinterpretation of these carryovers.
Sections
Sections are presented as they are annotated in the original legislative text. Any missing headers, numbers, or non-consecutive order is due to the original text.
1. Short title Read Opens in new tab
Summary AI
The first section of the bill states that the law will be officially called the "Angel Tax Credit Act."
2. Angel investment tax credit Read Opens in new tab
Summary AI
The section introduces a tax credit for angel investors, allowing them to claim 25% of their investments in qualifying small businesses, with a maximum of $250,000 per taxpayer each year. To qualify, businesses must be innovative, small, and new, and the total credit available nationwide is capped annually from 2025 to 2029, while the investments must be held for at least three years to fully benefit from the credit.
Money References
- â(b) Limitation.âThe amount of the credit allowed under subsection (a) for any taxpayer for any taxable year shall not exceed $250,000.
- â(c) Qualified equity investment.âFor purposes of this sectionâ â(1) IN GENERAL.âThe term âqualified equity investmentâ means any equity investment in a qualifying business entity ifâ â(A) the aggregate amount of such investments made by the taxpayer during the taxable year is $25,000 or more, â(B) such investment is acquired by the taxpayer at its original issue (directly or through an underwriter) solely in exchange for cash, and â(C) such investment is designated for purposes of this section by the qualifying business entity.
- â(d) Qualifying business entity.âFor purposes of this sectionâ â(1) IN GENERAL.âThe term âqualifying business entityâ means any domestic corporation or partnership if such corporation or partnershipâ â(A) has its headquarters in the United States, â(B) has gross revenues for the taxable year preceding the date of the qualified equity investment of less than $1,000,000, â(C) employs less than 25 full-time equivalent employees as of the date of such investment, â(D) has been in existence for less than 7 years as of the date of the qualified equity investment, â(E) has more than 50 percent of the employees performing substantially all of their services in the United States as of the date of such investment, â(F) is engaged in a high technology trade or business related toâ â(i) advanced materials, nanotechnology, or precision manufacturing, â(ii) aerospace, aeronautics, or defense, â(iii) biotechnology or pharmaceuticals, â(iv) electronics, semiconductors, software, or computer technology, â(v) energy, environment, or clean technologies, â(vi) forest products or agriculture, â(vii) information technology, communication technology, digital media, or photonics, â(viii) life sciences or medical sciences, â(ix) marine technology or aquaculture, â(x) transportation, or â(xi) any other high technology trade or business, as determined by the Secretary of the Treasury, and â(G) has equity investments designated for purposes of this paragraph. â(2) DESIGNATION OF EQUITY INVESTMENTS.âFor purposes of paragraph (1)(G), an equity investment shall not be treated as designated if such designation would result in the aggregate amount which may be taken into account under this section with respect to equity investments in such corporation or partnership exceeds $2,000,000, taking into account the total amount of all qualified equity investments made by all taxpayers for the taxable year and all preceding taxable years.
- â(1) IN GENERAL.âThere is an angel investment tax credit limitation of $500,000,000 for each of calendar years 2025 through 2029.
30E. Angel investment tax credit Read Opens in new tab
Summary AI
The section establishes an angel investment tax credit allowing qualified investors to claim a tax credit for 25% of their investments in small qualifying high-tech businesses, subject to limits such as a $250,000 annual cap per taxpayer. It outlines eligibility criteria for businesses and investors, including revenue thresholds, number of employees, and specific industries, and sets a national cap on total credits available annually from 2025 to 2029.
Money References
- (b) Limitation.âThe amount of the credit allowed under subsection (a) for any taxpayer for any taxable year shall not exceed $250,000.
- (c) Qualified equity investment.âFor purposes of this sectionâ (1) IN GENERAL.âThe term âqualified equity investmentâ means any equity investment in a qualifying business entity ifâ (A) the aggregate amount of such investments made by the taxpayer during the taxable year is $25,000 or more, (B) such investment is acquired by the taxpayer at its original issue (directly or through an underwriter) solely in exchange for cash, and (C) such investment is designated for purposes of this section by the qualifying business entity. (2) EQUITY INVESTMENT.âThe term âequity investmentâ meansâ (A) any form of equity, including a general or limited partnership interest, common stock, preferred stock (other than nonqualified preferred stock as defined in section 351(g)(2)), with or without voting rights, without regard to seniority position and whether or not convertible into common stock or any form of subordinate or convertible debt, or both, with warrants or other means of equity conversion, and (B) any capital interest in an entity which is a partnership.
- (d) Qualifying business entity.âFor purposes of this sectionâ (1) IN GENERAL.âThe term âqualifying business entityâ means any domestic corporation or partnership if such corporation or partnershipâ (A) has its headquarters in the United States, (B) has gross revenues for the taxable year preceding the date of the qualified equity investment of less than $1,000,000, (C) employs less than 25 full-time equivalent employees as of the date of such investment, (D) has been in existence for less than 7 years as of the date of the qualified equity investment, (E) has more than 50 percent of the employees performing substantially all of their services in the United States as of the date of such investment, (F) is engaged in a high technology trade or business related toâ (i) advanced materials, nanotechnology, or precision manufacturing, (ii) aerospace, aeronautics, or defense, (iii) biotechnology or pharmaceuticals, (iv) electronics, semiconductors, software, or computer technology, (v) energy, environment, or clean technologies, (vi) forest products or agriculture, (vii) information technology, communication technology, digital media, or photonics, (viii) life sciences or medical sciences, (ix) marine technology or aquaculture, (x) transportation, or (xi) any other high technology trade or business, as determined by the Secretary of the Treasury, and (G) has equity investments designated for purposes of this paragraph.
- (2) DESIGNATION OF EQUITY INVESTMENTS.âFor purposes of paragraph (1)(G), an equity investment shall not be treated as designated if such designation would result in the aggregate amount which may be taken into account under this section with respect to equity investments in such corporation or partnership exceeds $2,000,000, taking into account the total amount of all qualified equity investments made by all taxpayers for the taxable year and all preceding taxable years.
- â (1) IN GENERAL.âThere is an angel investment tax credit limitation of $500,000,000 for each of calendar years 2025 through 2029.