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Hall Income Tax—Phase Out & Angel Investor Credit

06/02/2016

Last month, Tennessee’s legislature approved a bill to reduce and ultimately repeal the Hall Tax – Tennessee’s tax on stock dividends and bond interest. The law, as signed by Governor Haslam, will initially cut the tax rate from 6% to 5% for tax years beginning on or after January 1, 2016. In addition, the law expresses the legislature’s intention to further reduce the tax rate by 1% per year through annual enactments of general bills in subsequent legislative sessions. The annual rate reductions are at the discretion of the legislature and are not tied to any specific state budget benchmarks. The Hall Tax will be eliminated for tax years beginning on or after January 1, 2022, regardless of whether the annual reductions are approved.

More recently, Governor Bill Haslam also signed H.B. 1536, which provides a tax credit for “angel investors” that can be applied against an individual’s Hall Income Tax liability for tax years beginning January 1, 2017 and thereafter. By passing this bill, Tennessee joins the ranks of 26 other states—6 neighboring—in providing such a tax credit.

Key notes:

  • A qualified angel investor may take a credit equal to 33% of the value of an investment if the investor, the company, and the investment meet certain requirements (a credit equal to 50% is provided for qualifying investments in companies located in “Tier 4” counties).
  • The angel investor must be a natural person who is an accredited investor as defined by the Securities and Exchange Commission.
  • The company must:
    • be an “innovative small business with high-growth potential”
    • have been in business for 5 years or fewer
    • have $3,000,000 or less in gross annual revenue
    • have 50 or fewer full-time employees, sixty percent of which must work primarily within the state.
  • The investment must be at least $15,000 and represent no more than 40% of the capitalization of the company at the time of the investment.
  • Angel investor credits are capped at $50,000 per investor in any tax year. The credits are nonrefundable and nontransferable, but do carry forward for up to 5 years.
  • An investor must apply with the Tennessee technology development corporation within 60 days of the investment.

Although the repeal of the Hall Income Tax has been signed into law, the tax will not be fully eliminated until 2022. Until that time, the angel investor credit could be of great value. For those clients that may potentially qualify, this presents an important planning opportunity, as the credit should be taken into consideration when analyzing future investments.

If you have any questions, please contact Mason Barrick, CPA, at mbarrick@lbmc.com or Andrew E. Hill, JD, at ahill@lbmc.com.