Year-End Tax Credit for Investments in Technology-Related Fields

As many taxpayers are about to enter into the 4th quarter of their 2014 fiscal year, now is a good time to find productive ways to reduce taxable income. One such way is to take advantage of Virginia's Qualified Equity and Subordinated Debt Investments Tax Credit (“Investment Credit”). This provides taxpayers with an Investment Credit for a “Qualified Investment” that is made to a “Qualified Business”.1

A Qualified Investment is made when a taxpayer infuses new capital, in the form of cash, into a qualifying business in exchange for either equity or subordinated debt. 2 Generally, the equity received by a taxpayer in connection with a qualified business investment must be held by the taxpayer for at least 3 full calendar years following the year in which the taxpayer is allocated the Investment Credit.3 Likewise, a taxpayer who receives subordinated debt in connection with such an investment must hold the debt for at least three years after it is issued.4 The subordinated debt must not require repayment of principal for the first three years after issuance of such debt. If the debt requires repayment within three years, the subordinated debt will not be considered a Qualified Investment.

A Qualified Business, for Investment Credit purposes, is a business meeting the following five criteria:

1. Gross revenues of no more than $3 million dollars in most recent fiscal year;
   
   
2. Principal office or facility located in Virginia;
   
   
3. Business primarily performed in, or production substantially performed in, Virginia;
   
   
4. Less than $3 million received in aggregate gross cash proceeds from issuance of equity or debt investments; and
   
   
5. A business primarily engaged in, or organized to engage in, one of the fields specified in Va. Code § 58.1-339.4(A) (i.e. advanced computing, advanced manufacturing, biotechnology, energy, information technology, medical device technology, etc.).5
   

However, a taxpayer applying for the Investment Credit cannot simply state on their application that the business it made a Qualified Investment to meets the Qualified Business criteria. The taxpayer must make sure that the business has filed Form QBA: an “Application for Designation as a Qualified Business for the Qualified Equity and Subordinated Debt Investments Tax Credit”.

If all of the above criteria are met, then the amount of the Investment Credit the taxpayer may receive is equal to 50% of qualifying investments made during the taxable year.6 Virginia has set a $5 million cap on the total amount of the credit available to all taxpayers in 2014. However, it has provided that if such amount of total qualifying requests for the credit exceeds the $5 million cap, then the credit is to be prorated among taxpayers.7 Thus, it is not too late to apply for the credit; the Investment Credit is not doled out on a first-come, first-serve basis and, most importantly, provides a great last-minute opportunity for taxpayers to reduce their taxable income and for certain businesses to attract investments.

1See Va. Code § 58.1-399.4.
2Va. Code § 58.1-399.4(A).
3Va. Dept. of Taxation, Form QBA, Application for Designation as a Qualified Business for the Qualified Equity and Subordinated Debt Investments Tax Credit, P. 3.
4Id.
5See VA Code § 58.1-399.4; supra FN 3.
6Va. Code § 58.1-399.4(B).
7Supra FN 3.