What were the eligibility, calculation, transfer, and asset-sale rules for South Carolina's expired Angel Investor Credit?

Plain-English summary

South Carolina Revenue Ruling 14-6 explained the former Angel Investor Credit for early-stage investment in registered high-growth South Carolina businesses.

The program was repealed December 31, 2019. The ruling preserved unused approved credit only for the original ten-year carryforward period, so this page is relevant solely to a potentially surviving legacy credit or asset-sale adjustment.

Former credit calculation

The credit equaled 35% of a qualified investment. An individual could receive no more than $100,000 of credit for all qualified investments in one tax year, excluding carryforwards.

Only 50% of the approved credit could be applied to net South Carolina income-tax liability in the investment year. The other 50%, plus any unused amount, could be used in later years within the ten-year carryforward period.

Statewide approvals were capped at $5 million per calendar year. Investors had to apply by December 31 of the investment year, and excess timely applications were allocated pro rata.

Who and what qualified

An angel investor generally had to be an individual or qualifying investment-only pass-through entity that also met the federal accredited-investor definition and the Act's additional limits. C corporations, LLCs taxed as C corporations, and nongrantor trusts did not qualify as angel investors under the ruling.

A qualified investment was cash exchanged directly for common or preferred stock, an equity interest, or subordinated debt in a qualified business. Broker fees, commissions, or similar solicitation compensation disqualified the investment.

The business had to be registered and currently certified by the Secretary of State before the investment. It also had to meet the ruling's South Carolina location, headquarters, age, employee, gross-income, industry, and excluded-activity requirements.

Pass-through entities

A qualifying pass-through investor applied for the credit itself and allocated the approved credit to eligible individual owners in the same manner as their shares of income or loss. The allocation election was irrevocable, and unused shares limited by an owner's individual cap could not be shifted to other owners.

Transfers

An approved credit could be sold, exchanged, or otherwise transferred to any person or entity, but only once. The transferor had to give written notice to DOR within 30 days.

The transferee could use the credit only against South Carolina income tax. The credit remained nonrefundable, but the original investor's $100,000 annual maximum and 50%-in-the-first-year limitation did not apply to the transferee. A transfer did not restart or extend the ten-year life.

If the transferor had no valid credit, the transferred credit was disallowed and the transferee's recourse was against the transferor.

Sale of the investment asset

Selling stock or debt that generated the credit could require a state taxable-income adjustment similar to recapture. For a net capital gain, the original investor could have to reduce the gain eligible for South Carolina's 44% capital-gain deduction. For a capital loss, the investor could have to add back the lesser of the credit amount or loss.

These adjustments remained with the original investor who acquired the credit asset, even if the tax credit itself had been transferred to someone else.

Common questions

Q: Can a new investment earn this credit now?

A: No. The Act was repealed December 31, 2019.

Q: Did repeal immediately erase an approved unused credit?

A: No. The ruling allowed carryforwards to continue for the original ten-year period.

Q: Could the credit be transferred multiple times?

A: No. The ruling allowed only one sale, exchange, or transfer, apart from specified death or divorce events.

Q: Did selling the investment eliminate the original investor's adjustment responsibility?

A: No. The original investor remained responsible for the Chapter 44 asset-sale adjustments even after transferring the credit.

Citations and references

• S.C. Code Ann. Chapter 44 of Title 11 (former High Growth Small Business Job Creation Act)
• S.C. Code Sections 11-44-30 through 11-44-80 (definitions, credit, allocation, transfer, asset-sale adjustment, and repeal)
• S.C. Code Ann. § 12-6-1150 (44% net capital gain deduction)
• 17 C.F.R. § 230.501(a) (accredited-investor rule cited by the ruling)

Subject

Angel Investor Credit

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR14-6.pdf

Original ruling text

State of South Carolina

Department of Revenue
300A Outlet Pointe Blvd., Columbia, South Carolina 29210
P.O. Box 125, Columbia, South Carolina 29214

SC REVENUE RULING #14-6

SUBJECT:

Angel Investor Credit
(Income Tax)

EFFECTIVE DATE:

September 1, 2014

SUPERSEDES:

All previous documents and any oral directives in conflict
herewith.

REFERENCES:

Chapter 44, Title 11 (Supp. 2013)

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (2014)
S.C. Code Ann. Section 1-23-10(4) (2005)
SC Revenue Procedure #09-3

SCOPE:

The purpose of a Revenue Ruling is to provide guidance to the
public. It is an advisory opinion issued to apply principles of tax
law to a set of facts or a general category of taxpayers. It is the
Department’s position until superseded or modified by a change
in statute, regulation, court decision, or another Department
advisory opinion.

INTRODUCTION
The “High Growth Small Business Job Creation Act of 2013” was enacted in Title 11,
Chapter 44 to improve the availability of early stage capital for emerging high-growth
enterprises in South Carolina. To further this goal, the Act encourages individual angel
investors to invest in early stage, high-growth, job-creating businesses by providing an
angel investor an income tax credit of 35% of its qualified investment. The total credit an
individual is allowed for all investments in one tax year is $100,000. Only 50% of the
allowed credit can be used against the individuals net income tax liability in the tax year
the qualified investment is made. The credit has a 10 year carry forward.

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The Act contains numerous definitions, including “angel investor,” “pass through entity,”
“qualified investment,” and “qualified business,” and contains specific rules and
requirements for an investor to be eligible for the credit and for a business to be qualified
to receive an investment eligible for the credit. Since the total credit allowed to all
taxpayers is limited to $5 million in any year, an angel investor seeking to claim the
credit must submit an application to the Department for approval by December 31 of the
year the investment was made. Applications submitted after this date will not be
considered for credit approval. If the credit amounts on all of the applications received
by the Department exceed $5 million, then the Department must allocate the credit on a
pro rata basis among the angel investors who filed a timely application.
Upon notification to the Department, a credit can be sold or transferred one time to any
taxpayer. Special rules exist for the claiming of the credit by the transferee.
Complex rules exist upon the sale or exchange of the qualified investment (i.e., the stock
or debt in the qualified business) by the individual who was originally eligible to claim
the credit.
The purpose of this advisory opinion is to provide general guidance regarding the
provisions of the Act. This document contains the following parts:
Part I – Original Investor Guidance – Qualifications, Requirements, and Claiming the
Credit
Part II – Transfer of Credit – Notification to the Department and Claiming the Credit
Part III – Sale of an Angel Investor Credit Asset

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PART I – ORIGINAL INVESTOR GUIDANCE
Angel Investor Definition and Qualifications

1. Q. What is the definition of an “angel investor”?
   A. An angel investor is:
   a. An individual 1 person subject to South Carolina income taxes imposed by
   Chapter 6, Title 12, who is an “accredited investor” as defined by the United
   States Securities and Exchange Commission (see Part I, Question 5) or
   b. A pass through entity that (1) is formed for investment purposes, (2) has no
   business operations, (3) does not have committed capital 2 under management
   over $5 million, (4) is not capitalized with funds raised or pooled through
   private placement memoranda directed to institutional investors, and (5) is an
   “accredited investor” as defined by the United States Securities and Exchange
   Commission (see Part I, Question 5).
   Note: An angel investor cannot be a venture capital fund or commodity fund with
   institutional investors or a hedge fund. Code Section 11-44-30(1).

2. Q. What is the definition of a “pass through entity”?
   A. A pass through entity is a partnership, S corporation, or a limited liability
   company taxed as a partnership or S corporation. Code Section 11-44-30(4).

3. Q. Can an entity disregarded for South Carolina tax purposes, such as a grantor trust
   or single member limited liability company, meet the definition of an angel
   investor?
   A. Yes, provided the sole member or grantor meets all the requirements in Chapter
   44, Title 11 to qualify for the credit. Code Section 12-2-25 provides that certain
   entities are disregarded for tax purposes (i.e., the entity is not treated as a separate
   entity from its owner.) For example, if a single member limited liability company
   does not make a federal election to be taxed as a corporation, it will not be treated
   1

SC Code Section 12-2-20 defines “individual” as a human being.

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In general, “committed capital” is an agreement that obligates the investor to contribute money
to the investment entity. The investor may pay all of the committed capital at one time, or make
contributions over a period of time.
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as a separate entity. Instead, it will be treated as a sole proprietorship if owned by
an individual, a division of the corporation if owned by a corporation, or a division
of the partnership if owned by a partnership.
Disregarded entities that may meet the definition of an angel investor include:
a. a single member limited liability company which is not taxed for South
Carolina income tax purposes as a corporation and
b. a grantor trust.

4. Q. What type of entity does not qualify as an angel investor?
   A. Examples of entities that do not meet the definition of angel investor include a C
   corporation, a limited liability company taxed as a C corporation, and a trust that is
   not a grantor trust. Code Sections 11-44-30(1) and (4).

5. Q. How is the term “accredited investor” defined by the United States Securities and
   Exchange Commission?
   A. South Carolina law requires that an angel investor be an accredited investor as
   defined by the United States Securities and Exchange Commission (SEC). For
   federal purposes, a company that offers or sells its securities must register the
   securities with the SEC or find an exemption from the registration requirements.
   For some of the exemptions, a company may sell its securities to “accredited
   investors.” Below is a summary of the federal regulations defining accredited
   investor 3 used in determining whether an individual or pass through entity meets
   the definition of angel investor.
   a. A natural person whose individual net worth, or joint net worth with that
   person’s spouse, exceeds $1 million, excluding the value of the person’s
   primary residence;
   b. A natural person who had an individual income exceeding $200,000 in each of
   the two most recent years or joint income with that person’s spouse exceeding
   $300,000 in each of those years and has a reasonable expectation of the same
   income level in the current year;
   3

The federal securities laws define accredited investor in 17 C.F.R. § 230.501(a). Note:
Tax credits generated as a result of these investments are not considered securities under
South Carolina law. Code Section 11-44-80.
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c. A director, executive officer, or general partner of the issuer of the securities,
or any director, executive officer, or general partner of a general partner of the
issuer;
d. A partnership, corporation, business trust, or Internal Revenue Code 501(c)(3)
organization, not formed for the specific purpose of acquiring the securities
offered, with total assets exceeding $5 million;
e. Any entity in which all the equity owners are accredited investors. (See
Question 6);
f. A trust, with total assets exceeding $5 million, not formed for the specific
purpose of acquiring the securities, whose purchase is made by a sophisticated
person;
g. A bank, savings and loan association, insurance company, registered
investment company, business development company, or small business
investment company; or
h. An employee benefit plan, within the meaning of the Employee Retirement
Income Security Act, if a bank, savings and loan association, insurance
company, or registered investment adviser makes the investment decisions, or
if the plan has total assets exceeding $5 million or, if a self-directed plan, with
investment decisions made solely by persons that are accredited investors.
Caution: Although the above are accredited investors, some do not meet the
definition of “angel investor” discussed in Part I, Question 1. An individual or
pass through entity must meet all the requirements in Chapter 44, Title 11 to
qualify for the credit.

6. Q. How does an angel investor that is a pass through entity verify its SEC accredited
   investor status that it is “an entity in which all the equity owners are accredited
   investors”?
   A. When determining accredited investor status, if the pass through entity meets the
   SEC requirement only because it is an entity in which all the equity owners are
   accredited investors, then the pass through entity making the investment must
   review every level of entity ownership to verify all equity owners are accredited
   investors.

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If any partner, shareholder, or member at any level of ownership does not meet the
accredited investor requirement, then the pass through entity making the
investment does not meet the definitions of “accredited investor” or “angel
investor” and no credit is allowed for the investment.

Qualified Investment Definition and Requirements

7. Q. What is a “qualified investment”?
   A. A qualified investment is an investment by an angel investor of either:
   a. a cash investment in a qualified business for common or preferred stock or an
   equity interest or
   b. a purchase for cash of subordinated debt in a qualified business.
   Investment of common or preferred stock or an equity interest or purchase of
   subordinated debt does not qualify if a broker fee or commission or a similar
   remuneration is paid or given directly or indirectly for soliciting an investment or
   purchase. Code Section 11-44-30(6).

8. Q. Can an investor make multiple qualified investments in a qualified business or
   invest in more than one qualified business?
   A. Yes. Neither the number of qualified investments an angel investor can make in
   any qualified business nor the dollar amount of qualified investments is limited.
   The total credit, however, allowed an individual for all its qualified investments is
   limited to $100,000 per year, excluding carry forward amounts. See Part I,
   Question 22. Code Section 11-44-50(2).

9. Q. Can a husband and wife each make a qualified investment?
   A. Yes, however, the maximum credit allowed each spouse for all his or her
   “qualified investments” is limited to $100,000 per year. See Part I, Question 22.
   Code Section 11-44-50(2).

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10. Q. Can an angel investor’s investment in a business in which he, or a related party,
has an ownership interest qualify for the credit?
A. Yes, providing all credit requirements are met. Code Section 11-44-30(6).

11. Q. Can an investment be made at any time and qualify for the credit?
    A. No. To be a qualified investment, the angel investor must make an investment in a
    qualified business “registered” with the South Carolina Secretary of State under
    the High Growth Small Business Job Creation Act. A registered business is one
    that has been certified by the Secretary of State as a qualified business at the time
    of application to the Secretary. Investments made before the date a business is
    certified by the Secretary of State do not qualify for the credit. Code Sections 1144-30(5) and (7).

Qualified Business Definition and Requirements

12. Q. What businesses can be certified by the Secretary of State to raise capital from an
    angel investor?
    A. An angel investor must invest in a “qualified business.” A qualified business is a
    business that meets all of the requirements listed below.
    a. Is registered as a “qualified business” with the South Carolina Secretary of
    State (See Part I, Question 13) (Note: This registration differs from registration
    with the Secretary of State to do business in South Carolina or filing articles of
    organization with the Secretary of State, etc.);
    b. Is a corporation, limited liability company, or partnership located in South
    Carolina;
    c. Has its headquarters 4 located in South Carolina at the time the qualified
    investment is made;
    d. Was organized 5 years or less prior to the qualified investment;
    4

Headquarters is the facility or portion of a facility where corporate staff employees are
physically employed, and where the majority of the company’s or company business
unit’s financial, personnel, legal, planning, information technology, or other headquarters
related functions are handled. Code Section 11-44-30(2).

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e. Employs 25 or less people in South Carolina at the time it is registered with the
Secretary of State under this Act as a qualified business;
f. Had gross income of $2 million or less on a consolidated basis as determined
in accordance with the Internal Revenue Code in any complete year before
registration;
g. Is primarily engaged in: (1) manufacturing, (2) processing, (3) warehousing,
(4) wholesaling, (5) software development, (6) information technology
services, (7) research and development, or (8) a business providing services
listed in Code Section 12-6-3360(M)(13) of the job tax credit statute, (i.e.,
ambulatory health care service, hospital, or residential care facility), other than
those described in item (h) below; and
h. Does not substantially engage 5 in: (1) retail sales, (2) real estate or
construction, (3) professional services, (4) financial brokerage, investment
activities, or insurance, (5) natural resource extraction, (6) gambling, or (7)
entertainment, amusement, recreation, or athletic or fitness activity for which
an admission or fee is charged. Code Section 11-44-30(5).

13. Q. How does a business register with the Secretary of State as a “qualified business”?
    A. To be eligible to raise capital from an angel investor, a business must first register
    with, and receive approval from, the Secretary of State as described in this Act.
    Approval of this registration constitutes certification for 12 months after being
    issued. A business is permitted to renew its registration with the Secretary of State
    if, at the time of renewal, the business remains a qualified business. Code Sections
    11-44-30(7) and 11-44-60(A).
    See the South Carolina Secretary of State website at www.scsos.com for
    information on registering as a qualified business.

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A business is “substantially engaged” in an activity if its gross revenue from an activity
exceeds 25% of its gross revenues in a year or it is established pursuant to its articles of
incorporation, articles of organization, operating agreement, or similar organizational
documents to engage as one of its primary purposes such activity. Code Section 11-4430(5).
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14. Q. How does an angel investor know if a business has been certified by the Secretary
of State as a qualified business under the Act?
A. An investor should check with the business it is seeking to invest in to verify
whether it is currently approved by the Secretary of State as a qualified business.
The Secretary of State will issue a qualified business a letter certifying that it is
registered under the Act.
In addition, the Secretary of State posts a “Qualified Business Report” on its
website, www.scsos.com, which lists the name and registration date of each
qualified business by county. This list is updated as of January each year. The
registration is effective for 12 months after being issued.
Caution: If a business is not currently registered under the Act at the time the
angel investor makes an investment, this investment is not eligible for the credit.
Code Section 11-44-60(D).

15. Q. Can the Secretary of State revoke its approval of a business as a “qualified
    business” for purposes of the credit?
    A. Yes. If the Secretary of State finds that any information contained in the
    registration application is false, the Secretary of State may revoke the registration
    of the business under the Act. Code Section 11-44-60(B).

Original Credit Approval and Use

16. Q. Why does an angel investor have to apply with the Department to receive approval
    of the credit amount?
    A. Since the total credit allowed is $5 million for all taxpayers in any calendar year,
    an angel investor seeking to claim a credit must apply to the Department to obtain
    approval for the credit. If the credit amounts on timely filed applications exceed $5
    million, then the Department will allocate credits on a pro rata basis. Code
    Sections 11-44-50(1), 11-44-70(A), and 11-44-70(C).

17. Q. What form is used to apply to the Department to obtain approval to claim the
    credit?
    A. Form TC-56A, Application for Angel Investor, is used by the angel investor to
    obtain approval from the Department.

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If the angel investor is an individual, the individual should submit Form TC-56A.
If a husband and wife each make a separate investment, then each spouse should
submit Form TC-56A.
If the angel investor is a pass through entity, the pass through entity should submit
Form TC-56A; each partner, shareholder, or member of the pass through entity
does not separately apply.

18.Q. What is the time period for the angel investor to submit an approval application to
the Department?
A. The angel investor may submit Form TC-56A to the Department at any time after
the qualified investment is made but must submit the application by December 31
of the calendar year the investment was made. Applications submitted after this
date will not be considered for credit approval.

19. Q. Who does the Department notify that the credit is or is not approved and when
    does the Department provide the notification?
    A. The Department will notify the individual angel investor or the pass through entity
    angel investor making the direct investment of the tax credit amount approved for
    the qualified investment. The Department does not notify each partner, member,
    or shareholder of a pass through entity.
    Notification of the credit approval or denial will be sent by the Department by
    January 31 of the year following the investment.
    Note: If an individual is a partner, shareholder, or member of more than one pass
    through entity angel investors, he should be aware that the Department will send a
    credit approval notice to each pass through entity angel investor. Each pass
    through entity angel investor is then responsible for notifying the individual of his
    allocated credit amount for that angel investor. The individual claiming the credit,
    or credits for multiple investments, is responsible for determining his total credit
    amount and credit limitations on his tax return.

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20. Q. Does the Department’s notification of a credit amount mean it cannot be audited?
A. No. Notification to the angel investor is based upon the credit application
information provided at the time. The application and credit amount may be
audited at a future date for periods open under the statutory time limitation. Code
Section 12-54-85.

21. Q. What form is used to compute and claim the credit?
    A. Form TC-56, “Angel Investor Credit,” is used by an individual to compute and
    claim the credit.

22. Q. What is the credit amount?
    A. An angel investor is entitled to an income tax credit of 35% of its qualified
    investment. The aggregate amount of credit allowed an individual for one or more
    qualified investments, whether made directly by the individual or directly by a
    pass through entity and allocated to an individual, in one tax year cannot exceed
    $100,000, excluding carry forward amounts. Amounts in excess of the credit
    maximum are not allocated or available for use in any year. Code Sections 11-4440(A) and 11-44-50(2).

23. Q. Are all owners of a qualified pass through entity angel investor eligible for the
    credit?
    A. Only those owners who are individuals qualify. Others who are not individuals do
    not qualify and may not reallocate, sell, or transfer their proportionate share of the
    credit.
    For example, a partnership angel investor has an individual, an S corporation
    (owned by two individuals), and a C corporation as partners. Only the individuals
    (i.e., the individual partner and the individual shareholders of the S corporation)
    are entitled to their proportionate share of the credit. The C corporation and its
    shareholders, including shareholders who are individuals, are not entitled to any
    credit and have no credit to sell, transfer or otherwise allocate. Code Sections 1144-30 and 11-44-40.

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24. Q. How is a pass through entity angel investor required to allocate the credit to its
individual partners, shareholders, or members?
A. The pass through entity angel investor must make an irrevocable election with the
Department as to the manner the credit is to be allocated. Each individual who is a
partner, shareholder, or member of the pass through entity making an investment
directly in a qualified business must be allocated the credit allowed in an amount
determined in the same manner as the proportionate shares of income or loss of
such pass through entity would be determined.
If an individual’s share of the pass through entity’s credit is limited for a tax year
due to the maximum allowable credit under this Act, the pass through entity and
its owners may not reallocate the unused credit among the other owners. Code
Section 11-44-4(C).

25. Q. Does the original investor claim the entire credit in the year of investment?
    A. No. Fifty percent of the allowed credit may be applied to the angel investor’s “net
    income tax liability” for the tax year during which the qualified investment is
    made. Fifty percent of the allowed credit may be applied to the “net income tax
    liability” in the tax years after the “qualified investment” is made. Code Section
    11-44-40(B).
    “Net income tax liability” is defined as the individual’s South Carolina income tax
    liability reduced by all other credits allowed under Title 12 (Taxation), Title 11
    (Public Finance) and Title 48 (Environmental Protection and Conservation). Code
    Sections 11-44-30(3) and 11-44-50(3).
    At this time, credits allowed under Title 11 and Title 48, include the Venture
    Capital Investment Credit (Chapter 45, Title 11), Credit for Contribution to the
    Hydrogen Infrastructure Development Fund (Code Sections 11-46-30 and 12-63630), and Energy Efficient Manufactured Home Credit (Code Section 48-52870).

26. Q. What is the credit carry forward period?
    A. Any unused credit may be carried forward for 10 years from the tax year the
    investment is made. Code Section 11-44-50(3).

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27. Q. What is the repeal date?
A. The Act is repealed on December 31, 2019. Any credit carry forward will continue
to be allowed until the 10 year period is completed.

PART II - TRANSFER OF CREDIT – NOTIFICATION TO THE DEPARTMENT
AND CLAIMING THE CREDIT

1. Q. Can an angel investor income tax credit be sold or transferred?
   A. Yes. The income tax credit available may be sold, exchanged, or otherwise
   transferred. Amounts in excess of the $100,000 credit maximum are not available
   for transfer. Code Section 11-44-50(5).

2. Q. Can a credit be transferred more than one time?
   A. No. The entire credit, or any portions of a credit, may be transferred only once.
   However, a “transfer” by the angel investor to his heirs and legatees upon his
   death and to his spouse or incident to divorce is not considered a one-time transfer.
   Notification of such event should be provided to the Department prior to any heir,
   legatee, or former spouse claiming the credit to assist in proper processing.
   Notification should again be made to the Department subsequent to an heir,
   legatee, or former spouses’ one time transfer all or a portion of his credit. See Part
   II, Question 12 below for notification procedures. Code Sections 11-44-50(4) and
   (5).

3. Q. Can the original credit be transferred to any person or entity and what taxes may
   the transferred credit be used against?
   A. Yes. The credit may be transferred to any person or entity. The transferred credit
   remains a credit for use against a transferee’s South Carolina income tax only and
   is nonrefundable. Code Sections 11-44-40(A) and 11-44-50(5).

4. Q. Can the transfer involve more than one transferee?
   A. Yes.

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5. Q. When and how does a transferor notify the Department of a credit transfer?
A. The transferor must notify the Department in writing within 30 days of the transfer;
the Department does not have a pre-printed form for this notification. The request
will be deemed approved two weeks after the transferor has submitted all
information requested below in complete form and the transfer is carried out
consistently with the information submitted in the request. Failure of the transferor
to notify the Department of the transfer results in disallowance of the transferred
credit until the transferor complies. See Part II, Question 12 below for the
information that must be provided in the notification.

6. Q. What form is used to claim a transferred credit?
   A. The transferee claims a transferred credit on Form 1040TC, “Tax Credits,” or
   1120-TC, “Corporate Tax Credits.” A transferred credit is not reported on Form
   TC-56, “Angel Investor Credit.”

7. Q. When can a credit be transferred?
   A. A credit can be transferred any time after the original angel investor has been
   notified of the credit amount by the Department (see Part I, Question 19 above.)
   Further, a credit can be transferred even if the credit has not been claimed by the
   original angel investor on his tax return in Year 1.

8. Q. Is there a maximum credit amount that a transferee may claim per year?
   A. No. The annual $100,000 aggregate credit amount applicable to the original angel
   investor (see Part I, Question 22 above) does not apply to the transferee of that
   credit. Code Sections 11-44-50(2) and 11-44-50 (5).

9. Q. Can the transferee claim the entire credit in the year of transfer?
   A. Yes. A taxpayer to whom a credit has been transferred may use all of the credit for
   the tax year in which the transfer occurred. There is no requirement that the
   transferee may claim only 50% of the credit in the year of the transfer nor is there
   a requirement that transferee’s “net income tax liability” be reduced by all other
   credits allowed under Title 11, 12, and 48 before claiming the credit. Code
   Sections 11-44-30(3), 11-44-40(B), 11-44-50(3) and 11-44-50(5).

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10. Q. What is the credit carry forward period for a transferred credit?
A. A transfer does not extend the time a credit can be used. A transferred credit may
not be used more than 10 years after the credit was originally issued. Code
Section 11-44-50(5).

11. Q. What if the transferor has no right to claim or use the credit at the time of the
    transfer?
    A. The credit will be disallowed. The transferee’s recourse is against the transferor.

12. Q. How does a transferor notify the Department of a transfer of all or a portion of the
    credit?
    A. The transferor must send a written “notice of transfer” to the Department
    containing the following information:

13. The complete name, address, telephone number and the taxpayer identification
    number of the transferor of the credit;
14. The complete name, address, telephone number and taxpayer identification
    number of each transferee of the credit;
15. A statement that this portion of the credit has not been transferred before;
16. The total amount of credit currently available to the transferor (i.e. the total
    amount of credit less any credits to be used or used by the transferor in the
    current or prior tax years);
17. The date the original credit was issued;
18. The date the transfer of the credit will be made;
19. The amount of the credit to be transferred;
20. The transferor must provide a waiver of the right to claim that portion of the
    credit being transferred;
21. The transferors remaining credit balance after the transfer; and,

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10. Any other information requested by Department.
The written notice should be mailed to:
Angel Investor Credit Transfer Notice
Research and Forms Development
Department of Revenue
Columbia, SC 29214-0019
The written notice of transfer may also be e-mailed to: [email protected].

13. Q. What is the repeal date?
    A. The Act is repealed on December 31, 2019. Any credit carry forward of the
    transferee will continue, however, the transferred credit cannot be used more than
    10 years after the credit was first issued to the original angel investor. Code
    Sections 11-44-80 and 11-44-50(5).

PART III: SALE OF AN ANGEL INVESTOR CREDIT ASSET
Under the Act, an individual investor originally eligible to claim the credit may be
required to make South Carolina taxable income adjustments when he sells all or a
portion of his equity interest or debt in the qualified business associated with the angel
investor credit. The adjustments serve a purpose similar to an income tax credit recapture.
Guidance is provided below with respect to certain tax implications upon the sale or
transfer of the credit assets. Note: This discussion is limited to the tax consequences in
Chapter 44 of Title 11; however, other tax provisions may also apply to a sale or transfer.

1. Q. What are the South Carolina income tax consequences of selling an asset which
   qualified for the angel investor credit?
   A. When an “angel investor taxpayer” (defined in Part III, Questions 2 and 3) sells an
   asset that qualified for the angel investor credit (“credit asset”) (defined in Part III,
   Question 4), the investor may be required to make adjustments to South Carolina
   taxable income. In the event of a net capital gain, the “angel investor taxpayer”
   will be required to reduce the net capital gain eligible for the South Carolina 44%
   capital gain deduction under Code Section 12-6-1150 (see Part III, Questions 5
   and 6). In the event of a capital loss, the angel investor taxpayer will be required
   to increase his South Carolina taxable income by the lesser of amount of the angel
   investor credit or the capital loss (see Part III, Question 7). Code Section 11-44-65.

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2. Q. Who is an “angel investor taxpayer?”
A. An “angel investor taxpayer” is an individual taxpayer who invested in a capital
asset and as a result of that investment was eligible to claim the angel investor tax
credit. Code Section 11-44-65(A)(1). If the capital asset investment was made by a
qualified pass-through entity, the angel investor taxpayer is the individual who is a
partner, shareholder, or member that can claim the angel investor credit on his
individual income tax return. In the case of a disregarded entity, the angel investor
taxpayer is a single member individual of a LLC or the individual grantor of a
grantor trust. An angel investor taxpayer is the individual who is originally eligible
to claim the angel investor credit.

3. Q. Does an angel investor taxpayer include a taxpayer that receives the angel investor
   credit through a sale or other transfer?
   A. No. An angel investor taxpayer does not include a taxpayer that receives the credit
   through a sale or other transfer. The original purchaser of the credit asset continues
   to be liable for any taxes due under Code Section 11-44-65 even if he has already
   sold or otherwise transferred the credit.

4. Q. What is a “credit asset?”
   A. A “credit asset” is stock or debt acquired directly by an individual or indirectly by
   an individual through a pass-through or a disregarded entity who was eligible to
   claim the angel investor credit with respect to that stock or debt. Code Section 1144-65(A)(2).

5. Q. What is the 44% capital gain deduction?
   A. Code Section 12-6-1150 provides that individuals are allowed a deduction from
   South Carolina taxable income of 44% of the net capital gain recognized in this
   State during the taxable year (“44% deduction”). “Net capital gain” is defined in
   Internal Revenue Code (IRC) Section 1222(11) as “the excess of the net long-term
   capital gain for the taxable year over the net short-term capital loss for such year.”
   In order to qualify for a long-term capital gain, the capital asset must be held for
   more than one year. IRC Section 1222(3).

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6. Q. When is an angel investor taxpayer required to reduce the net capital gain eligible
for the 44% deduction?
A. An angel investor taxpayer is required to reduce the net capital gain eligible for the
44% deduction when he recognizes a net capital gain on the sale or exchange of
credit assets (defined in Part III, Question 3) in the tax year. The reduction of the
net capital gain eligible for the 44% deduction is limited to the income associated
with the angel investor credit. The income associated with the angel investor credit
is calculated by dividing the total credit amount by 7%. Code Section 11-4465(B).
If the net capital gain on the sale of a credit asset is less than the income
associated with the angel investor credit (credit amount / 7%), the net capital gain
eligible for the 44% deduction is reduced to zero and there is no 44% deduction.
(Example 1).
If the net capital gain on the sale of a credit asset is more than the income
associated with the angel investor credit (credit amount / 7%), the net capital gain
eligible for the 44% deduction is reduced by the amount of the income associated
with the angel investor credit. (Example 2).
Example 1: Sale of a credit asset which reduces the 44% net capital gain
deduction to zero.
Facts: An angel investor taxpayer invests $30,000 in a qualified business and is
eligible to claim an angel investor credit of $10,500 (35% x $30,000). After a year,
the angel investor taxpayer sells the investment for $50,000 recognizing a net
capital gain of $20,000 ($50,000 sales price - $30,000 basis).
Sales Price

Angel Investment

Gain/Loss

Credit Amount

$50,000

$30,000

$20,000

$10,500

The reduction of the net capital gain eligible for the 44% deduction is calculated as
follows:
Step 1: Determine the income associated with the angel investor credit.
Credit Amount / 7% = Income Associated with the Credit
$10,500 / 7% = $150,000

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Step 2: Determine if the net capital gain on the sale of the credit asset is more
or less than the income associated with the angel investor credit calculated in
Step 1.
$20,000 (net capital gain) is less than $150,000 (income associated with
the credit).
Step 3: Determine the reduction of the net capital gain eligible for the 44%
deduction.
Since the net capital gain on the sale of the credit asset is less than the
income associated with the original credit amount, the net capital gain
eligible for the 44% deduction is reduced by the entire $20,000 net capital
gain. As a result, none of the gain is eligible for the 44% deduction.

Example 2: Sale of a credit asset which partially reduces the 44% net capital gain
deduction.
Facts: An angel investor taxpayer invests $30,000 in a qualified business and earns
a credit of $10,500 (35% X $30,000). After a year, the angel investor taxpayer
sells the investment for $210,000 recognizing a net capital gain of $180,000
($210,000 sales price - $30,000 basis).
Sales Price

Angel Investment

Gain/Loss

Credit Amount

$210,000

$30,000

$180,000

$10,500

The reduction of the net capital gain eligible for the 44% deduction is calculated as
follows:
Step 1: Determine the income associated with the angel investor credit.
Credit Amount / 7% = Income Association with the Credit
10,500 / 7% = $150,000
Step 2: Determine if the net capital gain on the sale of the credit asset is more
or less than the income associated with the angel investor credit calculated in
Step 1.
$180,000 (net capital gain) is more than $150,000 (income associated with
the credit).
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Step 3: Determine the reduction of the net capital gain eligible for the 44%
deduction.
Since the net capital gain on the sale of the credit asset is more than the income
associated with the original credit amount, the taxpayer must reduce the net
capital gain eligible for the 44% deduction by the income associated with the
credit amount, in this case, $150,000.
$180,000 (net capital gain) - $150,000 (income associated with the angel
investor credit) = $30,000 (net capital gain that qualifies for the 44%
deduction).
Example 3: Sale of a credit asset sold at a gain and a non-credit asset sold at a
loss.
Facts: An angel investor taxpayer invests $30,000 in a qualified business and is
eligible to claim a credit of $10,500 (35% X $30,000). After a year, the angel
investor taxpayer sells the investment for $210,000 recognizing a capital gain of
$180,000 ($210,000 sales price - $30,000 basis). The taxpayer also has a capital
loss on a non-credit asset of $160,000. As a result, the angel investor taxpayer has
a total net capital gain of $20,000 ($180,000 net capital gain on credit asset $160,000 capital loss on non-credit asset).
The reduction of the net capital gain eligible for the 44% deduction is calculated as
follows:
Step 1: Determine the income associated with the angel investor credit.
Credit Amount / 7% = Income Association with the Credit
10,500 / 7% = $150,000
Step 2: Determine if the net capital gain on the sale of the credit asset is more
or less than the income associated with the angel investor credit calculated in
Step 1.
$20,000 (net capital gain) is less than $150,000 (income associated with
the credit).

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Step 3: Determine the reduction of the net capital gain eligible for the 44%
deduction.
Since the net capital gain on the sale of the credit asset is less than the
income associated with the original credit amount, the net capital gain
eligible for the 44% deduction is reduced by the entire $20,000 net capital
gain. As a result, none of the gain is eligible for the 44% deduction.

7. Q. How is the reduction of the net capital gain eligible for 44% deduction computed
   if multiple credit assets are sold in a single year?
   A. An angel investor taxpayer must attribute the net capital gain on credit assets to
   each credit asset in the ratio of the long-term capital gain on each credit asset over
   the total of all long-term gains on credit assets to determine the net capital gain
   reduction. Code Section 11-44-65(B).
   Example 1: The sale of multiple credit assets which reduce the net capital gain
   eligible for the 44% deduction to zero.
   Facts: An angel investor taxpayer sells three credit assets he has owned for more
   than a year. The sales price, angel investment, gain or loss on sale, and credit
   amount for each asset are:
   Asset
   A

Sales
Price
$30,000

Angel
Investment
$20,000

Long-term
Gain/(Loss)
$10,000

Credit
Amount
$7,000

B

$60,000

$30,000

$30,000

$10,500

C

$20,000

$40,000

($20,000)

$14,000

Net long-term gain

$20,000

The reduction of the net capital gain eligible for the 44% deduction is calculated as
follows:
Step 1: Determine the income associated with each angel investor credit.
Credit Amount / 7% = Income Association with the Credit
Asset A: $7,000 / 7% = $100,000
Asset B: $10,500 / 7% = $150,000

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Asset C: $14,000 / 7% = $200,000
Step 2: Determine the net capital gain attributable to each angel investment.
Asset Gain / Total of Long Term Capital Gains x Net Long Term Gain
Asset A: 10,000/40,000 X $20,000 = $5,000
Asset B: 30,000/40,000 X $20,000 = $15,000
Asset C: N/A since there was a loss on the sale of Asset C
Step 3: Determine if the net capital gain calculated in Step 2 is more or less
than the income associated with the angel investor credit calculated in Step 1.
Asset A: $5,000 (gain attributable to Asset A) is less than $100,000
(income associated with the credit)
Asset B: $15,000 (gain attributable to Asset B) is less than $150,000
(income associated with the credit)
Asset C: N/A since no gain was attributable to the sale of Asset C
Step 4: Determine the reduction of the net capital gain eligible for the 44%
deduction.
Asset A: Since the net capital gain attributable to Asset A ($5,000) is
less than the income associated with the original credit
($100,000), the net capital gain that qualifies for the 44%
deduction is reduced by the entire $5,000.
Asset B: Since the net capital gain attributable to Asset B ($15,000) is
less than the income associated with the original credit
($150,000), the net capital gain that qualifies for the 44%
deduction is reduced by the entire $15,000.
The net capital gain of $20,000 is reduced by $5,000 from
Asset A and $15,000 from Asset B. As a result, none of the
$20,000 net capital gain is eligible for the 44% deduction.

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Example 2: Sale of multiple credit assets which partially reduces the 44% net
capital gain deduction.
Facts: An angel investor taxpayer sells three credit assets he has owned for over a
year. The sales price, angel investment, gain or loss on sale, and credit amount for
each asset are:
Asset
A

Sales
Price
$180,000

Angel
Investment
$20,000

Long-term
Gain/(Loss)
$160,000

Credit
Amount
$ 7,000

B

$60,000

$30,000

$ 30,000

$10,500

C

$20,000

$40,000

($20,000)

$14,000

Net long-term gain

$170,000

The reduction of the net capital gain eligible for the 44% deduction is calculated as
follows:
Step 1: Determine the income associated with the angel investor credit.
Credit Amount / 7% = Income Association with the Credit
Asset A: $7,000 / 7% = $100,000
Asset B: $10,500 / 7% = $150,000
Asset C: $14,000 / 7% = $200,000
Step 2: Determine the net capital gain attributable to each angel investment.
Gain / Sum of Long Term Capital Gains x Net Long Term Gain
Asset A: 160,000/190,000 X $170,000 = $143,158
Asset B: 30,000/190,000 X $170,000 =

$26,842

Asset C: N/A since there was a loss on the sale of Asset C
Step 3: Determine if the net capital gain calculated in Step 2 is more or less
than the income associated with the angel investor credit calculated in Step 1.
Asset A: $143,158 (gain attributable to Asset A) is more than
$100,000 (income associated with credit amount)

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Asset B: $26,842 (gain attributable to Asset B) is less than $150,000
(income associated with credit amount)
Asset C: N/A since no gain was attributable to Asset C
Step 4: Determine the reduction of the net capital gain eligible for the 44%
deduction.
Asset A: Since the net capital gain attributable to Asset A ($143,158) is
more than the income associated with the credit amount
($100,000), the gain that qualifies for the 44% deduction must
be reduced by the income associated with the credit
($143,158 - $100,000 = $43,158). $43,158 of the net capital
gain would qualify for the 44% deduction.
Asset B: Since the net capital gain attributable to Asset B ($26,842) is
less than the income associated with the original credit
($150,000), none of the $26,842 net capital gain attributable
to Asset B qualifies for the 44% deduction.
Summary: $170,000 (total net capital gain) - $100,000 (income
associated with credit on Asset A) - $26,842 (income associated with
credit on Asset B, limited to the gain on Asset B) = $43,158 (net capital
gain that qualifies for the 44% deduction).

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Example 3: Sale of multiple credit assets and a long-term capital gain from the
sale of a non-credit asset.
Facts: An angel investor taxpayer sells three credit assets and one non-credit asset
he has owned for over a year. The sales price, angel investment, gain or loss on
sale, and credit amount for each asset are:
Asset

Sales
Price

Angel
Investment

Long-term
Gain/(Loss)

Credit
Amount

A

$180,000

$20,000

$160,000

$7,000

B

$60,000

$30,000

$ 30,000

$10,500

C

$20,000

$40,000

($ 20,000)

$14,000

Net long-term gain

$170,000

Net long-term capital
gain on non-credit asset:

$50,000

Total net capital gain:

$220,000

The reduction of the net capital gain eligible for the 44% deduction is calculated as
follows:
Step 1: Determine the income associated with the angel investor credit.
Credit Amount / 7% = Income Association with the Credit
Asset A: $7,000 / 7% = $100,000
Asset B: $10,500 / 7% = $150,000
Asset C: $14,000 / 7% = $200,000
Step 2: Determine the net capital gain attributable to each angel investment.
Gain / Sum of Long Term Capital Gains x Net Long Term Gain on Credit
Assets
Asset A: 160,000/190,000 X $170,000 = $143,158
Asset B: 30,000/190,000 X $170,000 =

$26,842

Asset C: N/A since there was a loss on the sale of Asset C
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Step 3: Determine if the net capital gain calculated in Step 2 is more or less
than the income associated with the angel investor credit calculated in Step 1.
Asset A: $143,158 (gain attributable to Asset A) is more than
$100,000 (income associated with credit)
Asset B: $26,842 (gain attributable to Asset B) is less than $150,000
(income associated with credit)
Asset C: N/A since no gain was attributable to the sales of asset C
Step 4: Determine the reduction of the net capital gain eligible for the 44%
deduction.
Asset A: Since the net capital gain attributable to Asset A ($143,158) is
more than the income associated with the credit ($100,000),
the net capital gain that qualifies for the 44% deduction must
be reduced by the income associated with the credit
($143,158 - $100,000 = $43,158). $43,158 of the net capital
gain would qualify for the 44% deduction.
Asset B: Since the net capital gain attributable to Asset B ($26,842) is
less than the income associated with the original credit
($150,000), none of the $26,842 net capital gain attributable
to Asset B qualifies for the 44% deduction.
Non-credit Asset: The entire gain $50,000 gain qualifies for the 44%
deduction.
Summary: $220,000 (total net capital gain) - $100,000 (income
associated with credit on Asset A) - $26,842 (income associated with
credit on Asset B, limited to the gain on Asset B) = $93,158 (net capital
gain that qualifies for the 44% deduction).

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Example 4: Sale of multiple credit assets and a capital loss on the sale of a noncredit asset.
Facts: An angel investor taxpayer sells three credit assets he has owned for over a
year. The sales price, angel investment, gain or loss on sale, and credit amount for
each asset are:
Asset
A

Sales
Price
$180,000

Angel
Investment
$20,000

Long-term
Gain/(Loss)
$160,000

Credit
Amount
$7,000

B

$60,000

$30,000

$30,000

$10,500

C

$20,000

$40,000

($20,000)

$14,000

Net long-term gain

$170,000

Capital loss on a
non-credit asset:

($160,000)

Net long-term capital gain

$10,000

The reduction of the net capital gain eligible for the 44% deduction is calculated as
follows:
Step 1: Determine the income associated with the angel investor credit.
Credit Amount / 7% = Income Association with the Credit
Asset A: $7,000 / 7% = $100,000
Asset B: $10,500 / 7% = $150,000
Asset C: $14,000 / 7% = $200,000
Step 2: Determine the net capital gain attributable to each angel investment.
Gain / Sum of Long Term Capital Gains x Net Long Term Gain
Asset A: 160,000/190,000 X $170,000 = $143,158
Asset B: 30,000/190,000 X $170,000 =

$26,842

Asset C: N/A since there was a loss on the sale of Asset C

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Step 3: Determine if the net capital gain calculated in Step 2 is more or less
than the income associated with the angel investor credit calculated in Step 1.
Asset A: $143,158 (gain attributable to Asset A) is more than
$100,000 (income associated with credit amount)
Asset B: $26,842 (gain attributable to Asset B) is less than $150,000
(income associated with credit amount)
Asset C: N/A since no gain was attributable to the sales of asset C
Step 4: Determine the reduction of the net capital gain eligible for the 44%
deduction.
Asset A: Since the net capital gain attributable to Asset A ($143,158) is
more than the income associated with the credit ($100,000),
the net capital gain that qualifies for the 44% deduction must
be reduced by the income associated with the credit
($143,158 - $100,000 = $43,158. $43,158 of the net capital
gain would qualify for the 44% deduction.
Asset B: Since the net capital gain attributable to Asset B ($26,842) is
less than the income associated with the original credit
($150,000), none of the $26,842 net capital gain attributable
to Asset B qualifies for the 44% deduction.
Although $43,158 of net capital gain could qualify for the 44%
deduction if there was at least $43,158 of net capital gain, that amount is
limited to the total net capital gain. In this case, since the total net
capital gain is only $10,000, the maximum amount that can qualify for
the 44% deduction is $10,000.

8. Q. Is there a limit on the amount of capital loss on the sale of an angel investment?
   A. Yes. If an angel investor taxpayer recognizes a net capital loss on the sale or
   exchange of credit assets, the angel investor taxpayer must add to South Carolina
   taxable income the net capital loss on those credit assets up to the amount of the
   angel investor tax credit. Net capital loss is defined in IRC Section 1211 without
   regard to the $3,000 limitation in IRC Section 1211(b)(1). Code Section 11-4465(C).

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Example 1: Net capital loss on sale of credit asset is less that the credit amount.
Facts: An angel investor taxpayer invests $10,000 in a qualified business and earns
a credit of $3,500 (35% x $10,000). The angel investor taxpayer sells the credit
asset for $8,000 resulting in a net capital loss of $2,000 ($8,000 sales price $10,000 basis = $2,000 capital loss).
Since the net capital loss is less than the total amount of the angel investor credit,
the angel investor is required to add the entire net capital loss of $2,000 to South
Carolina taxable income.
Example 2: Net capital loss on sale of credit asset is greater than the credit
amount.
Facts: An angel investor taxpayer invests $10,000 in a qualified business and earns
a credit of $3,500 (35% x $10,000). The angel investor taxpayer sells the credit
asset for $5,000 resulting in a net capital loss of $5,000 ($5,000 sales price $10,000 basis = $5,000 capital loss).
Since the net capital loss is more than the total amount of the angel investor credit,
the angel investor taxpayer is required to add the entire amount of the angel
investor credit of $3,500 to South Carolina taxable income.
Example 3: Capital loss and gain on the sale of credit assets resulting in a net
capital loss.
Facts: An angel investor taxpayer invests $10,000 in a qualified business and earns
a credit of $3,500 (35% x $10,000). The angel investor taxpayer sells the credit
asset for $5,000 resulting in a net capital loss of $5,000 ($5,000 sales price $10,000 basis = $5,000 capital loss). In addition to the capital loss on credit assets,
the angel investor taxpayer had a capital gain on the sale of a credit asset of $2,000
resulting in a net capital loss for all credit assets of $3,000 ($5,000 capital loss on
credit assets + $2,000 capital gain on credit assets).
Since the net capital loss ($3,000) is less than the total amount of the angel
investor credit ($3,500), the angel investor is required to add the capital loss of
$3,000 to South Carolina taxable income.

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9. Q. If the angel investor taxpayer sells his angel investor credit, is he still required to
reduce his 44% deduction or add to South Carolina income a result of a capital
loss as provided in Code Section 11-44-65?
A. Yes. Even if the angel investor taxpayer sells his angel investor credit, when the
taxpayer sells his credit assets, he must still reduce his 44% net capital gain
deduction or add to South Carolina taxable income as a result of a capital loss as
provided in Code Section 11-44-65.
The transferee of the credit is not liable for the reduction to the 44% deduction or
the capital loss add-back.
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Rick Reames III
Rick Reames III, Director
October 9
, 2014
Columbia, South Carolina

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