Beginners’ Guide to the South Carolina Angel Investor Tax Credit

If you are an entrepreneur building a business in South Carolina, or a potential investor who might invest in a South Carolina-based company, you need to know about the South Carolina Angel Investor Tax Credit.

Information on the credit is limited and guides on using it are rare. This article seeks to change that. We cover what the credit is, what companies and investments are eligible, and how you apply for the credit in this Beginners’ Guide to the South Carolina Angel Investor Tax Credit.

What is it? The South Carolina angel investor tax credit is a credit against your South Carolina income tax liability, of up to 35% of the amount you invest in a qualified South Carolina company.

Who can get the credit? The credit is open to any investor that is accredited per SEC rules.

How does an investor get the credit? To qualify, the investor must make a direct cash investment into a company that has been recognized as a “Qualified Business” by the South Carolina Secretary of State.

What companies are Qualified Businesses? To qualify, the company must:

• be less than five years old
• be headquartered in South Carolina
• have 25 or fewer employees in South Carolina
• have gross income under $2 million in any previous fiscal year
• be engaged in manufacturing, processing, warehousing, wholesaling, software development, IT services, R&D, and certain service-related facilities
• complete an application with the SC Secretary of State and receive approval before taking a qualifying investment

How does the investor apply for the credit?

First, the investor makes the investment into the Qualified Business after the company has been qualified by the Secretary of State.

The investor then completes an application (via MyDORWAY) for the credit before December 31st of the year in which the investment is made.

Once the application is successful, the SC Department of Revenue sends the investor a credit award letter. The investor then adds a tax credit claim form to the tax return to use it.

How much credit can be applied for?

For a qualified investment, an investor can claim a tax credit of up to 35% of the investment amount. So, for example, a $10,000 investment would be eligible for up to a $3,500 credit.

This is limited, though, to a maximum of $100,000 for a single taxpayer in a single tax year — so an individual investor can claim a tax credit on up to $285,714 of qualified investments in a single year ($285,714 times 35% = $100,000). Married taxpayers can take $100,000 of credit each (even if they file taxes jointly).

How much credit will be awarded?

A maximum of $5 million of credit can be awarded each year. If valid applications total more than $5 million, all applicants are pro-rated down. The “proration factor” varies in each year: some years there has been no prorating; in the worst year, 2019, applicants received 46% of the amount of credit they expected, so received 16% instead of 35%.

How much credit can be used?

Once the credit is received, the investor can use up to 50% against the taxes due on tax return for the year of the investment. The rest is available to be used in subsequent years, up to 10 years from the year of the investment.

The credit is nonrefundable, which means it can be used to reduce a tax liability but not more than that. So, if you owe $500, the most credit you can use is $500; the rest you must carry forward.

What happens if I can’t use the credit? If you do not have a tax liability and do not expect one over the next ten years, the credit may be sold, exchanged, or transferred. You can transfer all or a portion of the credits you have.

Where can I learn more about the credit?

The original bill that created the credit was The High Growth Small Business Job Creation Act of 2013. This expired at the end of 2019, but was renewed in 2020 to extend through 2025.

The South Carolina Secretary of State has information on the application to be a Qualified Business on the Secretary of State’s website.

The South Carolina Department of Revenue has more information on the credit itself, with an especially helpful set of information in its Revenue Ruling #14–6.

The application form for an investor to apply for an allocation of the tax credit was a Angel Investor Credit 1350 / SC SCH.TC-56A form accessed through the Department of Revenue’s website. If you’re applying for the South Carolina angel tax credit from 2020 onwards, fill out the allocation through the MyDORWAY on the DoR website. Click Here for a tutorial.

Why do I care about this as a founder?

There are two key reasons why founders need to know about and use the credit.

First, the credit is limited to “accredited investors” based on the SEC’s rules, which are generally tied to wealth or income. However, a critical exception is that founders of companies are automatically accredited investors in their own companies.

Therefore you, as a founder of a company, should be able to get a state income tax credit of up to 35% of what you invest (in cash) in your startup. Many founders start companies from an existing job, or initially earn other income too — and all would hope to earn salary over time from this startup, even if you’re not taking much in salary in the early months.

This tax credit can reduce the tax you paid on pre-founding income, consulting work, or future salaries, giving you more resources to develop your high growth startup. (You can hopefully pay lots of capital gains tax later instead!)

So founders need to know about the credit for their personal taxes.

Second, imagine you had a way of making your startup “35%” more attractive to investors. Well, you do. You need to be including this credit in your pitches, and make sure potential investors know they can get the credit for investing in you.

People that regularly invest in South Carolina companies probably know about the credit by now. But “family and friends” who are not generally making angel investments probably don’t. And out-of-state very likely don’t. You need to make sure they know about the potential benefit of the credit to mitigate their risk.

Hopefully that is enough to get you started using the credit. As always when it comes to taxes, there are devils in the details. If you have any questions, check out our “Complete Guide” to the credit coming soon, or give us a call!