Good news for individual and corporate investors in Virginia! Recently enacted legislation creates a personal and corporate income tax subtraction for certain income attributable to an investment in a Virginia venture capital account made on or after January 1, 2018, but before December 31, 2023. So income related to such an investment can potentially be excluded from Virginia taxable income.
What is a Virginia venture capital account?
The legislation defines a “Virginia venture capital account” as an investment fund certified by the Virginia Department of Taxation. Certification requires the operator of the investment fund to (i) register the fund with the Department prior to December 31, 2023; (ii) indicate that it intends to invest at least 50% of the capital committed to its fund in qualified portfolio companies; and (iii) provide documentation that it employs at least one investor who has at least four years of professional experience in venture capital investment or substantially equivalent experience. The Department may require an investment fund to provide documentation of the investor’s training, education, or experience to determine substantial equivalency.
What is a qualified portfolio company?
The legislation defines a “qualified portfolio company” as a company that (i) has its principal place of business in the Commonwealth; (ii) has a primary purpose of production, sale, research, or development of a product or service other than the management or investment of capital; and (iii) provides equity in the company to the Virginia venture capital account in exchange for a capital investment. Sole proprietorships are excluded.
Most income attributable to an investment in a Virginia venture capital account is eligible for the subtraction, including investment services partnership interest income, otherwise known as investment partnership carried interest income.
The subtraction is not allowed to an individual income taxpayer for an investment in a company that is owned or operated by a family member or affiliate of the taxpayer. It also is not allowed for an individual income taxpayer who claimed the subtraction for certain long-term capital gains or the qualified equity and subordinated debt investments credit for the same investment.
For a corporate taxpayer, the subtraction is not allowed for an investment in a company that is owned or operated by an affiliate of the taxpayer or that was used as the basis to claim the subtraction for certain long-term capital gains.