Capital Gains Exemption for Technology Businesses
The Exemption: To the extent included in federal adjusted gross income, there shall be subtracted, for taxable years beginning on or after January 1, 2011, any income taxed as a long-term capital gain for federal income tax purposes, or any income taxed as investment services partnership interest income (otherwise known as investment partnership carried interest income) for federal income tax purposes.
Qualification: To qualify for a subtraction under this subdivision, such income must be attributable to:
- An investment in a "qualified business," which is defined as (i) having annual gross revenues of no more than $3 million in its most recent fiscal year, (ii) having its principal office or facility in the Commonwealth, (iii) is engaged in business primarily in* or does substantially all** of its production in the Commonwealth, (iv) has not obtained during its existence more than $3 million in aggregate gross cash proceeds from the issuance of its equity or debt investments (not including commercial loans from chartered banking or savings and loan institutions), and (v) is primarily engaged, or is primarily organized to engage, in the fields of advanced computing, advanced materials, advanced manufacturing, agricultural technologies, biotechnology, electronic device technology, energy, environmental technology, information technology, medical device technology, nanotechnology, or any similar technology-related field determined by regulation by the Department of Taxation to fall under the purview of this section; OR
- An investment in any technology business approved by the Secretary of Technology, provided the business has its principal office or facility in the Commonwealth and less than $3 million in annual revenues in the fiscal year prior to the investment.
* “Primarily engaged in business in the Commonwealth” means 50% or more of the entity’s gross receipts are derived from sources within Virginia.
** “Substantially all of its production in the Commonwealth” means 80% or more of the entity’s expenses are incurred within Virginia.
Valid Dates: This Capital Gains Exemption is valid for investments made between April 1, 2010, and June 30, 2020.
Exception: No taxpayer who has claimed a tax credit for an investment in a “qualified business” under § 58.1-339.4 shall be eligible for the subtraction for an investment in the same business.
How Do I Claim this Exemption?: 1. When filing your taxes fill out the appropriate tax form. The following tax forms & schedules include this exemption: Form 500 ADJ, Form 502 ADJ, Form 760 Schedule ADJ, Schedule 760PY ADJ, and Schedule 763 ADJ. OR 2. Have the business in which you are investing apply through the Secretary of Technology’s office for certification that the company is an approved technology company. And then submit the appropriate tax form.
Is It Possible to Receive a Letter of Pre-Certification Stating that My Company is an Approved Technology Business?: Yes. The Secretary of Technology’s office will pre-certify that your company is an approved technology business.
Does this Pre-Certification Guarantee me the Capital Gains Exemption?: No. To receive the subtraction, your investment in the company must still meet the other conditions of the statute. The Pre-Certification by the Secretary of Technology only means that as of the date of the application for certification the business is an approved technology business. The investor is responsible for ascertaining that all other requirements are met, and that no substantial changes have occurred in the business’s principal office and the nature of its business between the date of application for certification and the date of investment. When filing your taxes, file the appropriate tax from, and if all other legal requirements are met, the subtraction will be granted.
What are the Other Legal Requirements Besides Being an Approved Technology Business?: If you have invested in a business that has been pre-certified by the Secretary of Technology, you must determine that all of the following requirements are met in order to claim the subtraction on your Virginia income tax return:
- You must have made an investment between April 1, 2010, and June 30, 2020.
- You must have held the investment long enough for the gain on the sale to qualify as long-term capital gains under federal law, or you must realize income treated as “investment services partnership interest income (otherwise known as investment partnership carried interest income).
- You must not have claimed a Virginia income tax credit for the investment under § 58.1-339.4 (Qualified equity and subordinated debt investments tax credit).
- The business in which you invested must meet the following requirements:
- The business must have had its principal office or facility in the Commonwealth at the time of the investment.
- The business must have had less than $3 million in annual revenues in the fiscal year prior to the investment.
How to Receive a Certification from the Secretary of Technology’s Office: Fill out and submit our on-line certification application. Your application will be considered and if approved you will be sent a letter of certification.