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Bill Summary · HB 325

Overview

HB 325 (2026 Regular Session, Kentucky) proposes changes to and expansion of Kentucky’s Angel Investor Program, creating and regulating an angel investor tax credit and related program administration. The bill aims to stimulate economic development by increasing investments in qualifying small businesses, particularly knowledge-based and high-tech ventures, through tax incentives, reporting requirements, and expanded program governance.

Main purpose and intent

  • Establish and expand an angel investor tax credit program to encourage investments in qualified small businesses.
  • Provide a framework for certifying qualified small businesses, qualified investors, and qualified investments.
  • Create reporting and recapture mechanisms to monitor program effectiveness and ensure compliance.
  • Enable transferability of credits between investors and taxpayers, with safeguards around liability and recapture.

Key provisions and changes

Angel investor tax credit (KRS 141.396)

  • The credit is nonrefundable and applied against the individual tax liability under KRS 141.020.
  • The maximum credit a taxpayer may claim in a taxable year is 50% of the total amount of credit awarded or transferred to that taxpayer.
  • Unused credits can be carried forward up to 15 years; no backdating or carryback allowed.
  • Credits cannot be used to offset interest, penalties, or other additions to tax; the holder of the credit assumes related liabilities.
  • Credits may be transferred by a qualified investor to any individual taxpayer, with notice to the Department and compliance with existing transfer rules.
  • Taxpayers claim the credit on their tax return following the Department’s instructions.
  • Recapture provisions: the Department must recapture credits if the Authority finds recapture is required under KRS 154.20-240.
  • Data reporting: by May 1 of each year, the Department and the Cabinet for Economic Development must report on multiple metrics related to angel investments and credits claimed (business demographics, investment totals, job creation, locations, etc.). If data are not currently available, they must obtain them.

Qualification criteria (KRS 154.20-234)

  • Qualified Small Business:
    • Net worth ≤ $10 million or net income after federal taxes ≤ $3 million for the prior two fiscal years.
    • Active in a qualified activity in Kentucky.
    • ≤ 100 full-time employees.
    • More than 50% of assets and operations located in Kentucky.
    • No more than $1,000,000 in aggregate qualified investments that allow investors to receive credits.
  • Qualified Investor:
    • An individual (or a disregarded entity via a single-member LLC) who is an accredited investor under SEC Regulation D and not closely related to a large ownership holder in the target business.
    • Ownership limits: ≤ 20% ownership and not employed by the small business prior to investment; must seek a financial return.
  • Qualified Investment:
    • Cash investment of at least $10,000 in a qualified small business, made in compliance with securities laws.
    • Investor receives equity or near-equity instruments (e.g., SAFEs, convertible debt).
  • Additional program guidance: The Authority may establish further requirements and guidelines for implementation and administration.

Investment fund framework (KRS 154.20-254)

  • Definitions for program governance, including:
    • Investment fund, investment fund manager, affiliate relationships, and related terms.
    • Credits are allocated to approved investment funds and passed through to investors as part of the tax credit program.
  • The statute provides a structure for how investment funds participate, how credits are allocated, and the regulatory framework governing fund managers and investors.

Reporting and recapture (KRS 154.20-240)

  • Qualified small businesses that received qualified investments must file an annual report to the Authority, starting February 1 of the year following the award and continuing for four years.
  • Reports must demonstrate continued eligibility (assets in Kentucky, investment limits, active qualified activity) and provide data on jobs, sales, private investment, expansions, and other outcomes.
  • If a business fails to report or fails to meet criteria, the Authority may trigger recapture of the credit from the investor or transferee, with funds returned to the state general fund.
  • Insolvent businesses that cease operations receive a written notification and are exempt from further reporting; unclaimed credits at insolvency time expire.

Who or what would be affected

  • Qualified Small Businesses: eligibility criteria and ongoing reporting requirements impact access to angel investments and potential tax credits.
  • Qualified Investors: eligibility (accreditation, ownership limits, related-party restrictions) and the ability to transfer credits to taxpayers.
  • Taxpayers: individuals with tax liability who may claim up to 50% of the awarded/transferred credits in a given year; credits are nonrefundable.
  • Investment Funds and Fund Managers: governance and compliance requirements under the investment fund framework, including reporting and recapture mechanics.
  • Kentucky economy and workforce: potential impact through increased investments, job creation, knowledge-based and high-tech development, and expanded business activity in Kentucky.

Procedural and timeline aspects

  • Effective scope applies to taxable years beginning on or after January 1, 2015 (existing base for angel investor credit).
  • Annual reporting by qualified small businesses is due February 1 after the year of credit award, continuing for four years.
  • Interim and ongoing data reporting to the Interim Joint Committee on Appropriations and Revenue is mandated, with recurring updates each May 1.
  • Recapture provisions are triggered upon failure to report or failure to maintain eligibility, with revenue redirected to the general fund.
  • The bill as introduced includes an action history indicating referral to committees for consideration.

Potential impacts and considerations

  • Incentivizes private investment in Kentucky small businesses, especially knowledge-based and high-tech ventures.
  • Creates a structured framework for credit transfers, potentially broadening the pool of taxpayers who can participate.
  • Adds administrative and reporting obligations for small businesses, investors, funds, and state agencies.
  • Introduces recapture risk for noncompliance, aligning with program integrity goals.
  • Economic impact depends on administrator effectiveness, investor participation, and the ability of qualifying businesses to meet criteria.

Compiled from official sources — confirm details with the bill’s official record.

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