Location:
CORPORATIONS; TAXATION;
Scope:
Connecticut laws/regulations; Other States laws/regulations; Program Description;

OLR Research Report


September 29, 2010

 

2010-R-0376

STATE ANGEL INVESTOR TAX CREDIT PROGRAMS

By: John Rappa, Chief Analyst

You asked us to describe state angel investor tax credit programs and identify the states that adopted such programs after 2004.

SUMMARY

At least 21 states offer income and business tax credits to angel investors for investing in newly-formed, technology-related businesses. These investors tend to be wealthy individuals looking for opportunities to develop and establish new businesses in areas that interest them. Public and private venture capital agencies, on the other hand, tend to invest in research and development that could lead to new products or in young, emerging businesses whose early sales promise quick returns.

Like other tax credit programs, angel investment tax credit programs use tax breaks instead of appropriated funds to stimulate private investment. The angel investment tax credit programs across states have the same components (e.g., credit amount, investment caps), but differ based on:

● the amount of credit investors can claim (e.g., 100% in Hawaii);

● limits or caps on the amount of credits available per year or for the entire program (e.g., $18 million annual cap in Wisconsin, $45 million aggregate cap in Ohio);

● criteria used to qualify investors (e.g., individuals with high net worth in Kansas, technology-based businesses meeting annual revenue or asset limits in Ohio, and investments remaining at risk for a specified time in Maine and Vermont);

● additional credits for investing in targeted-areas (Maine, state-designated distressed areas) or specified technologies (Wisconsin, nanotechnology); and

● whether investors must claim a credit during the tax year they made the investment or a portion of the credit over a specified number of years.

Eleven of the 21 states enacted angel investor tax credits since 2005 (Arizona, 2005; Arkansas, 2007; Colorado, 2010; Connecticut, 2010; Kansas, 2005; Louisiana, 2005; Maryland, 2005; Minnesota, 2010; New Mexico, 2007; Rhode Island, 2006; and Wisconsin, 2005). Most of the states authorized the credits for a specified time. For example, Connecticut's credits expire in FY 2015. None of the states repealed the credits, but two allowed them to expire—Hawaii, in 2010, and Louisiana in 2009. Attachment 1 lists the enactment and termination dates, where applicable, for the tax credits.

TAX CREDITS FOR ANGEL INVESTORS

Credit Amounts and Limits

At least 21 states offer income and business tax credits for angel investments, according to on-line and literature searches. As Attachment 2 shows, the credits range from 15% of the investment in Colorado to 100% in Hawaii. Some states offer higher credits for investing in businesses located in rural or economically distressed areas (Arizona and Maine, respectively) or that are socially or economically disadvantaged (Ohio). Vermont's 3% credit applies to capital gains income.

All but three states (Hawaii, Oklahoma, and Rhode Island) limit the total amount of credits available to all investors. Most impose an annual or aggregate cap. Annual caps range from $750,000 in Colorado to $18 million in Wisconsin. Aggregate caps range from $20 million in Arizona and Kansas to $45 million in Ohio. Kansas imposes a $20 aggregate cap in addition to a $6 million annual cap. Some states limit the amount of investment for which individual investors may claim credits (Arizona, Kansas, Louisiana, Maine, New Mexico, North Carolina, North Dakota, Ohio, Vermont, and Wisconsin.)

Eligible Investors and Investments

As Attachment 2 shows, most of the states apply the credits to personal income and business taxes. Kansas, Louisiana, and Wisconsin limit the credit to personal income taxpayers with a high net worth.

The states use different criteria to determine if an investment qualifies for a credit. Most limit the credit to investments in technology-based companies that meet annual revenue or net asset limits. Minnesota sets a minimum $10,000 investment floor for individual investors while Kentucky sets a minimum $500,000 investment floor. Hawaii, Ohio, and Kansas set maximum investment ceilings ($2 million, $250,000 or $300,000, and $50,000, respectively).

Louisiana and Wisconsin take a different tack. The former limits the credit to investments in early stage businesses that derive most of their revenue from customers in other states. Wisconsin limits the credit to small businesses that have been operating in the state for less than 10 consecutive years.

Besides limiting the types of businesses that qualify an investor for a credit, three states also require the investment to meet specific criteria. Maine and Vermont require the investment to remain at risk for at least five years. Vermont specifically prohibits the investor from receiving any payback during that period or earning more than a reasonable rate of interest. Ohio prohibits principal payments during the first three years following the investment and limits dividend and interest payments during that period to 10% of the investment.

Schedule for Claiming the Credits

Most of the states require taxpayers to claim a portion of the credit over a specified period, which ranges from two years in Wisconsin to five in Hawaii and Louisiana. Some allow taxpayers to carry forward portions of a credit they cannot use in a tax year. The carry-forward period ranges from three years in Arizona to 15 years in Maine.

JR:df

Attachment 1: Enactment and Termination Dates for State Angel Investor Tax Credit Programs

State Angel Tax Credit Programs

History

Enacted

Sunset

Arizona Small Business Capital Investment Tax Incentive Program
(Ariz. Rev. Stat. 41-1518)

2005

2011

Arkansas Equity Investment Tax Credit Incentive Program
(Ark. Code Ann. 15-4-3303 ) 

2007

2019

Colorado: Colorado Innovation Investment Tax Credit
(Colo. Rev. Stat 24-48.5-112)

2010

2011

Connecticut Angel Investors Tax Credit Program (PA 10-75)

2010

2014

Hawaii: Hawaii High Technology Business Investment Tax Credit
(Haw. Rev. 235-110.9) 

2001

2010

Indiana Venture Capital Investment Tax Credit (Ind. Code 6-3.1-24)

2003

2012

Kansas Angel Investor Tax Credit (Kan. Stat. Ann. 74-8131)

2005

2016

Kentucky Investment Fund Tax Credit (Ky. Rev. Stat. Ann
(154.20-250 - 154.20-284)

1998

Not Applicable (NA)

Louisiana Angel Investor Tax Credit (La. Rev. Stat. 47:6020)

2005

2009

Maine Seed Capital Tax Credit (Me. Rev. Stat. Ann. 36 5216-B)

1988

NA

Maryland Biotechnology Investment Tax Credit (Md. Code Ann. 10–725)

2005

NA

Minnesota Angel Investment Tax Credit
(2010 Minn. Sess. Laws Chapter 216)

2010

2014

New Mexico Angel Investment Tax Credit (N.M. Stat. 7-2-18.17)

2007

2011

North Carolina Qualified Business Investment Tax Credit
(N.C. Gen. Stat 105-163.010)

2002

2011

North Dakota Seed Capital Investment Tax Credit (N.D. Cent. 57-38.5)

1993

NA

Ohio Technology Investment Tax Credit (Ohio Rev. Code 122.152)

1996

NA

Oklahoma Small Business Capital Credit (Okla. Stat. 68 2357.63a)

2001

2012

Rhode Island Rhode Island Innovation Tax Credit
(R.I. Gen. Laws 44-63-2)

2006

2016

Vermont Angel Venture Capital Tax Credit (32 Vt. Stat. Ann. 5930v)

2003

NA

Virginia Qualified Equity and Subordinated Debt Investments Credit
(Va. Code 58.1-339.4)

1998

NA

Wisconsin Angel Investor Tax Credit (Wis. Stat 71-.07(5d)

2005

NA

Source: Matrix of States Offering Angel Investment Tax Credits, Angel Capital Education Foundation (from paper by Ezugo Nwosu, Carnegie Mellon University), April, 2010

Attachment 2: Comparison of State Tax Credits for Angel Investors

State

Credit Amount

Investment Caps

Eligible Investments

Eligible Investors

Schedule for Claiming Credits

Arizona

(Ariz. Rev. Stat. 41-1518)

30% or 35% income tax credit for investing in (1) small business or (2) bioscience or rural area business, respectively

$20 million program cap

$250,000 annual cap per investor

Minimum $25,000 invested in early-stage companies with net assets under $2 million

Individuals, LLCs, Sub-Chapter S corporations, or partnerships

Three-year schedule, with three-year carry-forward for unused credit amounts

Arkansas

(Ark. Code Ann. 15-4-3303 ) 

Credit against personal and business income taxes equal to 33.3% of state-approved investment

Credit amount can't exceed 50% of tax liability after all other credits and reductions have been taken

$6.25 million per year

Businesses meeting specified criteria, including those

occupying incubators,

receiving equity or seed capital investments, and

participating in federal Small Business Innovation Research Program.

Individuals and businesses

No schedule

10-year carry-forward for unused credits

Colorado

(Colo. Rev. Stat 24-48.5-112)

15% up to $20,000 against personal and business income taxes

$750,000 per year

Minimum $25,000 equity security made in 2010 in Colorado-based businesses:

primarily engaged in R&D or manufacturing new technologies, products, and services

operating for at least five years,

with annual revenue under $2 million and total assets under $5 million

with at least two non-administrative full-time employees

with 50% of gross assets and employees located in state

Individuals, LLCs, partnerships, S corporations, or other entities except C corporations

Investors and affiliates control no more than 30% of business receiving the investment

No schedule

Five-year carry-forward for unused credits


Connecticut
PA 10-75

25% personal income tax credit, up to $250,000

$6 million per year in FY 11-13 and $3 million in FY 14

Connecticut-based start-up, technology-based businesses that:

gross under $1 million a year,

have fewer than 25 employees,

operated in state for at least seven consecutive years, and

received less than $2 million in investments from eligible angel investors.

Individuals, groups, and businesses (1) not subject to corporation business tax (e.g., S corporations) and (2)

that control no more than 50% of the business receiving the investment

No schedule

Five-year carry-forward for unused credits

Hawaii

(Haw. Rev. 235-110.9) 

100% credit against income, corporate, franchise, and insurance premium taxes

No caps

Up to $2 million invested in business doing R&D in Hawaii

Individuals, banks, and insurance companies

Five-year schedule

Unused credits carried forwarded until fully claimed

Indiana

(Ind. Code 6-3.1-24)

Income, sales, financial institutions, and insurance premium tax credit equal to 20% of investment or $500,000, whichever is less

$12.5 million annually

Motor racing, R&D, technology transfer, or economic base firms:

annual revenues under $10 million in the two years prior to the investment

50% of employees live in the state

75% of assets in the state

Individuals and businesses

No schedule

Unused credits carried forward for up to five years

Kansas

(Kan. Stat. Ann. 74-8131)

Income tax credit equal to lesser of $50,000 or 50% of investment

$20 million program cap

$6 million annual cap

$250,000 annual investor cap

Cash investments up to $50,000 in early stage commercial development companies

High net worth individuals

No schedule

Unused credits carried forward until used


Kentucky
(Ky. Rev. Stat. Ann (154.20-250 - 154.20-284)

40% business and corporate income tax credit

$ 40 million aggregate cap

$ 8 million per fund

Minimum $500,000 cash investment in state-certified investment fund

Maximum 30% investment per business

Small businesses:

Fewer than 100 employees

Net worth under $ 5 million (or $10 million if knowledge-based business) or net income under $3 million in prior two years

50% assets, operations, and employees in state

Investors investing in state-certified funds

50% of total credit per year

Unused credits carried forward up to 15 years

Louisiana

(La. Rev. Stat. 47:6020)

50% income or corporate franchise tax

$1 million per year per business, up to $2 million

$5 million annual cap

Angel pools and individuals meeting specified net worth criteria

Investments in early stage wealth creating business deriving at least 50% of revenue from out-of-state customers

High net worth individuals

Five-year schedule

Unused amounts must be used within 11 years after the investment

Maine

(Me. Rev. Stat. Ann. 36 5216-B)

60% income tax credit for investments in “distressed area businesses;” 40% for those outside these areas

Credit amount cannot exceed 50% of tax due

Direct Investment:

Investors limited to $500,000 per business

Businesses limited to $5 million for credit eligible investments

Investors investing through funds limited to:

$1 million per fund in any consecutive three-year period and

$5 million for investments in all funds

Business

Annual gross sales under $3 million

Type:

manufacturer

high tech

service firm deriving at least 60% of its sales from out of state

attract significant permanent capital to state

Investment must remain at risk for at least five years; special rules for investments through a fund

Individuals (including people owning less than 50% of the business receiving the investment) and venture funds (limited to $1 million per fund per consecutive three-year period)

25% per year, beginning with first year after investment was made; fund investors can claim up to 20% in investment year

Credit amount cannot exceed 50% of tax owed

For investments in specified funds, 20% of credit may be claimed at time of investment

15-year carry-forward


Maryland
(Md. Code Ann. 10–725)

50% income and business tax credit up to $250,000

Credit eligible investment per company capped at 15% of total appropriation to Maryland Biotechnology Investment Tax Credit Reserve Fund

Total annual credit limited to fund's annual appropriation

State-certified biotechnology companies:

headquartered and operating in state

fewer than 50 employees

operating for less than 10 years

Individuals and entities investing at least $25,000 in eligible companies

State refunds portion of credit that exceeds taxes owed

Minnesota

(2010 Minn. Sess. Laws Chapter 216)

25% individual income tax credit up to $125,000 per individual and up to $250,000 for married and joint filers

$11 million per year FY 10

$12 million per year in FY 2011-14

Minnesota-based technology companies:

Fewer than 25 employees

51% of employees and payroll in Minnesota

Wages at least 175% of poverty level

Operating for at least 10 years

Received no more than $2 million in private equity

Generated no more than $4 million in credit eligible investments

Provided no more than 50% of investor's gross income

Minimum Investments:

Individuals: $10,000

Funds: $30,000

State certified investors and investment funds

State refunds portion of credit that exceeds taxes owed

New Mexico

(N.M. Stat. 7-2-18.17)

25% income tax credit up to $100,000

Taxpayers limited:

$25,000 per investment

two investments per year, each in a different business

three investments per business

Total annual credit capped at $750,000

New Mexico-based high technology businesses

100 or fewer full-time employees

Annual gross revenues under $5 million

Individuals

No schedule

Three-year carry-forward


North Carolina

(N.C. Gen. Stat 105-163.010)

25% income tax credit up to $50,000

$7.5 million annual cap

$50,000 per investor per year

Eligible businesses:

Newly formed or grossed less than $5 million in last fiscal year

Manufacturing, processing, wholesaling, R&D, or service

Individuals and pass-through entities (e.g., S corporations)

No schedule

Five-year carry-forward

North Dakota

(N.D. Cent. 57-38.5)

45% income tax credit

$3.5 million annual cap

$500,000 per business

Eligible businesses:

Principal offices and majority operation in state

Non agriculture, economic base (does most of its business outside state)

Majority employees state residents

Individuals and pass-through entities

Credit must be claimed in first year

Four-year carry-forward

Ohio

(Ohio Rev. Code 122.152)

Credit against income, corporation, franchise, intangibles, and public utility tax: 30%, up to $90,000 for investments in specified types of firms; 25%, up to $62,500 for investments in other types of firms

$1.5 million per business

Total $45 million cap

Business's gross revenue or net book value under $2.5 million in most recently completed fiscal year

Business Type: R&D and specified technology-related firms

At-risk investments up to $250,000 ($300,000 for investments in specified types of firms) with no repayment of the principal for three years

Annual combined dividend and interest payments cannot exceed 10% of the investment for the first three years after the investment was made

Individuals (excluding senior executives of businesses receiving the investment), groups, and businesses

No schedule

15-year carry-forward

Oklahoma

(Okla. Stat. 68 2357.63a)

20% income tax credit for investment made through state-certified small business capital company

No caps

Eligible businesses:

Oklahoma–based business in which small business capital company no more than 50% of business

Meets federal small business definition for appropriate business sector

Engages in:

Agriculture

Construction

Manufacturing

Wholesale

Services

Individuals and pass-through entities

No schedule

Three-year carry-forward


Rhode Island
(R.I. Gen. Laws 44-63-2)

50% personal and business tax credit up to $100,000

No caps

Rhode Island-based business with gross revenues under $1 million in the prior two calendar years and engages in:

Biotechnology & life science

Communications and information technologies

Financial services

Marine and defense manufacturing

Professional, technical, and educational services

Industrial and consumer product manufacturing and design

Investors and businesses, including their executives and employees

No schedule

Three-year carry-forward

Vermont

(32 Vt. Stat. Ann. 5930v)

3% capital gains income tax credit

Investment between $50,000 and $200,000

Business

Annual gross sales $3 million or less

Type:

manufacturer

R&D

produce a product or deliver a service mostly to out-of-state customers

Investment:

At risk, no guarantee

No payback for at least five years provide no more than a “reasonable rate of interest”

Individuals, partnerships, LLCs, and S corporations

Not applicable—credit applies to the capital gain

Virginia

(Va. Code 58.1-339.4)

50% income tax credit

$5 million per year for all investments

Credits prorated if annual requests exceeds $3 million

Credit amount cannot exceed lesser of $50,000 or liability for that tax year

Virginia-based businesses:

received less than $3 million in equity investments

primarily engaged in information technology, manufacturing, biotechnology, and other specified technology fields

does not employ or compensate the investor for services

Individuals

15-year carry forward


Wisconsin
(Wis. Stat 71-.07(5d)

25% income tax credit

Total $30 million cap

Total annual credits $5.5 million until 2010; $18 million per year thereafter

Up to $500,000 in equity purchases or other expenditures; extra $250,000 after 2010 for nanotechnology-related investments

Manufacturing, agriculture, product assembly and processing, and R&D businesses that have:

fewer than 100 employees, more than half of whom live in Wisconsin,

been operating in state for less than 10 consecutive years, and received less than $1 million in investment tax credits

Individual and groups (i.e., angel networks)

12.5% per year for two consecutive years, beginning with year certified by state