September 29, 2010 |
2010-R-0376 | |
STATE ANGEL INVESTOR TAX CREDIT PROGRAMS | ||
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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 None of the states repealed the credits, but two allowed them to expire—Hawaii, in 2010, and Louisiana in 2009.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.
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Attachment 1: Enactment and Termination Dates for State Angel Investor Tax Credit Programs
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 |
|
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 |
|
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 |
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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 |
(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 |
|
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 |
|
(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 |
|
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 |
