A detailed flowchart to help determine eligibility for this tax credit is available, here.
Governor Pawlenty signed into law the “Small Business Investment Tax Credit” (the “Angel Credit”). Investors in qualifying small businesses are eligible for a tax credit equal to 25 percent of their investment subject, of course, to various limitations. The law also allows taxpayers to earn this credit by making indirect investments in eligible businesses—they can invest in a qualifying fund which invests in such businesses.
The investor receives a credit equal to 25 percent of the amount invested, subject to a maximum per business over the life of the business of $1 million and an annual maximum per investor of $125,000 ($250,000 for taxpayers filing joint returns). Only cash investments for equity qualify for the credit.
The credit is subject to cancellation and the investor will need to repay any credit upon disposing of the investment prior to the end of the second calendar year after the year of investment. The investor will not be required to repay the credit if the business fails, sells substantially all of its assets or goes public.
A business which has been allocated credits must file annual reports confirming its ongoing compliance with requirements related to its location, the location of employees, its ongoing involvement in innovation, and compliance with certain payroll guidelines. While a business will be subject to a fine if it fails to file the report, a business that leaves Minnesota (i.e. fails to employ a majority of its employees and pay more than half of its payroll here) will be required to repay a portion of the credit allocated to its investors. The portion required to be repaid starts at 100 percent and is reduced by 20 percent each year.
The credit is only available for investments in businesses that are “engaged in, or committed to engage in, innovation in Minnesota.” In order to be eligible, the company’s primary business activity must be one of the following:
- “using proprietary technology to add value to a product, process or service in a qualified high-tech field;”
- “researching or developing a proprietary product, process or service in a qualified high-tech field;” or
- “researching, developing or producing a new technology for use in the fields of tourism, forestry, mining, manufacturing or transportation.”
The legislature authorized the grant of credits of $11 million for the remainder of 2010 and $12 million per year for each of the next four years. Unallocated credits will carry forward and be available in later years. The credit will be available very soon. Applications for qualification as a fund may be made beginning August 1. Applications by investors, including by eligible funds, and applications by companies may be made beginning September 1.
In order to be eligible for the credit, both the business and the investor (or investment fund) must meet numerous additional requirements.
Revisions made in response to my testimony (follow this link to read testimony) helped broaden eligibility for the credit. Particularly, the bill was amended so that the credit is available not only to accredited investors but also to non-accredited investors in most private placements and to investors in SCOR offerings (a short-form public offering for early-stage companies).
In light of Minnesota’s significant budget issues, it was clear that the credit could not be a “blank check” available to any young company but, instead, needed to be focused on businesses most likely to benefit the state economy and where the tax credit is most likely to spur investment. Nonetheless, I remain concerned that the restrictive and complicated requirements, particularly some of the circumstances under which the credit can be lost after the investment has been made, will make the credit less effective in encouraging investment in the businesses that could benefit the most, earlier stage companies.