The so-called angel tax credit may be the most anticipated of the new incentives, due largely to similar programs already in existence in neighboring states.
Minnesota’s newly created angel tax credit creates a refundable reduction in a taxpayer’s income taxes by 25 percent of a qualifying investment. The investment must be in cash and invested in a qualifying small emerging high technology business. The business must either:
? use proprietary technology to add value to a product, process or service in a qualified high-technology field;
? be researching or developing a proprietary product, process or service in a qualified high-technology field;
? or be researching, developing or producing a new proprietary technology for use in agriculture, tourism, forestry, mining, manufacturing or transportation.
In addition, the business must have its headquarters in Minnesota and have fewer than 25 employees, with at least 51 percent of the employees and 51 percent of total payroll based in the state.
The business must pay all employee wages of at least 175 percent of the poverty level (currently $18.55/hour), with the exception of executives, officers, board members and owners of at least 20 percent of the business. Businesses must have been operating for no more than 10 years and cannot have received previous equity investments exceeding $2 million.
Generally, qualified investors must either be federally accredited (which means they pass specific federal guidelines having to do with wealth and income) or be investing in certain exempt filings. The credit is unavailable to an investor or member of an investor’s family who derives more than 50 percent of his or her annual gross income from the qualified small business in which he or she proposes to invest. Businesses, investors and funds must apply for and receive certification from the Minnesota Department of Employment and Economic Development prior to making the cash investment.
The minimum qualifying investment is at least $10,000 by individuals and at least $30,000 by qualifying funds. A qualifying fund must be organized as a pass-though entity such as a partnership, limited liability company or S corporation and have at least three owners. A qualifying fund must certify that it invests in qualified small businesses, is organized as a pass-through entity, and has at least three separate investors who are all “qualified investors.”
The maximum credit is $125,000 per year per individual or $250,000 per year for married filing joint taxpayers. The maximum amount of credits per investee business is $1 million in aggregate. The program’s funding limit is $11 million for 2010 and $12 million per year for the years 2011 through 2014. Credits will be available on a first come, first served basis.
If the investment is not held by the individual investor or fund for at least three years, previously taken angel tax credits must be repaid by the investor with any unused credits revoked. The three-year holding period is not required if the investment becomes worthless, if the business is sold, if at least 80 percent of its assets are sold, or if the business goes public and begins trading its stock over an exchange.
The credit is revoked and credit amounts previously taken by investors must be repaid by the business if it fails to meet the 51 percent of employees and 51 percent of payroll in Minnesota tests during the first five-year reporting period. The revocation amount to be repaid declines by 20 percent per year until it is reduced to 0 percent in year six.
A report including a $100 filing fee must be submitted annually to the Minnesota Department of Employment and Economic Development for three years following the investment for individuals and five years following the investment for funds. The annual report must certify to the department that the investment would be in a transaction registered under Minnesota’s small corporate offering registration or exempt from registration.
As with all tax advice, the reader should consult his or her own tax adviser for application of the ideas and concepts discussed in this article.