ALERT - The Angel Tax Credit

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August 10, 2010

OVERVIEW
Minnesota enacted an Angel Tax Credit in 2010, which provides opportunities for  individual investors and qualifying funds to receive a 25% income tax credit, for investments made in qualified small emerging businesses such as the high-technology field or businesses using new proprietary technology.  There are $11 million in Minnesota tax credits available in 2010 and $12 million available 2011-2014.  The maximum credit per individual investor is $125,000 ($250,000 for married filing jointly).

PURPOSE OF THE ANGEL TAX CREDIT
The Angel Tax Credit is designed to encourage the growth of and foster job creation by small emerging high-technology Minnesota businesses by providing tax incentives for making capital investments in these businesses.  The benefits are significant.

  • Businesses:  Receive the capital they need to grow.
  • Investors:  Lower their risk for investing in new businesses.
  • Minnesota: “Kick-starts” emerging businesses and creates jobs for Minnesotans.

ANGEL TAX CREDIT:  QUALIFYING INVESTORS
Minnesota’s Angel Tax Credit is available for “qualified individuals” and funds.  They must be certified by the Minnesota Department of Employment and Economic Development (“DEED”) prior to making the investment.  In addition, “qualifying individuals” must:

  • Be natural persons (not an entity taxed as an individual),
  • Be accredited investors per SEC Reg. D,
  • Be a non-accredited investor investing in exempt filings per Minn. Stat. § 80A.46(13) or (14) or Minn. Stat. § 80A.50(b),
  • Not receive more than 50% of their annual gross income from the qualifying business,
  • Make a minimum investment of $10,000 cash in the qualifying business,
  • Since the tax credit is refundable, a qualified investor does not need to be a Minnesota resident.

ANGEL TAX CREDIT: QUALIFYING FUNDS
“Qualified investment funds” must:

  • Have a minimum of three qualifying investors,
  • Be organized as a pass-through entity (S-corp., LLC, partnership),
  • Ensure that the investor’s investment in the fund is an equity interest such as common stock, a partnership or membership interest, preferred stock, or an interest bearing note with mandatory conversion to equity,
  • Make a minimum investment of $30,000 cash in the qualifying business.
  • Does not need to be organized in Minnesota.

ANGEL TAX CREDIT: QUALIFYING BUSINESS TYPES
Businesses must apply with DEED prior to receiving an Angel Tax Credit.  A qualifying business is engaged in innovation in Minnesota with its primary business activity as:

  1. Using proprietary technology to add value to a product, process, or service in a qualified high-technology field; or
  2. Researching or developing a proprietary product, process, or service in a qualified high-technology field; or
  3. Researching, developing, or producing a new proprietary technology for use in the fields of agriculture, tourism, forestry, mining, manufacturing, or transportation.

A qualified high-technology field includes:  aerospace, agricultural processing, renewal energy, energy-efficiency and conservation, environmental engineering, food technology, cellulosic ethanol, information technology, materials science technology, nanotechnology, telecommunications, biotechnology, medical devices, pharmaceuticals, diagnostics, biologicals, chemistry, veterinary science, or similar.

ANGEL TAX CREDIT: BUSINESSES EXCLUDED
A business will not qualify if it is an excluded industry.  Excluded business types include:

  • real estate development 
  • hospitality
  • insurance 
  • transportation
  • banking 
  • construction
  • lending 
  • ethanol from corn
  • lobbying 
  • professional services from
    • attorneys
    • accountants 
    • business consultants
    • physicians
    • health care consultants
  • stadium/ball park builders/financers
  • IT consulting
  • political consulting
  • wholesale trade
  • retail trade
  • leisure

Detailed qualification definitions are available on the DEED website at:  http://www.positivelyminnesota.com/Business/Financing_a_Business/DEED_Business_Finance_Programs/Angel_Tax_Credit.aspx.

ANGEL TAX CREDIT: BUSINESSES
In addition to the required business activity and for the exclusion of certain industries, businesses must meet the following criteria:

  • Must be headquartered in Minnesota.
  • A minimum of 51% of employees and payroll must be within Minnesota.
  • Must have fewer than 25 employees but does not need any employees.
  • Employees’ annual wages are at least 175% of the poverty level (currently $18.55/hour).
  • Have been in operation for less than 10 years.
  • Have never received private equity investments of more than $2 million.
  • Has not been disqualified from investment under Minn. Stat. § 80A.50(b)(3) small corporation offering registration disqualifications.
  • Have not generated more than $4 million in investments that received an Angel Tax Credit.  That is, there is a $1 million Angel Tax Credit maximum cap per business.
  • Must be certified by DEED before the investment is made.  The certification filing fee is $150.

ANGEL TAX CREDIT: REPORTING
Not only does the qualified investor or qualified fund need to have its investment approved by DEED prior to receiving an Angel Tax Credit, they must file annual reports with DEED for three years following investment.  In addition, the qualifying business must submit reports to DEED for five years following the investment. The reporting requirements are primarily designed to make sure that the qualifying factors which made the investment possible are maintained.

ANNUAL CERTIFICATIONS ARE REQUIRED
Angel Tax Credits are given on a first-come, first-serve basis.  Annual funding for this program is limited.
Briggs would be happy to consult on what the new Angel Tax Credit can mean for you and your business. 

If you have any questions, please contact a member of our Tax Law section or Business Law section.