Iowa Angel Tax Credits

Posted by Drew Larson in March 2012 on 3/1/2012

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During the 2011 legislative session, the Iowa General Assembly approved an annual $2,000,000 allocation of state tax credits for investments in qualifying businesses, often referred to as “angel tax credits.” The purpose of the legislation, including the angel tax credits, was to “[e]nsure economic growth and development throughout the state.” The legislation notes that “priority shall be placed on recruiting new businesses, business expansion, and retaining existing Iowa businesses” and “[e]mphasis shall be placed on entrepreneurial development through helping entrepreneurs secure capital, and [on] developing networks and a business climate conducive to entrepreneurs and small businesses.” 2011 S.F. 517, Div. I, § 2. The rules for the program are found in Iowa Code §§ 15E.41-15E.44. As of the date of this article, the Economic Development Authority has also submitted proposed rules for implementing the angel tax credits at proposed Iowa Administrative Code Chapter 261-115. This article assumes that the final rules will be implemented in substantially the form proposed.

The angel tax credit provides that a “taxpayer may claim a tax credit ... for a portion of the taxpayer’s equity investment in a qualifying business” made in 2011 or after. The tax credit equals 20% of the equity investment in a qualifying business, up to $50,000. A person can claim credits for up to five different investments in five different qualifying businesses each year. The credits cannot be claimed until the third tax year following the investment and may be carried forward for up to five years if not completely used.

To qualify for the credit, the investment must be in cash, must be for equity, and must be in a qualifying business. To meet the definition of qualifying business, the company must meet all of the following criteria:

  •     The principal operations of the business must be located in Iowa.
  •     The business must be no more than six years old.
  •     The business must have an owner that has completed (i) an entrepreneurial venture development curriculum, (ii) three years of relevant experience, (iii) a four year degree in business management, administration, or a related field, or (iv) other training or experience sufficient to increase the business’s probability of success.
  •     The business is not for retail, real estate, or professional services.
  •     The company does not have a net worth over $5,000,000 as of the date of the investment. Within 24 months of the first qualifying investment, the company shall secure total equity financing or near equity financing (convertible debt and royalty agreements) of at least $250,000.

While not completely clear, it also appears that the taxpayer must be an “investor” to receive the tax credits. This means that the taxpayer may not own 70% or more of the qualifying business’s total equity. It should also be noted that an investor or qualifying business may be any type of business entity, including corporations (C and S Corporation), limited liability companies, and partnerships.

There are a number of administrative requirements necessary to claim an angel tax credit. First, within 120 days of the first qualifying investment (or by March 31, 2012 if later for investments made in 2011) the business must submit various signed statements regarding the nature of the business, its balance sheet, statements showing it meets the definition of “qualifying business,” a list of equity and qualifying investments, and a statement regarding the existence of a business plan. The list of equity must be updated as additional equity contributions are received. The economic development authority will then notify the business and investors whether it qualifies as a qualifying business and place the business on a registry of qualifying businesses. Before an angel tax credit can be claimed for a particular investment, and within 24 months of the qualifying investment, the qualifying business must show that it has secured the $250,000 of equity or near equity financing required under the definition of “qualifying business.”

The investor must also submit an application for the angel tax credits, which must be submitted by March 31 of the year following the investment. These applications are date and time stamped. Credits are granted on a first-come, first-served basis. Once the credits are exhausted for a particular fiscal year, applications are carried over to the following fiscal year. Once approved, the economic development authority will send the investor a tax credit certificate. The tax credit certificate shall be rescinded if the qualifying business does not make the required certifications, does not raise the required equity, or otherwise fails to meet the requirements of the tax credit rules.

The angel tax credits will be a valuable tool for companies seeking capital investment, and it appears there will be significant demand for the angel tax credits. It is highly recommended that investors and qualifying businesses file their applications as soon as possible. If you believe that your business may have qualifying investments and desire assistance in making all the required filings, please do not hesitate to contact your BrownWinick attorney or Drew Larson at larson@brownwinick.com.

Drew D. Larson is an associate attorney at BrownWinick, practicing primarily in the areas of corporate transactions, health law, estate planning, tax and general litigation. Drew has a particular passion for working with technology startups and other entrepreneurs, helping startups take their business to the next level. Drew can be reached at 515-242-2485 or larson@brownwinick.com.  

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