Breaking down the Iowa angel tax credit
About the author: Drew Larson is an attorney at the BrownWinick Law Firm. For more about Larson, see the note following this post.
During the 2011 legislative session, the Iowa General Assembly approved an annual $2 million allocation of state tax credits for investments in qualifying businesses, often referred to as angel tax credits. On March 15, 2012, the Iowa Department of Economic Development released the application form for the credits. However, for investments made in 2011, the deadline for filing the tax credit application is March 31, 2012. If you think you may qualify for angel tax credits for 2011 you should apply immediately. All credits are awarded on a first-come, first-served basis.
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." The Economic Development Authority has also adopted rules for implementing the angel tax credits.
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 (i) must be in cash, (ii) must be for equity, options to acquire equity, or convertible debt, and (iii) 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 million as of the date of the investment.
- Within 24 months of the first qualifying investment, the company shall secured 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 percent 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 180 days of the first qualifying investment (or by June 30, 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 Iowa Department of Economic Development does not currently list an application form for qualifying businesses on its website, but it is believed that the same application form from the last angel tax credit law will be used, or something substantially similar.
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.
Author's note: This information is intended for informational and conversational purposes only and is not intended to provide specific legal advice. An attorney-client relationship is not created by reviewing, commenting on or discussing this information or its contents with the author. Any opinions posted here are those of the author(s), and not of BrownWinick. Links to and from other sites are for informational purposes only and are not an endorsement by the author.
Image credits: Photo by Elentir via Flickr
About the author: Drew Larson is an attorney at the BrownWinick Law Firm. Larson is the chair of its Startup Practice Group. He works primarily with technology, manufacturing, and estate planning clients.