Minnesota Creates Angel Investor Tax Credit and Expands Research & Development Tax Credit
Minnesota recently enacted legislation creating an angel investment tax credit for individuals and funds that invest in small Minnesota-based businesses and expanded the existing research and development tax credit. Funding for the Angel Investor Tax Credit is limited, and credits will be allocated to qualified investors and funds in the order they are received by the Minnesota Department of Employment and Economic Development (MNDEED). Consequently, medical technology companies and investors should review their eligibility now to ensure they are prepared to act promptly when the applications for qualification become available later this summer. This alert outlines the criteria and procedures for obtaining the Angel Investor Tax Credit and highlights changes to the existing research and development tax credit.
ANGEL INVESTOR TAX CREDIT
Qualified investors are eligible for a refundable tax credit equal to 25% of their investment in a qualified small business. The legislation enables qualified investors to obtain up to $11,000,000 in Angel Investor Tax Credits for the 2010 tax year and $12,000,000 for the 2011 through 2014 tax years.
Qualification Requirements for Businesses
Angel Investor Tax Credits will only apply to entities certified as a qualified small business by the commissioner of MNDEED. To qualify, businesses must:
- Focus their primary business activity in either (i) using proprietary technology to add value to a product, process, or service in a qualified high technology field; (ii) researching, developing a proprietary product, process, or service in a qualified high-technology field; or (iii) researching, developing, or producing a new proprietary technology for use in the fields of agriculture, tourism, forestry, mining, manufacturing, or transportation.
- Be headquartered in Minnesota and have at least 51% of their employees and payroll in Minnesota;
- Have less than 25 employees;
- Have raised no more than $2 million in private equity investments;
- Have been in business for no more than ten years;
- Ensure their employees’ annual wages are least 175% of the federal poverty guidelines for a family of four (this requirement is reduced proportionately for part-time employees and does not apply to executives, officers, board members or employees who own more than 20% of the outstanding securities of the business);
- Not be disqualified from making a small corporation offering registration; and
- Not be engaged in real estate development, insurance, banking, lending, lobbying, political consulting, information technology consulting, wholesale or retail trade, leisure, hospitality, transportation, construction, ethanol production from corn, or professional services provided by attorneys, accountants, business consultants, physicians, or health care consultants.
Investor Qualification Requirements
To qualify for the Angel Investor Tax Credits, investors must first apply and be certified by the commissioner of MNDEED for a given tax year as a qualified investor or qualified fund. Qualified investors must certify that they will only invest in an exempt transaction, or in a security registered under a small corporation offering registration. Qualified funds are pooled angel investment network funds that must invest or intend to invest in qualified small businesses, be organized as a pass-through entity, and have at least three separate investors—all of whom are required to satisfy the qualified investor certification criteria.
Investment Qualification Requirements
The Angel Investor Tax Credit is only available for 25% of a qualified investment. A qualified investment is defined as a cash investment in a qualified small business of at least $10,000 for qualified investors and $30,000 for qualified funds in a given calendar year. In exchange for the cash investment, investors must receive common stock, a partnership or membership interest, preferred stock, debt with mandatory conversion to equity, or an equivalent ownership interest as determined by the commissioner of MNDEED. All qualified investments must be held for at least three years—including the calendar year in which the investment was made. If the qualified investment is not held for at least three years, any credit allocated will be revoked and must be repaid by the investor.
Exceptions to the Three-Year Holding Rule
Investments are exempt from this rule if before the end of the three-year period the investment becomes worthless; eighty percent or more of the assets of the qualified small business are sold; the qualified small business is sold; or the qualified small business’s common stock begins trading on a public exchange. Similarly, if the business does not remain a qualified small business in any of the five years after a qualified investment was made, the business must repay a certain percentage of the credits.
Limitations and Procedures
A single investor may not claim more than $125,000 in Angel Investor Tax Credits per calendar year—married couples filing jointly may claim up to $250,000. Because only 25% of the qualified investment is eligible for the Angel Investor Tax Credit, only $500,000—or $1,000,000 if filing jointly—of an investor’s qualified investment is eligible for the Angel Investor Tax Credit. Furthermore, a qualified small business may only receive up to $1,000,000 in credits for qualified investments over all taxable years or $4,000,000 in total qualified investments.
To be eligible for Angel Investor Tax Credits, a qualified investor or fund must have applied for and received certification for the calendar year before making the qualified investment. If investors are not accredited (as defined in Regulation D of the Securities Regulations) they must apply for certification as a qualified investor within thirty days of making the qualified investment.
Once a qualified investment has been made, investors, funds and small businesses must notify the commissioner of MNDEED and provide annual reports that will be used to evaluate the impact of the Angel Investor Tax Credit on promoting job growth and economic development.
Applications for certification of qualified small businesses, qualified investors and qualified funds for the 2010 tax year will be available by August 1, 2010. Applications for Angel Investor Tax Credits for the 2010 tax year will be available by September 1, 2010. Both forms will be posted on MNDEED’s website. Applications for subsequent years will be available by November 1 of the preceding year.
RESEARCH & DEVELOPMENT TAX CREDIT
The existing research and development tax credit designed to encourage increased research activities within the state of Minnesota was amended as follows:
- “S” corporations and partnerships performing these activities may now claim the tax credit.
- The amount eligible for the tax credit was increased from 5% to 10% of the first $2,000,000 spent on qualified research expenses and basic research payments incurred for qualified research (as defined in the Internal Revenue Code) within the State of Minnesota, and 2.5% on all such expenses over $2,000,000.
- The tax credit is now refundable—if the amount of the credit for expenses incurred in taxable years beginning January 1, 2010 exceeds the tax liability, then the commissioner of revenue will refund the excess credit amount.
Recommendations for Investors & Businesses
Prospective investors should assess whether their planned investments for 2010 or future tax years are eligible for the Angel Investor Tax Credit and, if so, coordinate with businesses to ensure they are qualified. Similarly, businesses should assess their eligibility (i) as a qualified small business; and (ii) for tax credits related to qualified research expenses. If eligible, prospective investors and small businesses should begin preparing their applications as soon as they become available since funding for the Angel Investor Tax Credit is limited.
If you have questions about the content of this alert please contact Gina DeConcini at 612.607.7377; Patrice Kloss at 612.607.7360 or Barbara Wrigley at 612.607.7595.
This alert is a copyrighted publication produced by Oppenheimer Wolff & Donnelly LLP. The information contained in this alert is of a general nature and is subject to change. Readers should not act without further inquiry and/or consultation with legal counsel.