Early Stage Capital Measures Pass in KS, TN, and WV, In Limbo for AZ and ND

A mixture of success and trepidation accompanied 2016 legislation introduced in  several states to create, extend, or recapitalize angel tax credit programs. While legislation in Arizona’s legislature failed due to a lack of support, angel tax credit bills in Kansas and Tennessee passed easily with broad support from their governors, lawmakers, and the public. In North Dakota, the state’s angel tax credit program faces an unclear future due to concerns about transparency and oversight. To stimulate investments in West Virginia’s startup community, Gov. Earl Ray Tomblin signed legislation allowing non-accredited investors to make equity investment in state-based businesses.

Arizona

Attempts to resurrect the Arizona Angel Investment Tax Credit Program, which expired in 2014, languished in the state legislature after proponents failed despite support from the Arizona Commerce Authority (ACA) and the Arizona Technology Council.  SB 1139  included a $7 million allocation to recapitalize the tax credit, which had been a $20 million angel tax credit program established in 2006 and overseen by the ACA. The legislation would have allowed investors to claim credits equal to 30 percent of investments made in certified businesses. For investments made in bioscience companies or companies located in rural areas, the investors could have claimed credits up to 35 percent.

Kansas

In early May, the Kansas legislature passed HB 2405 to delay the sunset on the state’s angel investment tax credit program until 2021. Under HB 2405, investors can receive up to a 50 percent tax credit for investments in qualified Kansas businesses, subject to limitations, including:

• The tax credit may be used in its entirety in the taxable year in which the cash investment is made except that no tax credit shall be allowed in a year prior to January 1, 2005.
• If the tax credit exceeds the investors' liability in any one taxable year, beginning in the year 2005, the remaining portion of the credit may be carried forward until the total amount of the credit is used.
• The total tax credit allowed for a single Kansas business is $50,000.
• For single investors, the annual limit is a total of $250,000 in tax credits.

Gov. Sam Brownback is expected to sign the act, according to the Kansas City Business Journal.

North Dakota

A small skirmish has arisen over the state’s angel tax credit as two independent events put the program in the public spotlight. As required by law, the North Dakota legislature’s interim Political Subdivision Taxation Committee is currently reviewing more than 20 economic development incentives, including the angel tax credit. Any of the incentives could be changed or eliminated based on the recommendations coming out of the committee.

The angle tax credit became politically charged when it was singled out during a contested primary race to become the GOP candidate for governor. Gubernatorial candidate Wayne Stenehjem, according to Associated Press stories, used the program’s lack of specificity on where eligible investments must be made to criticize fellow candidate Doug Burgum for capturing angel tax credits for his participation in an Angel Fund that focused predominately on out-of-state companies. Burgum is reported to supports changes to the program.

With this increase scrutiny, several lawmakers are calling for more transparency, stricter eligibility rules, and oversight for the angel tax credit program. State Sen. Dwight Cook, a member of the Political Subdivision Taxation Committee, is now expected to introduce a bill that may include restricting investors from using angel funds for investments in out-of-state companies, according to the Bismarck Tribune.

The state angel tax credit allows North Dakota taxpayers to claim up to a 45 percent tax credit each taxable year on investments made to angel funds located in the state. The tax credit is capped at $45,000 per year with a lifetime limit of $500,000 in credits.

Tennessee

In April, Tennessee Gov. Bill Haslam signed the Angel Investor Tax Incentive (SB 2539) into law. The act will create an angel tax credit of up to 33 percent against an investors Hall Income Tax for investing in startup companies with a tax credit cap of $50,000. The Hall Income Tax applies to individuals receiving interest from bonds and stock dividends.

West Virginia

In March, Gov. Earl Ray Tomblin signed the West Virginia Small Business Capital Act (HB 2615) to allow state residents to purchase equity ownership in West Virginia companies. Under the new law, non-accredited investors can invest up $25,000 per year to a West Virginia-based business via an online crowdfunding portal – accredited investors are uncapped. For newly formed businesses, the startup must generate at least 80 percent of its operating revenue for the next two fiscal years from inside West Virginia. The West Virginia Small Business Capital Act also includes fraud protections including bad-actor disqualifications for both West Virginians and companies, according to a press release from TechConnect West Virginia. With the passage of HB 2615, West Virginia joins 22 states and the District of Columbia that allow its residents to make intrastate equity investment in companies located in that state.