Watered-down angel tax credit

Passing an angel investment tax credit in Minnesota is not important just for the dollar […]

Passing an angel investment tax credit in Minnesota is not important just for the dollar amount but to signal to investors in the Midwest, and indeed the rest of the country, that our state is a serious place to do business; that we are ready to embrace (finally) a commonly accepted way to spur investment in  promising high tech start-ups.

So in other words, something is better than nothing. We need to start somewhere. I need to remind myself this after reviewing the latest version of the bill emerging from the House.

To sum it up, the bill is a lot less ambitious than the one first proposed in January. There’s a lot less money and a lot more restrictions. Supporters say details are still being negotiated and things could change.

However, anything that would not make Minnesota more competitive with the 28 states that offer angel credits would defeat the point of the bill, said John Alexander, president of Twin Cities Angels and a strong supporter of the original legislation championed by Sen. Kathy Saltzman.

Here is a quick look at the major changes between the emerging bill and the one first introduced in January:

Less money: Given the state’s $2 billion budget shortfall, finding the money to fund the credit was always going to be a problem. This may explain why the dollar amount being discussed has dropped significantly.

The revised bill offers $22.5 million over five years ($2.5 million  for 2010 and then $5 million each year after that), about half of the amount and one-year longer than the original proposal of $40 million over four years.

Maximum amounts: Both bills call for a $125,000 limit on what investors can earn each year. The new bill, however, offers a more generous cap at $250,000 for married couples.

But the bill also places a major new restriction: The state will not award more than $1 million in credits for investments in any one company for the entire five years. Wow. That’s a pretty big deal. Will $1 million in credits for five years be enough to do anything? After all, some start-ups like medical devices and drugs require a lot more capital than other industries.

Oh, and in case you’re wondering, Wisconsin offers a maximum of $500,000 each per investor or fund. No lifetime cap for total amount invested in one company.

Penalties: Both bills say only investors who stay with the company for three years will be eligible for credits. But the revised bill says investors must repay the entire credit.

Both bills also require the companies to be based in Minnesota, employ no more than 25 people, at least 51 percent of its employees work in Minnesota, and pay its workers at least 175 percent above the federal poverty line for a family of four.

However, the revised bill lays out specific penalties for violations: An investor must repay the entire credit in the first year after receiving the credit, 80 percent for year two, 60 percent for year three, and so on.

No transfer: Unlike the January bill, the revised bill does not contain a provision allowing investors with no tax liability in Minnesota to transfer their credits to investors who do.

For example, an investor from Arizona puts $100,000 into a Minneapolis start-up. He can’t claim the credit but can convince a Minnesota investor to also fund the company by transferring the credit he would have earned to the local investor.

Leaving that out seems odd since Rep. Ann Lenczewski, the House Tax Committee chair who strongly opposes the credit, argued the original bill would do nothing to help Minnesota attract outside investors.

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