Angel investment tax credit hits bureaucratic snag

Investors rejoiced when Minnesota finally passed a five year, $50 million angel tax credit. Only one problem: the state’s largest angel group will be largely shut out.

Under a last minute provision inserted into the bill, investors participating in angel deals through individual retirement accounts and family trusts will not be eligible for the tax credit this year. That spells bad news for Rain Source Capital in St. Paul, where most of its funds list an IRA or trust as a member.

In a brief interview, Rain Source CEO Steve Mercil said its funds can still benefit from the credit but only if they untangle the money from the IRAs and trusts. The administrative headaches might even scare away some investors, he said.

How did this happen? Lawmakers say the provision’s original intent was to prevent companies like Medtronic from using the credits, which were designed to benefit small, individual investors. The provision said only “natural” investors can claim the credits. In other words, flesh and blood human beings. However, the Department of Employment and Economic Development (DEED) told Rain Source officials that it doesn’t think IRAs and trusts fit that definition.

Jeff Nelson, a DEED official is coordinating the angel program, did not immediately return a phone call.

When contacted by MedCity News, Sen. Kathy Saltzman (D-Woodbury), a major supporter of the credits, said she would look into the matter. Even if angel money in IRAs and trusts were eligible, it’s not clear who would receive the credit, the individual or the financial entity, she said.

Saltzman said the credit will still benefit investors, including Rain Source. But new laws often have unintended consequences, she said.

Another unknown: can the problem fixed through DEED or do legislators wait until next year to make appropriate changes to the program?

For opportunistic angel funds like Rain Source, next year might as well be next decade.