Our firm has received a number of inquiries regarding Nebraska’s new Angel Investment Tax Credit. In 2011, the Legislature passed the Nebraska Angel Investment Tax Credit Act, pursuant to which the Nebraska Department of Economic Development (“DED”) is authorized to issue up to $3,000,000 in refundable tax credits in each year commencing in 2011 and continuing through 2017.
In brief, the Angel Investment Tax Credit Act provides refundable state income tax credits to qualified investors that invest in qualified early-stage companies. By making these credits refundable, the State of Nebraska has effectively subsidized the angel investment. If a qualified investor makes a qualified investment of $100,000 in a Nebraska start-up company, and receives Nebraska’s 40% angel investment credit, that investor would receive $40,000 in cash (in reduced taxes or direct repayment) from the state.
In more detail, the credit works as follows:
- A qualified investor or fund is eligible to receive 40% refundable tax credit for an investment in a qualified small business in certain distressed areas (as established by the DED) and a 35% credit in non-distressed areas.
- Investments must be more than $25,000 for individuals and $50,000 for funds.
- To receive the credit, both the investor (an individual and a fund) and the company receiving the angel investment must be “certified” by the DED.
- To be a “certified” individual, the individual must: i) pay a $250 application fee; ii) file an annual report with the DED verifying his or her investment and compliance with the rules of the credit; iii) not control 50% or more of the qualified small business; and iv) receive 49% or less of his or her income from the business. The individual must be certified prior to making his or her investment in the business to receive the credit.
- To be a “certified fund,” the fund must: i) pay a $500 application fee; ii) have 3 or more investors (all of whom are qualified individuals); and iii) file an annual report with the DED identifying its investments and compliance with the rules of the credit. Like an individual, the fund must be certified prior to making its investment in a qualified small business to receive the credit.
- Tax credits related to investments by certified funds will be allocated directly and ratably to the owners of the certified fund, who shall each have been certified as investors by the DED.
- The total maximum amount of tax credits that can be allocated in a calendar year to a qualified investor for the investor’s cumulative qualified investments is $350,000 for a married couple filing jointly and $300,000 for all other filers.
- To be a “certified” business, the business must: i) have its headquarters located in Nebraska; ii) have 51% or more of its employees and total payroll in Nebraska; iii) have a primary business activity that involves Nebraska innovation (including adding value to a process, product or service using proprietary technology or developing or producing a process, product, or service); iv) have no more than 25 employees when the investment is made; and v) file an annual report identifying the eligible investments in the business.
- The DED will not certify more than a total of $1,000,000 in tax credits to any one business over the life of the program.
- Once the investment is fully approved by the DED, the investment must take place within 90 days. After that period, the credits may be re-allocated.
- The investment must be held, and cannot be transferred, for a three-year period, consisting of the calendar year of the investment and the following two calendar years. The three-year holding period does not apply only in the following situations: 1) the investment becomes worthless; 2) 80% or more of the company’s assets are sold, 3) the company merges; or 4) the company’s stock trades on a public exchange.
- Only Nebraska residents will be allocated tax credits under this program. Because the tax credits are refundable, investors may apply for a refund to the extent any credits allocated to them for a calendar year (and for which a corresponding qualified investment is made) exceed the amount of their Nebraska income tax liability. Tax credits cannot be carried-forward or carried-back to prior or subsequent tax years.
If an investor is interested in utilizing this credit, we strongly recommend that the investor seek professional counsel to help ensure that he or she will meet the requirements for the credit. The McGrath North Tax Group will be happy to assist an investor interested in the credit to determine whether credits are available and, if so, to help ensure that the investor may receive the credit.