State Budget Battles May Spare Angel Tax Credit

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Budget battles got ugly in Minnesota, but both parties agree the angel tax credit is successful.

Even though Minnesota, a sleepy mountain state in the U.S., was forced to shut down the state government in a bitter budget battle, the state is actually expanding an angel tax credit. Many other states have a similar program which offers generous tax breaks to angel investors or venture capitalists that are working on smaller-scale deals. But the program in Minnesota in particular has undergone changes that are intended to make the laws more flexible, and those changes were recently approved by the governor and the state legislature, demonstrating that even deeply divided state governments are working together to create jobs.

The state program gives qualified individuals a 25% tax break on investments of $10,000 or more in Minnesota start-ups. A spokesman for the Department of Employment and Economic Development recently highlighted three significant changes to the program. The credit is also now available to larger companies with new rules allowing companies to qualify for the angel tax credit if they have received less than $4 million in private equity investment. Up to now, the limit on private equity had been $2 million in a single company.

What other changes have been made to the angel tax credit?

Previously, the tax credit has only been available to individual angel investors. Now, private equity investors putting their funds to work through limited liability corporations will qualify for the Minnesota angel tax credit. The limited liability corporation won’t receive the tax credit directly, but individual investors in the corporations will be able to use the credit on their personal returns if they meet certain qualifications.

Another change to the program may very well impact a requirement unique to Minnesota. In the state, start-ups that qualify for the angel investor tax program are now required to pay full-time interns at least 175% of the federal minimum wage, bringing it to around $12.69 an hour. That’s down by more than 35% from the previous requirement that start-ups had to pay interns at least 275% of the minimum poverty level wage for a family of four, around $19.17 an hour. Above market wages meant the interns were an additional cost of venture capital for start-up firms and the new requirement allows businesses to pay more competitive wages.

Why all the focus on the tax credit?

Legislators probably expanded the program because it works. In 2010, the state’s angel tax credit program helped to provide more than $28 million in private equity investments to Minnesota businesses. The program was credited with creating 47 jobs, a number likely to grow now that the minimum wage requirements have been relaxed.

Other states have similar programs designed to help companies raise venture capital. The risks that private equity investors face are partially offset by the tax credit. Angel investors can still realize out-sized returns, and the states often get their money back on the income taxes they pay when cashing out successful investments.