National Association of Seed and Venture Funds – Position statement: Angel Investor Tax Credit

The membership of the National Association of Seed and Venture Funds (NASVF) commends thoughtful application of lessons learned in modeling the Angel Investment Tax Credit legislation. We believe that tax credit for investing in qualified early stage companies is crucial to enhancing the local and regional entrepreneurial business environment. Clearly, Wisconsin Act 255, which provides tax incentive for investors in early stage companies, has helped to create a healthy angel community, which helps sustain that region’s innovative early-stage companies. Every effort should be made to take advantage of lessons learned from this legislation, in order to build effective tax policy that helps sustain local and regional economic improvement on a national basis.

We urge a comprehensive legislative initiative regarding angel investor tax credits, with specific attention to the areas of immediate behavioral reward, venture eligibility, and investment eligibility.

Immediate behavioral reward

Incentives must reward changed behavior, and to benefit our current economy, that behavior must change immediately. The incentive to invest in early stage companies must be one that encourages immediate action. To do that, the incentive must have an expiration date and be of a high enough value to warrant action. We recommend a five-year term on the credit, with a three-year carry forward/ carry back provision. A 25 – 30 percent credit for the total investment would illicit action, and the investment should be held for three years or the tax credit could be recaptured (with the exception of a liquidation of the business). Alternatively, a 10 percent credit awarded every year for the first three years of investment would assure patience in exiting and multiple years of capital investment.

Venture eligibility

Care should be taken to define the types of ventures that would be eligible for the investor to receive the credit. We recommend qualifying such ventures as per the exclusion 1202 (e) (3) in the IRS code, as well as excluding ventures that are shell companies, real estate or life style businesses.

Investment eligibility

Legislation should also define how the investment funds may be used if they are to qualify for a tax credit. We recommend excluding investments to repurchase or redeem shares, funds invested by family members, and capping investments to $2 million per taxable year and with a maximum in any one venture capped at $1 million.

Supporting and encouraging angel investment will allow local businesses to create high-skill, high-wage jobs, resulting in a positive economic impact in local and regional communities. We support proper legislation that rewards immediate investing in qualified early-stage ventures.

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