Colorado Legislators Aim to Reward Angel Investors with Tax Credit

2/4/14Follow @MichaelXBD

Colorado could join the list of states that offer tax credits to angel investors if a bill currently before the Colorado General Assembly is passed.

Supporters of House Bill 14-1012, the Advanced Industry Investment Income Tax Credit, believe it would encourage more high-net-worth individuals to try their hands at angel investing and increase the amount of money active angel investors are willing to put into startups.

But the bill could face an uphill fight in the legislature, and questions remain about how well such credits really work.

The intent of the bill, is to free up additional capital for startups in a broad range of “advanced industries.” That includes companies that specialize in advanced manufacturing, aerospace, bioscience, electronics, energy and natural resources, information technology, and infrastructure engineering.

Rep. Max Tyler, a Democrat, and Rep. Cheri Gerou, a Republican, are sponsoring the bill, which was introduced on Jan. 8. The House Finance Committee will be the first committee to hear the bill, but as of Monday it was not on the committee schedule.

Supporters argue that access to seed- and early-stage capital remains a challenge for Colorado entrepreneurs. The Colorado BioScience Association is one of the industry groups pushing for the bill’s passage, along with the Colorado Technology Association and Colorado Cleantech Industry Association. CBSA president and CEO April Giles said her association’s members continue to list raising money as one of their toughest problems.

They think a state income tax credit will help, and they say the tax credit programs in other states have been a boon.

The national Angel Capital Association estimates about half of the states offer some kind of tax incentive for investors in startups. Giles believes they’ve been effective, and would like to see Colorado startups benefit.

“What some of the other states have seen is a huge increase in the amount of angel dollars that have gone in to their communities, and that’s what we anticipate happening,” Giles said.

The bill would work by allowing an investor or a partnership to claim a credit on their state income tax bill equal to 25 percent of their investment, or 30 percent if the company is located in a rural or “economically distressed” area.

Giles believes the amount is big enough to encourage existing angel investors to put more money on the table, and to inspire new angel investors to step forward.

But the bill comes with a number of stipulations and limitations that would affect investors. The investments would have to be at least $25,000 to qualify, and the maximum amount for a tax credit is $50,000.

Startups also would have to receive approval from the state economic development office to be eligible. The state will be checking that they’re in an eligible industry, are located in Colorado or at least have more than half their workforce here, have raised less than $10 million, have revenue less than $5 million, and have been operating or generating revenue for less than five years.

Finally, the state would only issue $2 million worth of credits per calendar year, placing a hard and fairly low ceiling on the program, which would expire Jan. 1, 2018.

And of course the bill has to navigate the legislative process and be approved by several committees before winning approval. The bill could be modified, especially once the state’s fiscal analysts issue their estimate on how much investment the measure could yield or how it would affect the state’s tax revenue.

A Widespread Phenomenon

According to Angel Capital Association executive director Marianne Hudson, tax breaks for angel investors are increasingly popular across the country. About half the states have some form of incentive program, she said.

Most are like Colorado’s in that they’re state income tax credits, she said. The 25 percent credit is in line with most states, although some states have credits in excess of 50 percent of the amount invested.

The credits have largely appeared in the past five years, so there is a scarcity of data showing whether they are or are not working.

“Most of them are pretty new, so it’s hard to tell … Next Page »

Michael Davidson is the editor of Xconomy Boulder/Denver. He covers startups, venture capital, clean tech, energy, aerospace, telecoms, and whatever else happens above 5,280 feet. Contact him at mdavidson@xconomy.com. Follow @MichaelXBD

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