Colorado Legislators Aim to Reward Angel Investors with Tax Credit
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 what the results are in terms of jobs or things like that,” Hudson said.
One state that has had a tax credit program for longer than that is Wisconsin, and it has emerged as one case study supporters point to.
Wisconsin has been using tax credits since 2005, and so far the state has distributed about $60 million in credits to 160 eligible companies, said Wisconsin Angel Network director Dan Blake. In 2012, $12.1 million in credits were distributed.
Blake and supporters of the Wisconsin program believe it has had two effects on angels.
Investors “are not just making an investment because of the credit, but it definitely brings people off of the sidelines. And there are a lot of people that think it makes for larger round sizes,” Blake said.
There are other signs in Wisconsin that the credits are having the intended effect, according to Blake. One is the number of angel groups throughout the state. According to the Wisconsin Angel Network, there are about 20 angel networks in the state.
Additionally, the tax credit program is leading startups to make sure they qualify because it’s considered a positive sign for investors.
“It’s oftentimes one of the first things that we work with companies on, to make sure they’re certified to receive the tax credit,” Blake said. “You’re far more attractive and it helps raise attention, and it’s definitely something a lot of early stage investors are looking for.”
A Prior Attempt
This isn’t the first time Colorado has tried to spur angel investing. In fact, the state legislature created a tax credit program for angel investors in 2010. Backers of the current bill say that measure was largely ineffective and little known.
“It had parameters around it that were pretty limiting for angel investors,” Giles said.
It also was very small. According to an FAQ from the state Department of Revenue, it was a 15 percent credit that was capped at $20,000 per investment. The program only issued credits for investments made in 2010, and it had a total cap of $750,000.
The credit also came before the surge in interest in angel investing over the past few years, Giles said.
“At that time, our angel community wasn’t really well established and didn’t have networks in which to invest,” she said. “Since then, they’ve just become much more engaged.”
But even if they’re becoming more organized, local angels haven’t been paying much attention to the state legislature and they still aren’t very familiar with the new bill, Rockies Venture Club director Peter Adams said.
“There’s not a whole lot of awareness about it, to tell you the truth. I haven’t heard a lot in the community about it,” Adams said. He said the RVC will try to get the word out.
Adams said he supports House Bill 14-1012, even though he would like to be sure legislators listen to investors to make some tweaks to its language to make it more investors friendly.
“This is a tool that 30 other states have that Colorado needs to have to rally our investors around the startup community,” he said.
If Colorado’s angel investors and startups want the bill to pass, odds are they’re in for a bit of a fight. Not necessarily because of direct opposition to the credits for startups, but because there is stiff competition for the limited amount of dollars the legislature will allocate to tax incentives while the state still has a tight budget. A lot of industry and interest groups are asking for breaks, and many will inevitably be unhappy, Gerou said.
“Do your work, because it could make the difference between life or death,” Gerou urges supporters of the bill. “I’m afraid we’re going to see a lot of these tax exemption [and credit] bills die because we just can’t afford them.”