Angel Tax Credit
Here you'll find answers to some of the most frequently asked questions about the Angel Tax Credit program. Scroll down the page to view all the questions, or select from the links below to view specific sets of questions.
QUESTIONS ABOUT QUALIFIED INVESTORS
Do Qualified Investors need to be residents of or domiciled in Minnesota?
- No. Qualified investors may be the residents of any state or any country, because the tax credit is refundable. No Minnesota tax liability is needed to receive the tax credit, though a Minnesota tax return must be filed.
How do Qualified Investors claim the credit?
- Investors must file a Minnesota Individual Income Tax Return (Form M1) and claim the credit on Schedule M1B, Business and Investment Credits, to the M1. Investor who do not live in Minnesota may also need to file Schedule M1NR, Nonresidents/Part-Year Residents. Forms are available at www.taxes.state.mn.us.
Can a pass-through entity be a Qualified Investor?
- No. In order to receive the tax credit, a pass-through entity must be a Qualified Fund.
Must a Qualified Investor be an accredited investor (as defined by SEC Rule 501)?
- Not if the investor only invests in Qualified Small Businesses that exempt under Minn. Stat. 80A.46 clauses (13) or (14) or only invests in a security registered under Minn. Stat. 80A.50 (b).
What is the minimum amount a Qualified Investor must invest in a Qualified Small Business to be eligible for the tax credit?
- The minimum qualifying investment is $10,000
May an investor make the investment in assets such as patents or real estate?
- No. A qualified investment must be in cash.
May an investor make the investment in the form of a loan, such as a bridge loan?
- No. A qualified investment must be in cash.
What is the maximum amount of tax credits a Qualified Investor can obtain in a calendar year? How much investment does it take to reach this maximum?
- The maximum tax credit per year is $125,000 ($250,000 for married filing jointly). As the tax credit rate is 25 percent, this requires investments of $500,000 ($1,000,000 for married filing jointly).
The definition of an accredited investor has been changed by recent federal legislation. Is DEED adopting the new definition?
- Yes. The value of personal residences may not be included in net worth.
May an investor use IRA funds to make a qualified investment?
- While investors may use IRAs to fund their qualified investments, investors are strongly urged to seek advice of tax counsel to determine the possible serious negative tax consequences of tapping the funds. Tax credits will be issued to investors in their capacities as natural persons.
Is a trust considered a natural person that may seek certification as a Qualified Investor?
- An irrevocable trust is a separate legal entity, which is not a natural person. A revocable trust, on the other hand, is not a separate entity from the grantor. Grantors may use revocable trust assets to fund their qualified investments. Tax credits will be issued to grantor investors in their capacities as natural persons.
A Qualified Investor seeking a credit allocation may not receive more than 50 percent of his or her gross income from the qualified small business in which the investment is being made (or be a family member of an individual who receives more than 50 percent of his or her gross income from the qualified small business in which the investment is being made). How is gross income measured?
- Gross income is considered total income as determined by line 22 of IRS Form 1040.
QUESTIONS ABOUT QUALIFIED FUNDS
Must a Qualified Fund be organized as a pass-through entity?
What is the minimum number of fund members that a Qualified Fund must have?
- Three natural persons. Other fund members may be non-natural persons, but only natural persons qualify for the credit.
Must a fund be organized in Minnesota?
Must all of a Qualified Fund’s members be accredited investors (as defined by SEC Rule 501)?
- Not if the Qualified Fund only invests in Qualified Small Businesses exempt under Minn. Stat. 80A.46 clauses (13) or (14) or in a security registered under Minn. Stat. 80A.50 (b).
What is the minimum amount a Qualified Fund must invest in a Qualified Small Business to be eligible for the tax credit?
- The minimum investment is $30,000
Does the tax credit certificate evidencing the tax credit come from (flow through) the fund to its investors?
- No. The tax credit certificates are issued directly from DEED to the Qualified Fund’s investors.
QUESTIONS ABOUT QUALIFIED SMALL BUSINESSES
Does the Qualified Small Business have to be organized in Minnesota?
- No, but it must be headquartered in Minnesota.
Must a Qualified Small Business be recertified each calendar year?
- Yes. Certification is valid for one calendar year. Businesses that wish to participate in subsequent years must again apply for certification for that year.
What should be contained in the required board resolution authorizing the business to participate in the program?
Is it mandatory that financial statements for new or start-up businesses be compiled by a public accounting firm?
- We have revisited this requirement. For new and start-up businesses we will accept pro forma statements for the most current period. They should be submitted with a copy of the most recent year’s tax returns (if a start-up in the current year, include a note that no returns were filed for the previous year).
What is the dollar figure for annual wages of at least 175 percent of the federal poverty guideline for a family of four?
- As of March 2013, it is $41,213, which is equivalent to $19.81 per hour based on a 2,080 hour work year. The annual amount is reduced proportionally for part-time employees, or for employees who have not worked a full year.
In calculating wages for the wage threshold requirement, are benefits considered?
- Yes. Wages include cash compensation, as well as all benefits which are deductible for the employer.
Do the wage minimums apply to all employees of the business?
- Yes. However, they do not apply to business’ executives, officers, board members, or any employees who own, control, or hold power to vote 20 percent or more of the business’ outstanding securities. Nor do they apply to employees of other businesses that make up the unitary group. Interns have a different wage minimum. They must be paid at least 175 percent of the federal minimum wage. That totals $12.69 per hour.
Does the employee maximum apply to just the Qualified Small Business?
- No. It applies to the business and the business’ unitary group.
Do the business’ officers count toward the less than 25 employee maximum?
- Yes. All the business’ employees count toward the maximum.
Does the Qualified Small Business need to have any employees?
- No. The business need not have any employees.
When is the previous private equity investment maximum of $4 million measured? Do investments made pursuant to this program count toward the maximum?
- The business’ qualifications for certification are measured as of the date of application for certification. Certification is good for the calendar year in which it is granted. Investments made pursuant to the program are not yet made at the time of certification, so such investments do not count toward the maximum. The investments, however, would count toward the maximum if certification is sought in subsequent calendar years.
How much investment can a business receive under the program?
- A business can receive up to $4 million in investments that qualify for and receive tax credits under the program. This equals $1 million in credits and is a program lifetime maximum for the business.
Are convertible loans considered equity investment?
- If such loans have a non-conditional mandatory conversion requirement, they are considered equity. Such debt must mandatorily convert, without condition, to equity within the three-year annual reporting requirement period for investors. Businesses are encouraged to submit a proposed convertible note to DEED for review before the investment is made to ensure the note falls within the program’s requirements.
Is the date operations began the same as the date of the business’ inception as a legal entity?
- It may be, but not necessarily. Mere formation of the legal entity with no other activity does not constitute “operations." Date of operations begins when a business is considered a development-stage business pursuant to SFAS 7 (e.g., raising capital, etc.).
What types of investment qualify for the Angel Tax Credit?
- Investments made in exchange for common stock, a partnership or membership interest, preferred stock, and debt with mandatory conversion to equity. Such debt must mandatorily convert to equity within the three-year annual reporting requirement period for investors.
How must an investment be made to qualify for the Angel Tax Credit?
- Qualified investments must be made in cash. Loans from investors, including bridge loans, cannot serve as a qualified investment.
QUESTIONS ABOUT PROCEDURES
May certification applications for a Qualified Small Business and a Qualified Investor and/or Fund be submitted with a Credit Allocation Application?
- A Credit Allocation Application may be submitted with the certification applications, but it will not be deemed filed until the related certification applications have all been approved.
When the forms and procedures refer to days, are these calendar days or business days?