Kansas extends ‘angel investor’ tax credit; North Dakota mulls changes to its program

Lawmakers in two Midwestern states have given close scrutiny in recent months to a targeted tax credit that has become an increasingly popular policy tool for trying to help entrepreneurs and startup companies. Known as “angel investor” tax credits, these incentives encourage investment in early-stage firms by mitigating some of the potential loss if a company fails. Most states in the Midwest have some form of this tax credit.

Kansas’ 11-year-old program was on track to sunset this year, but passage of SB 149 extended it for five years. As a result, individuals can receive a tax credit of 50 percent on their investment in a business that has been in operation for less than 10 years; has gross revenue of less than $5 million; and has an innovative and proprietary technology, product or service.

Under the Kansas program, a total of $6 million is available every year. According to the state Department of Commerce, the program has so far helped 298 companies raise more than $342.9 million in capital investments and created more than 1,100 jobs.
In North Dakota, meanwhile, an interim legislative committee has been exploring ways to improve its state’s tax credit for angel investors. (Under a law passed last year, all of North Dakota’s tax incentive programs must be reviewed once every six years.)
“The No. 1 concern is that credits can be given out for money in a fund that may never be invested in a company,” notes North Dakota Sen. Dwight Cook, a member of the interim committee and chair of the Senate Finance and Taxation Committee.
This is because the state currently allows tax credits for investment in an angel fund, regardless if those funds are invested in a business. Another concern is the lack of assurances that the money gets invested in North Dakota-based entrepreneurs and firms.
“I was surprised at the level of out-of-state investments by the angel funds,” he adds, “and I fully expect legislation to be introduced to limit angel funds’ investments to companies with 51 percent of their employees in North Dakota.” (Other states have included this type of requirement in their laws.) 
While new statutory language, more oversight and better reporting requirements are needed, Cook says, the tax credits remain good policy because of their role in encouraging investments of venture capital in the state’s fledgling businesses. These firms, in turn, can create more jobs and economic activity. 
Between 2011 and 2014, North Dakota provided $16.7 million in tax credits for investments totaling $41.3 million in 22 different angel funds.
Stateline Midwest: June/July 20162.51 MB