Policy: Understanding the Angel Investor Tax Credit in Iowa

A subtle change to decrease the amount of risk in angel investing increased the amount of capital invested in Iowa startup companies.

Iowa’s Angel Investor Tax Credit wasn’t funded in 2007 and remained unfunded until 2011 when former Governor Terry Branstad signed Senate File 517, which refunded the Angel Investor Tax Credit and move it under the Iowa Economic Development Authority.

When the program first restarted, the Angel Investor Tax Credit was 20 percent of the investment and was not refundable. This meant that an individual could not receive more money than they owed to the state.

A statute change in 2015 that increased the credit from 20 to 25 percent and made the credit refundable, increased utilization of the credit, according to Kristen Hanks-Bents, Director of the Angel Investor Tax Credit program for the Iowa Economic Development Authority.

What you see is that this is an incentive that helps buy down the risk, of what it is a risky investment for people,” Hanks-Bents said. “You are seeing a lot of investments in startups. It helps facilitate that increase in investment. Before we never hit the cap, and now we have a waiting list two years in a row. It is a benefit to the start up community and innovation in general.”

Explaining the Angel Investor Tax Credit

The Angel Investor Tax Credit is particularly meant for businesses at the seed capital investment stage.

Hanks-Bents said that the credit is meant for investors to directly invest into a qualifying business.

Angel Investor is meant for more seed stage round and earlier rounds of capital raising,” Hanks-Bents said.

In order for a business to qualify for the credit, they must apply through the Iowa Economic Development Authority and satisfy their qualifications including working primarily in Iowa, operating six years or less and have a net worth of less than or equal to $10 million.

For an investor to become certified, they must go through a similar process through the Iowa Economic Development Authority, but they must invest in a certified, qualifying business, make investments in cash for equity and have less than a 70 percent ownership stake in the business.

Businesses and investors are then approved by the Iowa Economic Development Authority. The applications are approved on a first-come basis.

We present those on a rolling basis just as long as we have room in the cab, essentially,” Hanks- Bents said. “If we have room in the cab, we send it to the board for approval.”

Investors can receive a maximum of $100,000 per fiscal year. In one calendar year, the maximum amount of tax credits awarded to one business’ investors is $500,000.

Once the $2 million cap is hit, the Iowa Economic Development Authority puts businesses and investors on a waitlist, which is revisited in the next fiscal year.

Iowa’s Angel Investor Tax Credit hit its $2 million cap last month, seven months after the start of the fiscal year.

Forming a partnership

Hanks-Bents said this credit goes hand-in-hand with the Innovation Fund Tax Credit.

You are talking about different points along the spectrum of a business’s life cycle,” Hanks-Bents said. “Ideally, Angel investors come in early and innovation fund comes in later.”

Matthew Busick is a certified angel investor and the founder of River Glen Venture Partners. Earlier this year, River Glen Venture Partners failed to become a certified Innovation Fund but Busick remains an active angel investor.

Busick has been an angel investor for almost 20 years. He also has qualified for the Angel Investor Tax Credit, and has used the credit since the credit started in 2011.

Although Busick is using the credit, Busick believes that there should be some changes made to the program to safeguard Iowa and the state’s taxpayers.

I believe that the taxpayers would be better served if the investor would have to go to some sort of training annually. Smart investors strike fair deals,” Busick said. “One of the problems with the credit is the only obligation on behalf of an individual investor is to go through the application process. It demands nothing of the investor in ensuring that the investor is capable of investing in this space.”

Busick understands that it is complicated to invest in a private business.

“When you think about it, the state is becoming a co-investor in these credits available in these businesses, so in many ways the state’s interest are the same as the investor’s,” Busick said. “The state owes an obligation to ensure that the state knows that they are doing.”

It remains to be seen how the potential tax reform could impact both the Angel Investor Tax Credit and the Innovation Fund Tax Credit.

The weight of the credit in Iowa

The Iowa Department of Revenue has yet to release a report analyzing the impact of the Angel Investor Tax Credit but Hanks-Bents said that anecdotally, she has seen a growth of investors since 2015.

But Busick says he’s unsure if the credit makes an impact.

“There are lots of different ways to get the same outcome (as the credit),” Busick said.  “When a business is exciting and investors consider what makes them exciting and whether or not they find the business investable is really not ever going to be reliant on a tax credit. It just adds a slight risk modification to smart capital allocators. Somebody who is putting money at risk in businesses at the earliest stages understands that it either will work or it won’t. Whether you get a credit or not, it isn’t going to make you invest.”

But Busick does believe the credit plays an important role in the bigger picture of economic development in Iowa, especially within the context of states surrounding Iowa. Currently, Nebraska, Minnesota, Illinois and Wisconsin have similar programs.

“These tax credits that surround us drive the need for Iowa to study whether it also needs one, in order to capture new business formation and keep business that gets past the new business formation stage and become viable, growing, exciting businesses,” Busick said. “In order to be at the table and competitive as everyone else that has a credit than we need one too.”

Jess Lynk is a contributor to Clay & Milk

Previous coverage

How the Innovation Fund Tax Credit impacts Iowa – Feb. 5, 2018

River Glen Ventures: Abandoning the fund – Jan. 24, 2018

Majority of Iowa R&D Tax Credit paid out as refunds in 2016 – Feb. 22, 2017