Recent Illinois legislation (P.A. 96-939) creates an angel investor credit that can be used against Illinois income tax liabilities for tax years beginning in 2011 through 2016. This new legislation also doubles the new market tax credit annual cap from $10M to $20M.
What is the Credit Amount?
For taxable years beginning after December 31, 2010, and ending on or before December 31, 2016, qualified applicants may claim an income tax credit equal to 25 percent of the claimant’s investment made directly in a qualified new business venture. The maximum amount of a taxpayer’s investment that may be used as the basis for a credit is $2M, for a maximum credit of $500,000. The maximum amount of credit that may be claimed by all investors in a single business is $1M. The aggregate amount of tax credits that may be claimed for investments made in all qualified new business ventures is limited to $10M per calendar year.
At this time, it is uncertain how the Department of Commerce and Economic Opportunity (DCEO) will administer the program. However, since the tax credits are capped at $10M per year, businesses and investors that may qualify for the credit should start preparing for the credit now in order to be prepared to file the applicable applications when made available by DCEO.
“Applicant” means a corporation, limited liability company, partnership or a natural person that makes an investment in a qualified new business venture. The term “applicant” does not include a corporation, limited liability company, partnership or a natural person who has a direct or indirect ownership interest of at least 51 percent in the profits, capital, or value of the investment or a related member.
Qualified New Business Venture
A “qualified new business venture” is a business that meets certain requirements and is registered with DCEO. The DCEO may register the business only if the business satisfies all of the following conditions:
- The business has its headquarters in Illinois.
- The business has the potential for increasing jobs and/or capital in Illinois.
- At least 51 percent of the employees employed by the business are employed in Illinois.
- The business has fewer than 100 employees.
- The business has been in operation in Illinois for no more than 10 consecutive years prior to the year of certification.
- The business has received no more than $10M in aggregate private equity investment in cash or $4M in investments that qualified for tax credits.
- The business is principally engaged in innovation in any of the following: manufacturing; biotechnology; nanotechnology; communications; agricultural sciences; clean energy creation or storage technology; processing or assembling products, including medical devices, pharmaceuticals, computer software or hardware, semiconductors, other innovative technology products, or other products that are produced using manufacturing methods that are enabled by applying proprietary technology; or providing services that are enabled by applying proprietary technology; or it is undertaking pre-commercialization activity related to proprietary technology that includes conducting research, developing a new product or business process, or developing a service that is principally reliant on applying proprietary technology.
- The business is not principally engaged in real estate development; insurance; banking; lending; lobbying; political consulting; professional services provided by attorneys, accountants, business consultants, physicians or healthcare consultants; wholesale or retail trade; leisure; hospitality; transportation or construction, except construction of power production plants that derive energy from a renewable energy resource.
If the amount of the credit exceeds the tax liability for the year, the excess may be carried forward and applied to the tax liability of the five taxable years following the excess credit year. For partnerships or Subchapter S corporations, the credit can be utilized by the partners or shareholders.
The DCEO will be responsible for administration of the angel credit program and for certifying applicants for the program. The DCEO must annually certify that the claimant’s investment has been made and remains in the qualified new business venture for no less than three years.
Recapture of Credit
If an investment for which a claimant is allowed a credit is held by the claimant for less than three years, or, if within that period of time the qualified new business venture is moved from the State of Illinois, the claimant must pay to the Department of Revenue the amount of the credit that the claimant received related to the investment. iBi