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Nebraska Unicameral Adopts Angel Investment Tax Credit Act

03.19.2012

With Governor Heineman’s signing of the Nebraska Angel Investment Tax Credit Act (the “Act”) on May 24, 2011, Nebraska took a positive step toward improving its status as an incubator for growing new businesses, and as a destination for Nebraska investors with an eye toward investments in start-up companies and other emerging businesses. The Act is designed to stimulate investment in small, Nebraska-based companies by providing refundable tax credits to qualifying investors who provide capital to eligible businesses. The Act went into effect on September 1, 2011 and the Nebraska Department of Economic Development (“DED”) began accepting applications on December 1, 2011 for 2012. The following is a summary of the important aspects of the Act that interested investors or start-up companies should know:

Qualified Investment

• A qualified investment is a cash investment in the equity interests (or debt with a mandatory conversion to equity) of a “qualified small business” of a minimum of (a) $25,000 in a calendar year by a “qualified investor”, or (b) $50,000 in a calendar year by a “qualified fund”

Qualified Small Business

• Must be headquartered in Nebraska, have at least 51% of its employees employed in Nebraska and at least 51% of its total payroll paid or incurred in Nebraska

• Must have 25 or fewer employees at the time the qualified investment is made

• Must be engaged in, or committed to engage in, innovation in Nebraska in one or more of the following activities as its primary business activity:

• Using proprietary technology to add value to a product, process, or service in a “qualified hightechnology field”; or

• Researching, developing, or producing a proprietary product, process, or service in a “qualified high-technology field”

• “Qualified high-technology field” includes aerospace, agricultural processing, renewable energy, energy efficiency and conservation, environmental engineering, food technology, cellulosic ethanol, information technology, materials science technology, nanotechnology, telecommunications, biosolutions, medical device products, pharmaceuticals, diagnostics, biologicals, chemistry, veterinary science, and similar fields

• Cannot be engaged in political consulting, leisure, hospitality, or professional services provided by attorneys, accountants, physicians, or health care consultants

• Before receiving the qualified investment, the business must apply for and receive certification from the DED for the calendar year in which the qualified investment was made

Qualified Investor

• Must be a Nebraska resident

• Must be an individual, trust or pass-through entity (i.e., any entity that is not taxed as a “C” corporation) with less than 3 owners (if 3 or more owners, must qualify as Qualified Fund, as discussed below)

• Must apply for and receive certification from the DED for the calendar year in which the qualified investment was made prior to making the qualified investment, except for “accredited investors” (as defined in the federal regulations issued pursuant to the Securities Act of 1933), who can apply for certification within 30 days after making the qualified investment

• The following types of individuals, trusts, or passthrough entities will not be certified as a qualified investor:

  • An individual who controls 50% or more of the qualified small business receiving the qualified investment
  • A venture capital company
  • Any bank, savings and loan association, insurance company, or similar entity whose normal business activities include venture capital investments

Qualified Fund

• Must be a pass-through entity

• Must invest or intend to invest in a qualified small business

• Must have at least 3 separate qualified investors for the entire 3-year holding period (discussed below)

Investment Limitations

• Only $3,000,000 of refundable tax credits will be awarded by the state each year

• No more than $1,000,000 in refundable tax credits will be allocated for qualified investments in any one qualified small business

• Tax credits only available through 2017

• Maximum amount in tax credits each year is $350,000 for married couples filing joint returns, and $300,000 for all other filers

• No refundable tax credit available if investor receives more than 49% of its gross annual income from the qualified small business in which the qualified investment is made

• 3-year holding period (calendar year in which investment is made, plus two years), with the following exceptions:

  • The qualified investment becomes worthless
  • 80% or more of the assets of the qualified small business are sold
  • The qualified small business is sold or merges with another business
  • The qualified small business’s common stock begins trading on a public exchange

If you are interested in learning more about the Angel Investment Tax Credit Act, we recommend checking out the information available on the Nebraska Department of Economic Development’s website. Koley Jessen’s Emerging Business Group capitalizes on the expertise available across our Firm to offer a broad range of services and expertise tailored specifically to entrepreneurs and emerging business clients. If you have questions about qualifying under the Act as an investor or as a small business, please feel free to contact us.

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