Tax credits proposed for investments in high-tech start-ups

Those investing in high-tech small businesses would receive refundable income tax credits under a bill heard by the Revenue Committee Feb. 3.

LB389, introduced by Bellevue Sen. Abbie Cornett at the request of the governor, would provide up to $5 million in tax credits annually for investments made in Nebraska businesses with 25 or fewer employees primarily engaged in researching, developing or using products and services in high-tech fields.

The bill would define high-tech field to include 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 and veterinary science.

To qualify for tax credits, individuals would need to invest at least $25,000 in a calendar year and qualified funds — composed of three or more investors — would be required to invest at least $50,000. Refundable credits equaling 40 percent of the investment would be granted to investors with caps of $350,000 for married couples filing joint returns and $300,000 for all other filers. Credits could not exceed $1 million per taxable year for any one business.

Richard Baier, director of the state Department of Economic Development, testified in support of the bill, saying it was the result of a study that revealed Nebraska’s limited opportunities for start-up seed money. Interviews conducted as part of the study suggested that accessing early stage capital is difficult here, he said, as seen by Nebraska’s ranking 44th in risk capital and entrepreneurial infrastructure in the 2010 State Technology and Science index.

“In this innovation age where entrepreneurial culture is so important — not only for Nebraska’s economy but also for our work force and youth retention — this is not how Nebraska wants to be known around the country,” Baier said.

LB389 would address this capital shortage by creating an angel investment tax credit similar to those implemented in more than 20 other states, Baier said. While the credits in other states range from 10 to 100 percent of the investment, he said, only Maryland offers a refundable tax credit like the one set forth in LB389.

“The states that have [adopted angel investment tax credits] have had pretty resounding success in terms of an increase in lending to small businesses,” Baier said.

To fund the tax credits, the bill would reduce the amount of tax credits offered under the Nebraska Advantage Rural Development Act from $4 million to $2 million and modify the credit limit under the Nebraska Advantage Microenterprise Tax Credit Act from $2 million to $1 million. The new limits would be imposed in 2012.

Baier said some tax credits offered through the Rural Development Act and Microenterprise Tax Credit Act have gone unused. Many businesses are forgoing the Rural Development Act credits in favor of incentives offered under tier one of the Nebraska Advantage Act, he said.

Doug McGregor, CEO of WebEquity Solutions, testified in support of the bill, saying it would make Nebraska a “rising star” in the high-tech world. Angel investment tax credits attract early stage investments, he said, as evidenced by Wisconsin’s threefold increase in angel investments under its program.

LB389 could provide a link between laboratory and marketplace, said Ron Withem, representing the University of Nebraska. He said angel funds are often used for prototype development, additional data collection and validation.

“Angel investors are one of the few sources to [transform] a discovery or invention from a research project to something in which a venture capital firm or industry would be interested,” Withem said.

Jennifer Wolf, executive director of Dawson Area Development, said credit markets are tight, which makes it difficult for entrepreneurs to find capital. Furthermore, she said, many start-up companies prefer an upfront injection of capital provided by angel investments instead of tax credits offered under current state tax incentive programs.

John Miles, representing the Lincoln Chamber of Commerce, said banks are not lending to start-up companies, which often have a good idea or invention but lack substantial net worth. Banks also hesitate to invest in these types of companies because only one in ten are successful, he added.

“Lack of capital is usually the biggest culprit in any business’s failure,” Miles said. “As a result, doing something to soften the risk of investment by angels and further incentivize other investors to become angels is extremely important and positive.”

The committee took no immediate action on the bill.