Nebraska’s Angel Investment Tax Credit Program: A Great Incentive to Invest in Nebraska’s High-Tech Startups

By David Skalka, Attorney and Daniel E. Cummings, Senior Certified Law Clerk

Croker Huck frequently receives inquiries about Nebraska's Angel Investment Tax Credit Act ("AITCA"), particularly from entrepreneurs attempting to raise private equity for their technology-related startups and small businesses. Enacted in 2011, the AITCA's stated purpose is to "encourage entrepreneurship and to increase investment in high technology industries in underserved areas of Nebraska" by helping improve the availability of capital for Nebraska startup businesses in high-technology fields (Neb. Rev. Stat. § 77-6301.01). The law was introduced at the Governor's request after a 2009 study showed that Nebraska ranked poorly in early-stage funding for small, start-up businesses.

Since its enactment, AITCA has become a popular means to encourage investment in Nebraska high technology startups and small businesses - so popular that the total tax credit fund for 2014 and initially in 2015 - $3 million - was fully allocated on January 1 of those years. The Nebraska Legislature in 2015 passed LB 156 which increased the tax credit fund to $4 million, but the Nebraska Department of Economic Development (NDED) has stated that the additional $1 million available for 2015 "will be entirely allocated to the existing waiting list and that any investors who are not already on the waiting list for 2015 are advised to begin planning for the 2016 Program."

What makes AITCA so popular is that is provides sizeable refundable tax credits for qualified investors or investment funds that make equity investments in qualified small businesses. The tax credits available under the AITCA were 35% of the investment or 40% of the investment in qualified businesses in distressed areas, as defined by the law, but as of April 27, 2017 are 40% for all investments. The total limit on available tax credits per year is now $4 million. To receive the tax credit, the qualified investor must make the qualified investment within 90 days after the tax credit has been approved and give the NDED notice that the investment has been made within 30 days after that 90 day period. Investors must hold their qualified investments for at least 3 years. If an investor does not hold the investment for the 3 year period, the tax credit is subject to revocation and recapture. The 3 year requirement does not apply if the qualified small business becomes worthless, sells its assets, is sold to or merges with another business, or begins selling publicly traded stock.

To be eligible for these tax credits, investors must be certified as a qualified investor and must invest in businesses certified as qualified small businesses.

Qualifying as a Small Business

To be eligible for investments under the AITCA, a business must apply for and be certified as a "qualified small business" by the NDED. A business must have its headquarters in Nebraska, have at least 51% of its employees and total payroll in Nebraska to be certified. It must also have 25 or fewer employees at the time of the qualified investment. A qualified small business may not receive more than $1 million in qualified investments over the duration of the AITCA program. To be eligible, a business must also have as its primary business activity using or developing proprietary technology in a qualified high-technology field. A high-technology field is defined in the law as including, but not being limited to "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." Qualified businesses may also "not be engaged in political consulting, leisure, hospitality, or professional services provided by attorneys, accountants, physicians, or health care consultants" other than using or developing proprietary technology in a qualified high-technology field. Qualified small businesses must file an annual report detailing the investments and other information.

The application form for a qualified small business may be found here.

Qualifying as an Individual Investor

Certification for an investor to become a "qualified investor" is also handled by application to and approval by the NDED. The NDED must certify, deny, or request more information of the applicant within 30 days of receiving an application to be certified as a qualified investor. To receive a tax credit, a qualified investor must make a "qualified investment," which is an investment of at least $25,000, but less than $300,000 for an individual or $350,000 for a married couple filing jointly. The AITCA excludes from certification individuals owning 50% or more of the qualified small business receiving the investment. Qualified investors may also not receive more than 49% of their gross income from the qualified small business they propose to invest in. Qualified investors must file an annual report detailing its investments and other information.

The application form for an individual qualified investor may be found here.

Qualifying as an Investment Fund

Certain business entities may also apply to be certified as qualified funds. These business entities, or "pass-through entities," are defined as an organization that is "a subchapter S corporation, general partnership, limited partnership, limited liability partnership, trust, or limited liability company and that for the applicable taxable year is not taxed as a corporation." Pass-through investors must have at least three investors who meet the requirements for qualified investors. Venture capital companies, banks, or similar entities whose normal business activities include venture capital investments are excluded from certification as qualified investors. To receive the tax credit, members of a qualified investment fund must apply to be certified as individual qualified investors. The investment limit for qualified funds is the combined limit of all of the individual qualified investors in that fund. The tax credits for investments made by qualified funds are received by the individual qualified investors in the qualified fund. Qualified funds must file an annual report detailing its investments and other information.

The application form for a qualified fund may be found here.

Within Croker Huck's expertise assisting startups and businesses with federal and state security law compliance in raising private equity and debt investment, Croker Huck has the expertise to assist with issues regarding the Angel Investment Tax Credit program. This includes assisting in structuring the investment to permit a qualified business to receive investor's funds prior to approval of the tax credit application for the investment while maintaining compliance with the AITCA. Contact us at 402-391-6777 or email an inquiry

The content of this article is for informational purposes only. It is not legal advice, nor is it intended to create, and your receipt of it does not constitute, an attorney-client relationship. This article may only be reproduced in its entirety (without modification) for the individual reader's personal and/or educational use and must include this notice. The content of this article is intended to be up-to-date, but may or may not reflect the most current legal developments. Croker, Huck, Kasher, DeWitt, Anderson & Gonderinger, L.L.C. assumes no liability or responsibility for any errors or omissions contained within this article. You should not act or refrain from acting based upon this article without seeking professional legal counsel. This article only provides a brief overview and an attorney should be consulted if you have questions regarding this topic in relation to your specific situation. To learn more contact a Croker Huck attorney at 402-391-6777 or through our website contact page.