Tax Breaks For Angels

To foster technology transfer, states reward early-stage investors.

In an effort to encourage start-up financing, nine states have established tax credits for angel investors. Depending on the state, the credits range from 15% to 50% of the amount invested, up to $1 million per person per year. Each state has unique provisions. Louisiana requires angels to demonstrate that at least half of the sales recorded by the businesses they funded come from out of state. Arizona prohibits investors who finance embryonic stem cell research.

Why all this activity now? Angels have increased their mainstream visibility in the past decade, and legislators are starting to grasp their value. The idea, say bill sponsors like Arizona state senator Barbara Leff, is to focus precious development dollars on homegrown companies rather than offering relocation packages to businesses from elsewhere. Legislators are especially eager to promote technology transfer from state universities. "I want to make sure that ideas can become commercialized and that those companies will stay in Arizona," Leff says. (There's also the herd mentality. Once one state implements a business incentive, more follow.)

Some programs have been marketed better than others. Kansas, which hands out $2 million in credits per year, reached its limit in only 41 days in January and February. Wisconsin, on the other hand, still has about $2.1 million of its $3 million left for the year. And Iowa, which was among the first states to provide the credit back in 2002, hasn't come close to its $10 million ceiling.

Brad Rake, president of Milwaukee-based Esker Technologies, used Wisconsin's program to hook up with a seasoned angel with deep pockets. His company, which develops technology to reduce wiring in autos, has expanded its work force and developed new products. The tax incentives, Rake says, "definitely make us more appealing" to angels.

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