Angel investors will get a federal tax cut for investing in government-funded technology start-ups under proposed legislation.
Five members of Congress – including Jared Polis, the founder of Proflowers.com and Bluemountain.com and a first-term Democrat from Colorado – are proposing a new tax break that would provide a 25 percent credit for an equity investment in a company that has already qualified for a federal research and development grant program for small businesses.
Under the legislation, introduced July 15 by Rep. Chris Van Hollen, a Maryland Democrat, the credit's value would be limited to half the size of the Small Business Innovation Research award. (The nearly 30-year-old SBIR spreads federal research largess to small businesses, requiring federal departments and agencies that spend more than $100 million in grants for outside research to set aside 2.5 percent of that for small businesses. Initial grants usually equal about $100,000 to assess the feasibility of an idea and then, at the next stage, grants of $750,000 are provided for research and development.)
The bill, called the Innovation Technologies Investment Incentive Act, is the latest in a string of local, state, and federal incentives to funnel private money toward technology ventures. It's modeled partly on Van Hollen's home state of Maryland's biotech tax credit, which offers investors a tax break valued at 50 percent of the eligible investment. (The state says the credit has helped it leverage $50 million in investment for biotech companies that are less than 12 years old and have fewer than 50 employees.) The proposed program will be capped at $500 million nationally.
The other 3 members of Congress who joined Hollen and Polis in introducing the bill: Maryland Rep. Dutch Ruppersberger, Pennsylvania Rep. Allyson Schwartz, and Minnesota Rep. Betty McCollum, all Democrats. The bill is pending in the House Ways & Means Committee.
How would the legislation help start-ups? "If I get an immediate tax credit, I get an immediate return. I know I would increase my investing if there was a tax credit," angel investor Stephen Spinelli, co-founder of Jiffy Lube, told Inc. earlier this year.
Don Rainey, a general partner with Grotech Ventures, a venture capital firm based in Vienna, Virginia, told the Washington Business Journal that linking the tax break to the SBIR award is a shrewd move.
"It takes all those federal dollars that will be spent anyway, and causes more private dollars to complement that investment," he said.
He added: "Start-ups tend to create more start-ups, particularly successful ones. People go into a start-up, see its success, learn what you need to do and they start companies."