New Bill Proposes 25% Tax Credit for Angel Investors and What This Means For Small Businesses

The Angel Tax and Small Businesses

Recently, both terms of Angel Tax and Angel Investor have become more mainstream and popular. If you don’t have anything to do with business, this may be the first time you’re hearing these terms. This article will go over what an angel investor is, what the angel tax is, and what this means for small businesses and their owners.

What is an Angel Investor?

According to Investopedia.com, an angel investor is a person or financial entity that invests in either small businesses or entrepreneurs. These investors are usually the small business owner’s family or friends. The money can either be used to start a business or help a business through a rough financial spot. The angel investor usually trades the monetary investment for a stake in the business. An angel investor can also invest in a business or startup through a crowdfunding platform, or through an angel investment network.

Standards to Become an Angel Investor

Anyone who is looking to become and angel investor must meet certain criteria to be eligible. Anyone who is looking to become an angel investor has to have a net worth of over $1 million dollars and make between $200,000 and $300,000 each year. They must also meet the Securities Exchange Commission’s (SEC) standards. They have a special branch dedicated to accredited investors. You must prove your annual income by submitting at least two year’s worth of income proof, along with proof that you either intend to keep earning the same amount or higher in the next three years.

What is the Angel Tax?

The Angel Tax is a 25 percent tax credit for individuals or investment firms that put their own money into startups or new businesses. The maximum credit you an invest is $125,000 or a singer person, or $250,000 for a joint investment with two people. According to Minnesota.gov, there are $10.7 million credits available. Of this $10.7 million credits available, $5 million is reserved for both minority-owned businesses and businesses owned by women.

Application Process

Your business must meet several criteria before it is available for the Angel Tax program. This is a four step process, and you must have the first two steps approved before you can accept any investment.

  • Step 1 – Certification. The certification process begins by applying exclusively online. You have to have all of the documents you need when you start the certification process because it times out after 20 minutes and you’ll have to start all over. You will also be charged a $150 application fee, and this is nonrefundable. After you apply, you will be contacted if more information is needed. If it isn’t required, you will receive an approval or denial email within a month. If there is someone that you want to act as a power of attorney for your business, now is the time to submit the Power of Attorney form.
  • Step 2 – Credit Allocation. Once you are certified, both the business and the investor must fill out the Credit Allocation application and submit it. Once your application is submitted, an approval or denial email will be sent out within 15 business days. As soon as this is received, the investment must be completed by December 31st or 60 days from the approval process.
  • Step 3 – Investment Proof. Once the business has completed the financial transaction, they have 15 days to submit an Investment Proof form along with two documents. A copy of the check that is made out to the business or a copy of the wire transfer. If you do a wire transfer, it has to show that the investor was the originator, with the business being the one receiving the funds. You must also have the business’s bank account receipt. This document has to have the businesses account number, business name, and it must show the money being deposited. Once these documents are submitted, the investor will receive an email stating it approves of the deposit and it was accepted.
  • Step 4 – Annual Report. The final step to apply is to file an annual report by February first. You will also have to pay a $100 filing fee each time you submit this report.

What Qualifications Does a Small Business Have to Meet?

A small business has to meet several qualifications to be eligible for the Angel Tax, and those requirements are listed below.

  • Have Fewer than 25 Employees
  • Pay Your Employees Annual Wages of at Least 175 Percent of the Federal Poverty Level
  • Be DEED Certified
  • Do Not Begin Trading Within 180 Days After an Investment
  • Not Exceed the 1 Million dollar Angel Tax Cap

What Does This Mean for a Small Business?

The Angel Tax means that more small businesses will have the opportunity to get started with the capital they might not have had access to before. This tax allows their family and friends to invest in their businesses easily and quickly. This tax has been extended, and we could see a surge of new startups and businesses all over. This will also give small business owners the peace of mind knowing that they will have something to fall back on if they run into a rough spot and need an influx of cash to keep their business up and running. More small businesses will stay open, and you won’t see as many families losing everything if their business can’t make it.

The Angel Tax is a resourceful way for investors, family, friends, and financial entities to give small businesses a break. As long as you follow the application process, it is a straightforward option to look into. Your business can survive and grow into a legacy for your family by utilizing the Angel Tax.