Act 255 Tax Credit Changes in 2011

By: Melissa M. Turczyn

As companies franticly scramble to get all of their ducks in a row before the clock strikes midnight on December 31st, including doling out any remaining Act 255 Tax Credits, perhaps we should take a minute to recap the upcoming changes to the credits, and discuss what investors can expect as we move into 2011.

Tax Credit Limitation Increases

The first big change involves the current tax credit limitations. Assuming a company has been approved by the Wisconsin Department of Commerce (the “Department”) as a Qualified New Business Venture (“QNBV”), such company can now take up to $8,000,000 in qualified investments. Such limitation is double the current limit of $4,000,000.  In other words, a QNBV may now qualify for tax credits for up to $8,000,000 of funding it receives. Given the state of the economy, this will likely aid many existing companies who must now go back to investors to ask for additional money.

Another limitation increase allows angel investors to invest substantially more money in QNBVs annually. Currently, there is a maximum of $5,500,000 allowed. Starting on January 1st, that limit goes up to $18,000,000; meaning an angel investor can invest up to that amount in QNBVs and receive tax credits assuming the portfolio companies have credits to allocate. It is important to note that there will be an additional $250,000 of tax credits available for investments in nanotechnology businesses.

A similar limitation increase is provided to fund managers. Instead of the current $6,000,000 maximum annual investment, fund managers may now invest up to $18,500,000 annually. An additional $250,000 tax credit is also available for investments made in nanotechnology businesses.

Capital Gains

If the increases in tax credit limitations are the ice cream sundae, perhaps the Governor’s latest announcement is the cherry on the top. Beginning January 1, 2011, investors with long-term capital gains will be able to subtract such gains from their federal adjusted gross income, assuming they are able to clear a few low hurdles. Similar to the Act 255 Tax Credits, the Department must approve a business as a QNBV Cap Gains Company. The definition for the Cap Gains Companies is broader than the original QNBV definition so as to allow more companies to qualify.

After a company is qualified under this program, it may seek out investors who are looking to ditch up to an aggregate of $10,000,000 of long-term capital gains per year. The process goes as follows: the investor sells the assets which provide the long-term capital gain; the investor must then deposit such gain into a segregated account in a financial institution; within 180 days of the sale, the investor must invest ALL OF THE PROCEEDS in a QNBV Cap Gains Company; and then the investor must notify the Wisconsin Department of Revenue that it will not be declaring that gain on its income tax return. What a great way to say Happy Holidays to the Department of Revenue.

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