Central Illinois Business Magazine

Archive                           November 2011


Take advantage of these tax breaks for investors while they last

By Randall Green
CIB Contributor
Published: Nov. 2011

A Federal tax incentive program that encourages private investment in start-up companies is scheduled to expire at the end of 2011, but there is still time for certain investors to take advantage of it. The state of Illinois also offers its own tax incentive to investors that is scheduled to expire at the end of 2016.

The Federal Incentive:

Since 1993, non-corporate investors in eligible small businesses have been able to exclude 50 percent of their capital gains resulting from those investments. However, in mid-February 2009, The American Recovery and Reinvestment Act of 2009 increased that exclusion to 75 percent and in September 2010, the Small Business Jobs Act of 2010 further increased the exclusion to 100 percent through the end of 2010. Both increases have been part of a concerted government effort to encourage investment in eligible small businesses by private investors.

Recognizing that three months was hardly enough time for most investors to identify an investment opportunity and strike a deal, the 100 percent federal incentive was extended through December 31, 2011.

As part of the federal incentive, investors can exclude 100 percent of their capital gain in qualified small business stock that:

Is acquired after September 27, 2010 and before January 1, 2012,

Is held more than five years before sale, and

The gain is not greater than $10 million or ten times the taxpayer's investment.

As an additional benefit, during the 100 percent exemption period the gain on the sale of the eligible stock is not subject to regular income tax or the alternative minimum tax (AMT).

The Illinois Incentive:

The Illinois Angel Investment Credit Program (35 ILCS 5/220) is operated by the Illinois Department of Commerce and Economic Opportunity (DCEO) and allows investors to receive a tax credit of up to 25 percent of their investment in an innovative, qualified business venture in Illinois.

The credit is limited to a basis of $2,000,000 in each direct investment in a qualified new business venture and cannot exceed a taxpayer's tax liability; however, it may be carried forward for up to five years to offset future tax liabilities.

Unlike the federal incentive program, the Illinois program requires that businesses register each taxable year that they wish to be eligible for investment under the program.

The list of qualified businesses can be found on the DCEO's website at www.commerce.state.il.us/dceo. Illinois currently has about 30 qualified businesses, with the majority being located in the Chicago area. Some of the central Illinois businesses that are currently registered include:

ImmuVen, Inc (Champaign),

Lumec Control Products, Inc (Peoria),

Snapshot Energy, LLC (Champaign),

Aptimmune Biologics, Inc. (Champaign), and

Prairie Gold, Inc. (Bloomington).

Unlike the federal program, which has commonly been criticized for only benefiting investors in the event that the venture becomes profitable, the Illinois credit can be used to offset other tax liabilities regardless of the success of the particular investment.

Unless the federal incentive program is extended again, the Illinois incentive program will be the primary tax incentive for investors looking to invest in Illinois start-up companies beyond 2011.

Randy Green is an attorney at Meyer Capel, a Professional Corporation. He can be reached at (217) 552-1800 or rgreen@meyercapel.com

This article does not constitute legal advice, nor does it create an attorney-client relationship.

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