What changes did Kansas make to the Angel Investor Tax Credit in 2021?

Plain-English summary

Kansas Notice 21-13 explains that 2021 Senate Bill 66 revised the Kansas Angel Investor Tax Credit Act in four ways: amending definitions, increasing credit amounts and program limits, extending the sunset, and removing certain restrictions.

Definitions (Section 1 -- K.S.A. 74-8132(i)). The definition of "qualified securities" was changed with respect to debt instruments. Permitted debt is any debt that is subordinate to the qualified Kansas business's creditors, requires no payment by the business, and will convert to equity before the business raises additional funds.

Credit limits (Section 2 -- K.S.A. 74-8133).

• The maximum credit changed from being "equal to" 50% to "up to" 50% of the qualifying investment.
• Single-year credit amounts rose from $50,000 to $100,000 for a single Kansas business and from $250,000 to $350,000 for a single qualified investor.
• Annual program limits are set at $6.0 million in tax years 2021 and 2022, increasing $500,000 each year through tax year 2026; unused credits carry over for issuance in future years through 2026.

Transfer of credits (Section 2 -- K.S.A. 74-8133). The transfer provision (moved from subsection (e) to (d)) lets a qualifying non-taxpaying investor acquire a transferable credit of up to 50% of the cash investment, transferable one time to a natural person of net worth (as defined in 17 C.F.R. § 230.501(a)); no refund is allowed, and only the full credit for one investment may be transferred.

Program sunset (Section 2). The sunset was extended from tax year 2021 to tax year 2026.

Restrictions removed or modified (Section 2 -- K.S.A. 74-8133). The bar on credits for investments in venture capital companies was stricken; to receive a transferable credit an investor now needs no current tax liability at the time of investment (rather than no liability for the prior three years); and a transferee no longer needs to be an accredited investor.

Clawback (Section 3 -- K.S.A. 74-8136). A business receiving assistance must repay the Kansas Department of Commerce if it ceases to be qualified or moves operations out of Kansas; the bill now requires bioscience businesses to stay qualified for a minimum of ten years and other businesses for five years. If an investment was made lawfully, investors will not lose their credits if the business later loses its qualified designation. General program information is available from the Kansas Department of Commerce.

What this means for you

Investors in Kansas startups

• The credit is now up to 50% of a qualifying investment, with higher single-year caps ($100,000 per business, $350,000 per investor).
• You can qualify for a transferable credit with only no current tax liability at the time of investment, and a transferee no longer must be an accredited investor.

Qualified Kansas businesses

• The program runs through tax year 2026, and debt that is subordinate, payment-free, and equity-converting can count as a qualified security.
• Watch the clawback: bioscience businesses must remain qualified for ten years, other businesses for five, or repay the Department of Commerce.

Credit transferees

• A transferred angel-investor credit can be claimed against your Kansas income tax; the credit may be transferred only once and is not refundable.

Common questions

How much is the credit now? Up to 50% of a qualifying investment (changed from "equal to" 50%).

What are the new single-year caps? $100,000 for a single Kansas business (up from $50,000) and $350,000 for a single investor (up from $250,000).

How long does the program run? The sunset was extended from tax year 2021 to tax year 2026.

Can the credit be transferred? Yes -- a qualifying investor's credit (up to 50% of the investment) may be transferred one time to a natural person of net worth; it is not refundable.

What changed in the clawback? Bioscience businesses must stay qualified for ten years and other businesses for five; lawfully-investing investors keep their credits if the business later loses its designation.

Citations and references

• Senate Bill 66 (2021) -- revised the Kansas Angel Investor Tax Credit Act (definitions, limits, sunset, restrictions, clawback).
• K.S.A. 74-8132(i) -- definition of "qualified securities," amended for debt instruments.
• K.S.A. 74-8133 -- credit amounts, annual limits, transfer rules, and sunset (extended to tax year 2026).
• K.S.A. 74-8136 -- clawback/repayment provisions, modified for bioscience (ten years) and other businesses (five years).

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 21-13

Original ruling text

Policy and Research
109 SW 9th Street Phone: 785-368-8222
PO Box 3506 Fax: 785-296-1279
Topeka KS 66601-3506 www.ksrevenue.org
Mark A. Burghart, Secretary Laura Kelly, Governor

                                        NOTICE 21-13

                                ANGEL INVESTOR CREDIT
                                       (JULY 19, 2021)

   During the 2021 Legislative Session Senate Bill 66 was passed and signed into law. The bill

revises the Kansas Angel Investor Tax Credit Act (Act) by: (1) amending applicable definitions;
(2) increasing program tax credit amounts and annual program limits; (3) extending the sunset on
the program from tax year 2021 to tax year 2026; and (4) removing certain program restrictions.

Definitions

   Section 1 of the bill amends K.S.A. 74-8132(i) to change the definition of "qualified

securities" with respect to the use of debt instruments as qualifying forms of investment. Debt
instruments permitted to be used as a form of investment include any debt that:

   •     Is subordinate to the creditors of the qualified Kansas business receiving the
         investment;
   •     Requires no payment by such qualified Kansas business debtor; and
   •     Will convert to some form of equity before the qualified Kansas business debtor raises
         any additional funds.

Tax Credit Limits

   Section 2 of the Bill amends K.S.A. 74-8133 to make the following changes to limits on tax

credit dollar amounts:

   •     Subsection (a) is amended to change the maximum value of the tax credit from "equal"
         to 50 percent, to "up to" 50 percent of the qualifying investment; and

   •     Subsection (b) is amended to increase single-year tax credit amounts:
              From $50,000 to $100,000 for a single Kansas business; and
              From $250,000 to $350,000 for a single qualified investor;

   •     Subsection (b) is also amended to set annual tax credit limits at $6.0 million in tax years
         2021 and 2022, with a $500,000 increase each tax year after that through tax year 2026:
              Any unused tax credits for a given year will be carried over for issuance in future
              tax years until tax year 2026.

Transfer of Credits

  Section 2 of the Bill also amends K.S.A. 74-8133 to make the changes to the transfer of

credits. The amended language, formerly found in subsection (e), now in subsection (d), provides:

        (d) Any investor who has not owed any Kansas income tax under the provisions
 of article 32, chapter 79 of the Kansas Statutes Annotated, and amendments thereto, for
 the immediate past three taxable years without a current tax liability at the time of the
 investment in a qualified Kansas business, who does not reasonably believe that it will
 owe any such tax for the current taxable year and who makes a cash investment in a
 qualified security of a qualified Kansas business shall be deemed to acquire an interest
 in the nature of a transferable credit limited, for tax year 2021 and all tax years
 thereafter, to an amount equal up to 50% of this cash investment. This interest may be
 transferred to any natural person of net worth, as defined in 17 C.F.R. § 230.501(a), as
 in effect on the effective date of this act, whether or not such person is then an investor
 and be claimed by the transferee as a credit against the transferee's Kansas income tax
 liability beginning in the year provided in subsection (a). No person shall be entitled to
 a refund for the interest created under this section. Only the full credit for any one
 investment may be transferred and this interest may only be transferred one time. A
 credit acquired by transfer shall be subject to the limitations prescribed in this section.
 Documentation of any credit acquired by transfer shall be provided by the investor in
 the manner required by the director of taxation.

Program Sunset

  Section 2 of the bill amends K.S.A. 74-8133(b) to extend the sunset on the angel investor tax

credit from tax year 2021 to tax year 2026.

Restrictions on Investments and Investors

 Section 2 of the bill amends K.S.A. 74-8133 to remove or modify certain restrictions on

investments and investors:

 •     Subsection (d), which prohibited a credit for investments in Venture capital companies,
       has been stricken.

 •     Subsection (e) has been amended to provide that in order to receive a transferable
       credit, an investor must have no current tax liability at the time of investment, rather
       than no tax liability for the preceding three years;

 •     Subsection (e) has also been amended to provide the recipient of a transferable credit
       will not need to be an accredited investor as defined by federal regulation (17 C.F.R.
       section 230.501(a)); and

Clawback Provision

   Section 3 of the Bill amends K.S.A. 74-8136(g) to modify the clawback provision in the Act.

Currently, any business receiving financial assistance under the Act is required to make repayment
to the Kansas Department of Commerce if the business ceases to be a qualified business or moves
its operations outside of Kansas within ten years. The bill now also requires bioscience businesses
(i.e. a business engaged in bioscience as defined in K.S.A. 74-99b83, and amendments thereto) to
meet these qualifications for a minimum of ten years and any other business (i.e. a business that is
approved and certified as a qualified Kansas business as provided in K.S.A. 74-8134, and
amendments thereto) to meet these qualifications for five years

 Section 3 of the Bill amends K.S.A. 74-8136(h) to provide that if an investment was made

lawfully, investors will not lose any tax credits if the business in which the investment was made
were to lose its designation as a qualified business.

General Information

   For general information about the Kansas Angel Investor Tax Credit, you can visit the

Kansas Department of Commerce website at: https://www.kansascommerce.gov/program/taxes-
and-financing/kaitc-program-details/

                                 TAXPAYER ASSISTANCE

 Additional copies of this notice, forms or publications are available from our web site,

www.ksrevenue.org. If you have questions about this Notice, please contact:

                              Taxpayer Assistance Center
                             Kansas Department of Revenue
                             Scott Office Building, 1st Floor
                                    120 SE 10th Ave
                                     P. O. Box 3506
                                Topeka, KS 66601-3506
                                  Phone: 785-368-8222
                                   Fax: 785-291-3614