Access to capital has been a persistent challenge for early-stage companies based in Colorado. Even highly investable companies struggle with early-stage financing because of the limited number of angels and other early investors in the state.
Thankfully, Colorado offers a relatively new (and not widely known) tax credit for investors in early companies known as the Advanced Industry Investment Tax Credit that can serve as a valuable benefit to investors and can help companies in certain fields as they seek funding. The AIITC makes investing in Colorado companies more enticing by providing qualified investors in companies in certain “advanced” industries with a tax credit of up to $50,000. In order to be eligible for an AIITC-qualified investment, investee business entities must be in one of the following fields:
- Advanced manufacturing
- Energy/natural resource/ cleantech
- Information technology
- Infrastructure engineering
An investee must also be headquartered in Colorado or have at least 50% of its employees in the state and must be in a relatively early stage — meaning it cannot have received more than $10 million in investment over the life of the business, must be less than five years old, and must have less than $5 million in revenue.
Investees must meet additional criteria established by the Colorado Office of Economic Development and International Trade and must prequalify for the investment by registering here with the OEDIT.
There are also limitations on investors and the types of investments that will permit the tax credit. Investors must invest at least $10,000 in an eligible investee through equity or convertible debt and can receive a maximum of 25% of the investment as a tax credit (or 30% for investment in rural or distressed areas), up to $50,000. The investor cannot hold more than 30% of the investee entity’s voting equity prior to the investment and cannot hold more than 50% of the voting equity after investment. Investors also cannot be C-corporations. Perhaps most significantly, tax credits are limited statewide to $750,000 each year and are provided to investors on a first-come, first serve basis. Investors must apply for the AIITC in the calendar year and within 90 days of the investment.
So, what can companies and investors do to make the most of the AIITC? Companies seeking investment should prequalify for the AIITC program before they seek funding and inform potential investors of their qualification and the credit’s benefits. Companies may also be able to make small adjustments to their structure to meet eligibility for the credit. Given the relatively low statewide annual cap on the credit, investors should consider the timing of their investment — the earlier in the year they invest, the more likely they are to fit under the $750,000 cap (as of this writing, the state had just $116,175 in credits still available for 2019). Above all else, companies and their investors should be aware of the AIITC, consider it as they make growth decisions and encourage others to do the same. Not only can the benefits to growing companies of tax-deductible investment be significant, but popular demand for the credit would encourage the state to raise its caps and take other steps to make capital more available to Colorado’s businesses.
— Andrew Comer is an associate at Fortis Law Partners.