An income tax credit is available to individuals who set up a North Dakota angel fund for the purpose of pooling their monies to make qualified investments in qualified businesses. For purposes of this credit, a qualifying individual is referred to as an angel investor.
A qualified business is a non-publicly traded for-profit entity with annual revenues of $10 million or less that is engaged in research or development of new products or processes. A qualified business does not include an entity that invests in, or derives income from, real estate holdings or operations.
Eligibility: To participate in this credit program, both the angel fund and qualified business must be certified by the North Dakota Department of Commerce Division of Economic Development and Finance.
A qualified investment means a transaction in which a certified angel fund exchanges cash for either:
- An equity interest in a certified qualified business, or
- A debt instrument with a mandatory conversion to equity provision issued by a certified qualified business. To qualify, the investment must be made during the angel fund’s certification period, which is specified in the certification letter sent to the angel fund by the North Dakota Department of Commerce.
Credit Amounts: The amount of the credit depends on whether the qualified investment is made in an in-state or out-of-state qualified business.
- An in-state qualified business is one that is created under North Dakota law, has its principal office in North Dakota, and carries on the majority of its business activity (except sales activity) in North Dakota.
- An out-of-state qualified business is one that has a significant satellite operation in North Dakota that employs, or is projected to employ, over 10 employees. At least 50% of qualified investments must be made in in-state qualified businesses.
The credit is allowed to each angel investor who participates in a qualified investment by the angel fund. The credit is equal to the angel investor’s contribution to the total amount invested by the angel fund multiplied by the applicable credit rate:
- 35% for an in-state qualified business
- 25% for an out-of-state qualified business
The maximum credit allowed to an angel investor for all qualified investments made in a tax year is $45,000. An unused credit may be carried forward up to 5 tax years. An angel investor is allowed no more than $500,000 of credits under the program.
If a member of an angel fund is a partnership or other passthrough entity, a credit is allowed to the passthrough entity’s owners who are individuals. A tentative credit is calculated at the passthrough entity level on the amount of the entity’s contribution to the total amount invested by the angel fund. The passthrough entity distributes to the individual owners that portion of the tentative credit attributable to the individual owners’ respective interests in the entity. (The portion of the entity’s tentative credit attributable to the non-individual owners is disregarded.) The individual owners claim their respective shares of the credit, subject to the annual and life-time credit limits of $45,000 and $500,000, respectively.
Filing Requirements:
- Qualified Investment Report - Within 30 days after a certified North Dakota angel fund makes a qualified investment in a qualified business, the angel fund must file an investment report with the Office of State Tax Commissioner using the Angel Fund Qualified Investment Reporting Form.
- Fund must complete the Participating Angel Investor Investment Statement for each angel investor participating in the investment and submit the statement(s) with the investment report. A late filing penalty of $1,000 is charged to the angel fund for each month (or fraction of a month) the investment report is late.
- Angel Fund Annual Report – A certified North Dakota angel fund must file Form AFI, Annual Angel Fund Investment Report by December 31.
Application Process: To obtain certification, the angel fund and the business must complete and submit the appropriate application forms:
- Application For Certification as an Angel Fund - North Dakota Department of Commerce Division of Economic Development and Finance
- Application For Certification as a Qualified Business for the Angel Investor Tax Credit - North Dakota Department of Commerce Division of Economic Development and Finance
- The following Clearance Form may be needed:
Century Code Reference: N.D.C.C. § 57-38-01.26
Angel Fund Investment Credit – Pre-July 2017
Angel Fund certified or investments made before July 1, 2017, qualified under the Angel Fund Investment Credit. Please contact our office at 701-328-1247 if you have questions regarding investments made during this time.