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Two Bills, Same Goal: $10M Angel Tax Credit for Illinois Life-Science Startups

By Alex Philippidis

NEW YORK (GenomeWeb News) — Illinois is expected to join neighboring states in offering tax credits to angel investors in life sciences startups starting next year through one of two bills that passed the state House of Representatives this past week.

The bills include identical language setting aside $10 million in tax credits to assist state-based angel investors in startup companies that commercialize new technologies. Senate Bill 2093, which was amended to include the identical angel credits, passed both the state House and Senate on Thursday.

But because SB 2093 includes a controversial provision allowing a developer to finance a Marion, Ill., retail/entertainment plan through bonds backed by sales taxes — a version of which was once vetoed by Gov. Pat Quinn — life sciences leaders and their supporters in the legislature have pushed through a second bill with identical angel tax-credit language.

SB 3710 cleared the House on Wednesday, and the state Senate today was expected to concur with several House amendments to the bill before sending it to Quinn — who is expected to sign that measure.

David Miller, president and CEO of the Illinois Biotechnology Industry Organization, or iBIO, told GenomeWeb Daily News today the angel tax credit will help Illinois catch up to neighboring states in supporting life-science startups. That gap prompted some life-science startups to move out of Illinois, he said, despite advantages that include basic research at universities, available space at research parks, and the presence of pharmaceutical giants as potential partners.

"The only thing that we were really lacking is a government program to support the startups," Miller said. "I think [lawmakers] would have done more if the economy were better. I expect them to do more in the future, but this is just great."

"The sleeping giant has awakened. Look out," he added.

Miller said his group had garnered support for the tax credit from Quinn — the iBIO leader singled out Quinn aide John Kamis for his work in pushing through adoption of the program — as well as leaders in the state Senate and House.

iBIO led Illinois life sciences leaders over the past three years in lobbying for passage of the angel tax credits for startups, as well as a program awarding tax credits for venture capital investments in later stages. That lobbying paid off in part last week with the votes for SB 2093 and SB 3710, both of which call for awarding angel investors tax credits equal to 25 percent of their investment, up to a maximum $2 million, made directly in life-science companies and other "qualified" new business ventures.

The measures also allow angel investors whose credit exceeds their tax liability in a given year to carry forward the excess for the five following years. The tax credits are supposed to benefit investors in the life sciences and other specified industries whose companies have operated in Illinois for up to 10 years, have employed less than 100 employees, and have received no more than $10 million in private equity cash.

The angel credit was originally part of a broader bill — the Emerging Technology Industries Act, also known as Senate Bill 1522 — that combined the angel credits with an annual $15 million tax credit program for state-registered and qualified investors in early-stage life-science and other tech startups.

SB 1522 was conceived in 2008 as a bill to benefit the life sciences industry. The following year, hoping to improve the bill's prospects, iBIO and lawmakers last year agreed to expand the categories of businesses eligible for benefits under the bill, to include alternative-energy, or so-called "clean," technologies, and the state's fast-growing nanotech sector.

But after last year's version of SB 1522 failed to clear both houses of the state legislature, supporters opted to pursue only one of the measure's two programs, the angel credit. iBIO also continued building a coalition of supporters that grew to about 200 organizations statewide, with many members from outside the life sciences industry.

Approval for an angel tax credit program would mark Illinois' second major effort this year to position itself as friendly to the life sciences. The first came earlier this month, when Chicago hosted the 2010 BIO International Convention, attended by 15,322 industry professionals — up nearly 7 percent from the 14,352 at last year's BIO convention in Atlanta.

Illinois' action comes as two other Midwestern states have enhanced their tax credit programs, with the goal of competing for life-science startups and their jobs — and reorienting state economies that traditionally looked to manufacturing for higher-wage employment.

Minnesota Gov. Tim Pawlenty earlier this year signed into law measures that create a 25 percent angel investment tax credit, and expand the types of companies eligible for the state's R&D tax credit. The measures were part of HF 2695, an economic development bill that won support from lawmakers in both the Democratic-Farmer-Labor and Republican parties.

Minnesota agreed to set aside $11 million in credits in 2010, and $12 million in credits each year from 2011 through 2014. Angel investors under the measure can pursue a 25 percent tax credit for investments in small, emerging businesses, up to a maximum credit of $125,000 per person per year, or $250,000 if married filing jointly. If a startup qualifies for tax credits that exceed its Minnesota tax liability, the balance will be paid as a tax refund.

The bill also changes the state's R&D tax credit to a 10 percent refundable credit for first $2 million spent on qualified R&D expenditures, and a 2.5 percent credit for all qualified expenditures over $2 million. If a startup qualifies for tax credits that exceed its Minnesota tax liability, the balance will be paid as a tax refund.

Minnesota's R&D tax credit was previously a non-refundable credit for qualified R&D expenditures set at 5 percent for the first $2 million spent, and 2.5 percent for all qualified expenditures over $2 million. The bill also expands Minnesota's R&D tax credit beyond corporate giants, to S corporations, partnerships, and individuals.

Both the angel and R&D tax credits are intended to benefit "qualified" small businesses in the life sciences and other delineated fields that are headquartered in Minnesota, with more than half its employees working in the state, having a staff of fewer than 25 employees, being in business up to 10 years, and not having received more than $2 million in private equity investments.

"Hopefully, they're going to help spur bioscience development and entrepreneur development in our state," state Rep. Kim Norton (DFL-Rochester), who introduced the tax credit measures, told GWDN.

Dale Wahlstrom, president of The BioBusiness Alliance of Minnesota, told GWDN that his state's lawmakers, like its life-science leaders, have seen the success of tax credit programs in neighboring states.

"Wisconsin, Michigan, Ohio, North Dakota — they are all part of the dialogue, meaning that we have relationships established with every one of those states and regions. They helped us to rewrite the language [of the new programs] so that we could take advantage of what they've learned, and hopefully, that will help us avoid some of the things that didn't work in the past," Wahlstrom said.

Norton added, "We're trying to make sure that we're competitive with the states surrounding us."

To that end, Pawlenty also signed a bill commissioning a study within a year comparing Minnesota's regulations governing small-business startups with those of Wisconsin, Iowa, North Dakota and South Dakota.

"We often hear, well, that in Wisconsin it's easier for an entrepreneur to start up a business, it's easier than our surrounding states. Or we hear that it's easier in other states than in Minnesota: 'There's less regulation. Taxes are less.' We're trying to find out if those are anecdotal or in fact are true," Norton said.

Since 2003, Wisconsin has enacted several measures creating, then enhancing, its tax credit programs for angel and venture capital investors — notably Act 255 of 2005, and the Accelerate Wisconsin program announced in 2008.

On May 10, Gov. Jim Doyle signed into law the Connecting Opportunity Research Entrepreneurship, or CORE, Jobs Act. The measure, also called 2009 Wisconsin Act 265 raised the total amount of angel tax credits available to Wisconsin tech startups from $5.5 million to $6.5 million this tax year, and $20 million in 2011 and each subsequent tax year. Officials also added funding to the Early Stage Seed Credit program, from $6 million to $8 million in 2010, and $20.5 million in 2011 and each tax year after.

Also, investors can take the 25 percent tax credit over a single year, and not have to divide the benefit over two years.

"Last year, we counted in Wisconsin eight new companies that were formed out of state but came into our state. A good majority of those companies were taking advantage of the investment tax credits," Bryan Renk, executive director of BioForward, the statewide organization that represents Wisconsin’s biotechnology industry, told GWDN.

Four of those companies are now in Madison — Aldevron, Flex Biomedical, Inviragen, and Exact Sciences Corp. Three others are in Hudson, Wis. — Radip Diagnostek, RJA Dispersions, and VitalMedix. The eighth company, NanoMedex, is based in Fitchburg, Wis.

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