Legislature could expand Angel investment tax credit

Program is a lifeline for startups when early investment sources run out

Angel investment has helped dozens of New Mexico startups launch and grow, encouraging a bipartisan group of legislators to seek more incentives to help local Angel investors spread their wings across the state.

“Angels” are the people aspiring entrepreneurs often turn to after they max out on financial support from friends and family. That’s because those individual investors can lend a heavenly hand to transverse the infamous “Valley of Death” — a gaping ravine that fledgling startups face when they have a promising new product or service but must still prove their chops in the market before larger institutional investors are willing to step in.

An existing Angel tax credit provides a 25% knock off on state income taxes for qualifying individual Angel investments in local companies. That’s helped spur more financial support for many New Mexico businesses in recent years, according to the New Mexico Angels, which pools capital from individual Angels to collectively invest in companies.

Now, a bipartisan House bill (HB-69) would significantly expand the aggregate amount of state capital available annually for Angel tax credits, from $2 million currently to $5 million. It would also extend the tax expiration, or sunset date, by five years, from fiscal year 2025 to FY 2030.

It’s co-sponsored by three legislators, including Democratic Reps. Linda Serrato of Santa Fe and Meredith Dixon of Albuquerque, and Republican Rep. Joshua Hernandez of Rio Rancho.

The bill received unanimous support in its first hearing on Jan. 30 by the House Commerce and Economic Development Committee. It had a second hearing Monday morning in the House Taxation and Revenue Committee, which voted to temporarily table the bill.

But it’s expected to come back up in Tax and Revenue

alongside other bills under review to consider their collective fiscal impact before sending them to the House floor, said Sherman McCorkle, chairman and CEO of the Sandia Science and Technology Park Development Corp.

McCorkle said it’s “standard protocol” by Tax and Revenue to consider bills in the aggregate before moving them forward.

“It will definitely come back up,” McCorkle told the Journal. “There was no opposition voiced against the bill in the committee.”

Some committee members did ask for more information, such as updated Legislative Finance Committee projections on fiscal impact if the tax credit is expanded.

In its initial impact report, the LFC projected $4.7 million in potential annual general fund revenue requirements going forward, reflecting the new $5 million tax credit cap. That compares to about $900,000 annually in recent years under the current $2 million cap.

But the LFC is now revising its projections, because the previous House committee amended the original bill, stripping out a request to modify how the 25% Angel tax credit is managed.

Angels are currently eligible for up to a maximum $62,500 credit on each individual investment they make, with up to five such investment credits permitted in any given year. That means an investor could potentially apply for up to $312,500 in total state income tax liability reduction annually.

But that could far exceed an investor’s annual tax liability, so the credit can be carried forward for up to five years.

In the four years leading up to FY 2022, about $900,000 in credits were actually applied annually, with $4 million in carry-forwards.

To make the credit more attractive, the original bill proposed to make it refundable, with any pending amount due beyond current tax liability directly returned to investors at year-end.

But direct refunds could also make out-of-state investors with no state tax liabilities eligible for credit, making some legislators uncomfortable.

Under the current bill, the five-year carry-forward on tax credits remains unchanged.