The Access to Capital for Entrepreneurs Act of 2007: An Extension of the Impact of Tax Policy on Informal Venture Investing (2009)

(D)oes a tax credit 'really lead to investments? Does it make an investor invest in bad deals? Does it make people who should not be investing invest?' (Preston quoted by DeBaise 2007: R6). Government policy makers often look towards the small and medium sized business (SMEs) sector for job creation and other economic development benefits such as increasing the tax base. U.S. Congressman Don Manaullo's January 19 press release on creating anew federal tax incentive for early stage business angel investment notes that four jobs are created for each angel investment, resulting in net job creation and economic development benefits. Even without federal tax incentives to encourage additional angel investing the informal venture investment market grew by 10% during 2006 (Wright 2007). The U.S. Small Business Administration has championed the cause of SMEs through management development and training programs such as the Small Business Development Centers, Service Core of Retired Executives (SCORE), including management training opportunities available on-line through SBA's web portal. However, while both management and marketing capabilities and opportunities define an entrepreneurial venture's success, the limiting factor for many entrepreneurial ventures is simply the lack of early stage seed and risk capital. Wise and Miles (2003: 11) suggest that: Policy makers in the U.S. and Europe understand that entrepreneurship by large and small corporations can be influenced both by regulatory controls and reward stmctures.. .Government policy makers, globally, tend to rely on two major categories of tolls to induce entrepreneurial activities by corporations (or SMEs): (1) tax incentives; and (2) direct government support. The Access to Capital for Entrepreneurs (ACE) Act of 2007 is designed by government policy makers as a private sector solution to increase the supply of early stage seed capital for high potential entrepreneurial venture by creating a tax incentive for to take equity positions in SMEs. The ACE act of 2007 follows the example of several states which have allowed individual angel investors or angel investment pools to benefit from a 25% tax credit, up to a maximum credit of $250,000 for informal venture investment held for at least three years. This investment tax credit has created an economic incentive to encourage additional angel investing. HOW DOES THE PROPOSED TAX CREDIT FUNCTION? Individuals and investment partnerships made up of only are entitled to claim an investment tax credit when making informal venture investments in a small SMEs are qualified by size standards, domicile in the U.S., and corporate control (see HR 5198). A recent paper by White, White, and Miles (2006) suggests that the topic of angel investing has recently become much more important to small businesses and government policy makers and explores the question: Is informal venture investing an economically rational decision? This study updates that discussion in light of the proposed Access to Capital for Entrepreneurs (ACE) Act of 2007. Specifically, this study incorporates the implications of the proposed federal investment tax credit for informal business angel investments on potential rates of return. In this case, the internal rate of return on informal venture investments is evaluated in a scenario where the business angel can benefit from the financial effect of ACE. The proposed legislation for Angel Investments proposes to allow a qualified investor a 25% tax credit for an equity investment in a qualified small business. This means that a qualified investor who makes a $1,000,000 investment in a qualified small business will receive a $250,000 tax credit. This tax credit lowers the investor's federal tax liability by $250,000. This means that an investor who owes $300,000 in federal income taxes will have his tax liability reduced to $50,000 [$300,000 -$250,000] The investor's tax basis (investment) in the equity investment is reduced dollar per dollar by the amount of the tax credit. …