January marks the return of the Kentucky Angel Investment Tax Credit (KAITC), a program designed to spur capital investment in startups and small businesses based in the commonwealth. Anthony Ellis, the Executive Director and General Counsel at the Kentucky Cabinet for Economic Development, spoke to Louisville Future about the tax credit.
Tell us about the tax credit program?
Ellis: This program is intended to encourage investments in promising companies that likely otherwise would not have been made, or not made at the same level due to the companies typically being young and often pre-revenue. Although the tax credit goes to the investor, it ultimately benefits startup companies at a critical time for their survival and growth.
We are working extremely hard to improve Kentucky’s environment for both entrepreneurs and investors so that we have more of both. That is particularly true for our densely populated areas like Louisville, Lexington, and Northern Kentucky, where there is great potential for angel activity because you have a combination of high-net-worth individuals and institutional capital. We also focus on more underserved areas where we want to encourage investment and grow entrepreneurship culture. Providing an incentive that takes more of that investor money off the sidelines makes it available to early stage companies and helps Louisville’s – and the state’s innovation economy grow in the process.
The program was on hiatus for a couple of years. Why and why is it coming back?
Ellis: The legislature actually considered raising the cap to increase the amount of available credits because the demand was so high. The program was oversubscribed within a day, in part because the 40 percent credit was extremely generous. Lawmakers decided to pause the program to look at how it functioned, but included a January 2020 re-start in that legislation.
There appears to be a significant pent-up appetite for the credit, on the part of both entrepreneurs and angels. To date, we have received nothing but interest and anticipation from the community as it returns.
Does this tax credit program differ in ways from the previous one?
Ellis: We wanted to stretch the credits further and create more opportunities without increasing the overall pool of credits. One reason the program was so popular was that the baseline credit was 40 percent of the investment and 50 percent if it was in an enhanced county with higher unemployment.
State leaders looked at what a lot of other states were doing and talked to investors and businesses. There was broad consensus that the credit would still be effective at a lower rate for non-enhanced counties. That is why amount of the credit for non-enhanced counties was lowered to 25 percent.
It is now 40 percent for investments in enhanced counties to provide a substantial incentive for angel activity in those areas. Increasing accessibility for all entrepreneurs is a top priority for us. We are continuing to look for ways to improve the credit to spur greater growth throughout the commonwealth.
To view detailed guidelines for the 2021 Angel Investment Tax Credit Program or to apply for small business or angel investor certification, visit ced.ky.gov/KAITC.
Venture Connectors will be having a virtual lunch on Wednesday, Jan 6 to hear more from Tony Ellis about how Kentucky is supporting startup growth. You can register here.