Slowly but surely, our Federal and State Governments are recognizing that most new job creation comes from small to medium size companies.  As entrepreneurs launch their businesses, get funding to bring innovation to the market and grow into bigger companies, jobs are created.   Furthermore, they have realized that the primary source of capital to start and grow those businesses are private investors…not the local bank.  Therefore, to provide an incentive to the very wealthy to “give back” to their local economy by investing in local businesses, they provide a tax incentive. By putting their wealth back to work in providing capital to early stage companies, the investor receives tangible benefit in the form of a tax credit against earned income, but they also receive intangible benefits from knowing they have contributed to the creation of jobs and the delivery of innovative goods and services to the market place….ie Compassionate Capitalism.

The Compassionate Capitalist Broadcast covering this topic can be replayed by clicking this link:

http://www.blogtalkradio.com/karen-rands/2014/04/01/compassionate-capitalist-saving-taxes-as-an-angel-investor

This podcast reviewed the various options that investors have to reduce their tax basis by investing in companies that have not yet gone public.   Investing in companies with tax credits associated with them offers two wins…reduced paid in taxes during the term investment tax credit, and return on investment at the point of sale of the equity to a public market or another company.  Twenty-one (21) states now offer tax credits for angel investment.  The Angel Capital Association maintains a list with links for each state to learn what is available in that state.  http://www.angelcapitalassociation.org/public-policy/existing-state-policy/ .

The movie and gaming industry is also a big contributor to local economies.   States have implemented multiple programs to attract companies to produce movies and develop gaming software.  Forty-Four (44) states offer “production incentives” and twenty-eight (28) states offer tax credit incentives to investors in those endeavors.  http://en.wikipedia.org/wiki/Movie_production_incentives_in_the_United_States

For the most part, tax credits are applied against earned income.   If the investor doesn’t earn a “w2” income, the can still gain benefit by selling the credits.  A number of financial firms and legal firms exist to advise investors with tax credits and broker those credits for sale.   This is just one firm that offers good information about selling of tax credits. http://www.taxcreditsllc.com/

It is important to understand the options that are available to you to reduce your tax basis while diversifying your investment portfolio.   As you seek to increase your wealth, it is important to also protect that growth with a reduction in taxes whenever possible.  In most cases the states require paperwork to be filled out in advance by the company to eligible for tax credits.   Some industries may be excluded.   Therefore it is important to become familiar with the programs available in your state and as you look for companies to invest in, take the potential for tax credits into consideration when calculating the Internal Rate of Return (IRR).

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Are you an investor that is tired of the volatility and unpredictability of the stock market? Are you frustrated that you have little influence to affect the management or operation of that public company? Have you realized that the public stock market is actually pretty risky and the overall return on investment isn’t that great?  Then learning how to invest in private companies, purchasing shares in a company before it goes public, while the valuation is still low, could be the wealth creation strategy for you. Join the National Network of Angel Investors and sign up for the educational newsletter and free excerpts from the “Inside Secrets to Angel Investing”. http://NationalNetworkofAngelInvestors.com

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