Venture Capital Tax Credits

Venture Capital Funds that are certified by the Department of Commerce and that invest in Qualified New Business Ventures may be eligible to claim a 25% income tax credit on that investment.  Up to $2 million in aggregate cash equity investment by a qualified fund in a single Qualified New Business Venture may qualify for the tax credit.

A Qualified New Business Venture is an early-stage company with high-growth potential that meets Department of Commerce eligibility criteria and that has been certified by the Department.  Before a venture capital fund seeking tax credits invests in such a business, both the fund and the business must be certified by Commerce. 

Businesses can receive up to $4 million in tax credit-eligible cash equity investment, of which no more than $1 million in tax credit-eligible investment can come from angel investors. 
Example:   $500,000 in angel investment + $3,500,000 in venture capital funds = $4 million in investments eligible to earn tax credits. 

Venture Capital Fund Certification Process

In certifying funds, Commerce will consider a number of factors, including:

• The fund manager's experience in managing venture capital funds and/or investing in high-growth, early-stage businesses;

• The past performance of investment fund managed and/or businesses assisted by the fund manager;

• The fund's focus and strategy, management team experience, services it will provide to portfolio businesses and ability to access follow-on funding.

The fund manager must also complete and submit the Early Stage Fund Application.  At the time of final closing, the manager must also provide the private placement memorandum, the capitalization table and ratio of Wisconsin taxpaying and non-taxpaying investors. A fund's tax credits will be based on the proportion of its investors that pay Wisconsin income taxes.  (For example:  At the final closing, only 50% of a fund's investors pay Wisconsin income taxes.  That fund will receive credits based on 50% of its investment.  The credits will then pass through to the individual investors who pay Wisconsin income taxes.)

Certification of venture capital funds will be for the life of the funds.  However, Commerce can revoke the certification under certain conditions, such as supplying false information to obtain certification and violation of local, state or federal laws and regulations related to the conduct of the fund.  The fund manager must also notify the Department of Commerce within 20 business days if the investment is withdrawn or otherwise recovered, or if the Qualified New Business Venture ceases operation in Wisconsin.  If the investment is held for less than 12 months, or not used for legitimate business purposes, Commerce shall revoke the verification of tax credits and notify the Department of Revenue, which may take action to recapture the tax credits.

If the fund is a new fund and in the stage of obtaining financial commitments, the manager should complete and submit the Qualified Fund Manager Application.  If the application meets Commerce's criteria, the Department will "pre-qualify" the fund.  Once the fund meets its goals, Commerce will issue a formal certification upon final closing.

The Investment Process
A certified fund may invest in any business it chooses.  However, tax credits can be earned only on investments (up to the $2 million aggregate cash equity invesment) in Qualified New Business Ventures certified by Commerce.  (Click here for a list of certified Qualified New Business Ventures.)  Commerce may allocate $3.5 million in tax credits in each calendar year, up to the authorized limit of $35 million.  If the $3.5 million in tax credits has been allocated in any given year, the actual tax credit will be attributed to the next available year.  

Investment Lock-In
A certified fund may "lock-in" a tax credit allocation for up to 45 business days from the date of request.  (If the lock-in request is made simultaneously with a business application, the 45-day period will commence with certification of the business as a Qualified New Business Venture.) 

To request a lock-in, the fund must submit a Tax Credit Lock-In Request form and a draft investor agreement.  If the investment is not made within the 45-day period, the lock-in agreement will be rescinded.  Investments made after the 45 days have elapsed may still qualify for tax credits, but the credits will be effective on the date that Commerce receives the completed Tax Credit Investor Request Form.

To claim tax credits earned through their investments, venture capital funds must follow the Department of Commerce's verification process.  Investors and Qualified New Business Ventures must also comply with certain subsequent reporting requirements.

For more information about Venture Capital Tax Credits, contact:

Kathy Collins
608/267-0769
Kathy.Collins@Wisconsin.gov