A new tax credit law that Iowa Gov. Kim Reynolds signed on June 6 creates a $110 million cap on business development incentives and will encourage investments in startups and rural startup growth, officials say.

The new Seed Investor Tax Credit program allows for a 20% tax credit for investments in a qualified business located in a community with a population of 15,000 or more and a 35% tax credit for investments in communities with a population of less than 15,000, according to Iowa Economic Development Authority documents.

The law also establishes the new Business Incentives for Growth program, which replaces the High Quality Jobs program, and is designed to “attract high-impact, innovation-driven projects” that are based on investment, quality of jobs and industry 4.0 principles. It allows projects in rural communities with a population 20,000 or fewer to receive an up to 7.5% investment tax credit – or up to 5% investment tax credit for all other projects.

“So those were the two nods that we made to the rural,” said Debi Durham, director of IEDA and the Iowa Finance Authority. “For Iowa to be successful, all of Iowa needs to succeed, so I thought these were good additions to our policies and something that we fully support here at IEDA.”

Liz Keehner, principal at venture capital firm Next Level Ventures, who is also president of the Iowa Venture Capital Association, said it’s “to be determined” whether smaller communities can support the inflow of startups that may occur because of these incentives.

“From where we sit, at both Next Level and at the Iowa Venture Capital Association, we don’t see much startup activity when it comes to new technology companies, particularly in rural areas, because of the infrastructure that is potentially lacking and doesn’t quite support the needs of a startup,” she said. “[Those are] primarily funding, talent and internet access, and there are definitely rural communities that don’t have all three of those things, so you see more startup activity generated in urban areas because of the access to those.”

She said more investment in resources for founders in smaller communities could help.

“But hopefully, if we see more dollars flowing to founders in these areas, maybe those other problems could be solved,” she said.

Jessica Hyland, executive director of the Iowa Biotechnology Association, described the new law as having a “higher credit for investment in rural areas in the state. So for smaller communities, that’s probably pretty good news.”

She said her membership is a mix of rural and urban, noting that she was just at ribbon-cuttings in Tiffin and Eddyville.

“There are businesses building things in rural Iowa because [of the] infrastructure and … the components that they need, the land that they need, the resources they need, the feed stocks they need, all of that is in rural Iowa,” Hyland said.

Hyland praised the seed investor program, which replaces the state’s Angel Investor Tax Credit program.

“It’s going to allow investors to more easily create one of those funds and then to utilize those credits,” she said. “I think for companies that are looking for venture capital or for investment, it’s going to help the startups in the state of Iowa.”

One goal of the Seed Investor tax credit and the existing Innovation Fund Tax Credit is to accelerate the creation of new ventures by using investment tax credits to incentivize the transfer of capital from investors to entrepreneurs, particularly during early-stage growth, according to the legislation.

Keehner said the allocation for the former angel investor tax credit was only $2 million a year, and “oftentimes, there was more demand for that tax credit than there was availability” so there was a long wait list to receive the credit.

Under the new program, the Seed Investor tax credit will be combined with the allocation for the Innovation Fund tax credit, she said. The new combined cap will be $10 million, according to IEDA documents.

“If the angel investor tax credit went over allocation, they couldn’t pull from, say, unallocated dollars in the innovation fund bucket … the rules are still being decided on how [the $10 million] will be split up, but from my understanding, we can expect that the allocation that will be made available for the seed investor tax credit will increase from that [previous] $2 million cap,” Keehner said.

She said the increased allocation could lead to more investment in early-stage companies.

The law also expands eligibility for the Innovation Fund tax credit by changing the criteria to be certified as an Innovation Fund by the state. Funds now only need to have $3 million in investment commitments, down from the previous $15 million.

“An Innovation Fund is a venture fund like Next Level Ventures that generates a 25% tax credit for all of our limited partners or investors,” Keehner said. “Right now, Next Level Ventures is the only venture fund that is certified as an innovation fund, so we’re the only fund generating that tax credit on behalf of our investors. By lowering the criteria, [it] certainly opens the door for more fund managers to raise funds to invest in Iowa companies.”

Another policy change startup advocates are noting is the research and development tax credit is no longer administered by the Department of Revenue and is now run by IEDA. It is now capped at $40 million per fiscal year.

“It offers predictability, because there were a couple years [it] was a little less than $40 million, but not many,” Durham said. “Most of them were $50 [million], $60 [million] so there’s one that was like even the $80-some million a year. So this was a huge savings to taxpayers. It gave, again, predictability to budgeting, which we think is all good government.”