Iowa Tax Credit Overhaul: What A New Bill Could Mean for Venture Investment, Job Growth, and R&D Incentives

The Iowa Economic Development Authority (“IEDA”) recently unveiled its bill (HSB 305 and SSB 1205) to overhaul Iowa’s tax credit system. The bill is expected to go through the legislative process in both chambers soon for the 2025 session.

This bill is key for Iowa-based tech startups, venture investors, and established technology companies as it would replace existing tax credit programs for angel investments, R&D, and job creation and retention with new versions that seek to better target key industries. A goal of the legislation is to reduce tax incentives with the idea that Iowa’s recent history of tax cuts provides a favorable business climate without the same need for additional tax incentives.

Venture Investments

The existing separate tax credit allocations of $2 million for the Angel Investor Tax Credit and $8 million for the Innovation Fund Tax Credit would be replaced with one $10 million pool for both the new Seed Investor Tax Credit and the existing Innovation Fund Tax Credit. The Innovation Fund Tax Credit would continue to provide tax credits to limited partners of 25% of an equity investment in eligible venture capital funds that themselves invest in Iowa-based startups.

The new Seed Investor Tax Credit would work similarly to the Angel Investor Tax Credit by providing a tax credit for eligible equity angel investments into Iowa companies in STEM industries. Key differences include:

1. A 20% refundability tax credit for investments in urban businesses, and up to 35% refundability if the investment is made into a rural business (currently 25% no matter the business location).
2. A qualifying business must be in operation for five years or less (currently six years).
3. The business’s net worth must be less than $2 million (currently $10 million).

The maximum amount of venture investment tax credits that any taxpayer may receive would remain at $100,000.

Job Creation

The High Quality Jobs (“HQJ”) program, created in 2005, is a series of tax credits and financial assistance programs meant to encourage business investments in Iowa facilities. Under the existing HQJ program, a business must make a qualified investment based on wages and benefits provided to employees in Iowa. The ambitious HQJ program was, and remains, underutilized based on its authorized maximum redemption amount. The program had an authorized cap of $185 million in incentives when founded and currently has a cap of $68 million but has never had redemptions over $38.1 million, according to a 2023 report by the Legislative Services Agency.

The new proposal would replace the HQJ programs with a $50 million Business Incentives for Growth (“BIG”) program. An eligible business can apply and enter into an agreement with the IEDA for a sales and use tax refund and investment tax credits. Participating businesses would still be eligible to receive up to 10 years of local government property tax incentives. To be eligible, a business must be primarily engaged in advanced manufacturing, bioscience, insurance and finance, or technology and innovation. The business cannot be a data center or retail business. In evaluating applicants, IEDA would consider the following as positive factors:

1. A high proportion of in-state suppliers.
2. The proposed project will diversify the state economy.
3. Few in-state competitors.
4. Ongoing job creation potential.
5. Advanced technology usage.
6. Potential increases of state GDP.

R&D

The bill would replace the current Research Activities Tax Credit, which is administered by the Department of Revenue, with a new Research and Development Tax Credit, which would be administered by the IEDA. The structure of the credit would remain similar, as a refundable credit received as a percentage of eligible research expenditures. However, the proposal changes:

1. The calculation of the credit, which would change to up to a 3.5% credit based on eligible expenditures.
2. The type of industries that are eligible for the tax credit, which may be expanded by the IEDA.
3. The existing uncapped system to a $40 million capped system.

Next Steps

This legislation is developing in real-time and could be subject to substantial amendments to how it is currently written. Investors and innovators who might utilize tax credits in Iowa should stay informed on this proposal as it moves through the legislative process and connect with the attorneys in Dentons’ Global Venture Technology Group and Public Policy and Regulation Practice to best evaluate the impact and opportunities for their portfolios and businesses.