Raising Money? Don’t Forget About the Tax Credits

by Foley & Lardner LLP
Contact

With many states continuing to use tax credits to seed entrepreneurial growth, entrepreneurs and legal counsel must understand the applicable state-sponsored programs and position qualifying businesses to take advantage of these programs. Some government officials and scholars debate the extent to which government policy should seed entrepreneurial activity. Nevertheless, many states continue to view early stage investment tax credits as a “win-win-win” because early stage businesses receive capital, investors receive a tax credit, and states enhance the local economy through increased employment and innovation. Each state-sponsored tax credit program is unique and commonly differs in important aspects, including (1) the types of businesses that qualify under the programs, (2) the amount of tax credits given to investors, and (3) whether investors are compensated with refundable or non-refundable tax credits.

Of the early stage tax credit programs within approximately 20 states, each state’s program varies based on the types of businesses that qualify under the program. States generally require the same qualifications to ensure businesses are truly early stage businesses and are predominately located within the state. However, each state varies based on the principal industry of the business allowed under the program. Some states create a narrowly defined focus of acceptable industries, such as bioscience, advanced materials, information technology, and clean technology. Other states allow businesses from a broader range of industries, as long as they promote the purposes of the program. Most states define industries that automatically do not qualify for tax credits, including real estate, professional services, and financial services.

Additionally, early stage tax credit programs vary on the percentage of the investment that will qualify for tax credits. Historically, the percentage of the investments qualifying for tax credits has varied significantly, ranging from 4% to 100%. Many states provide 25%. Some states use a tiered structure and provide a general tax credit with a slightly higher credit for investments in specific industries or geographic locations.

Lastly, states vary on the compensation given to investors by offering either refundable or non-refundable tax credits. Tax credits directly reduce state tax liability. Most states offer non-refundable credits for qualifying investments. If non-refundable credits are more than the tax, the state does not refund the excess to the taxpayer, meaning tax liability never dips below zero. For example, an out-of-state investor generally cannot use non-refundable tax credits because the investor does not have tax liability within that state. While less common, some early stage tax credit programs compensate investors by offering refundable tax credits. If refundable credits are more than the tax, the excess is refunded to the taxpayer. Because an out-of-state investor can claim the tax credits regardless of state tax liability, refundable tax credit programs may attract a significant amount of out-of-state investments.

Before raising capital, an entrepreneur and legal counsel must understand the nuances of the applicable state program to ensure the business is initially and continually qualified to offer tax credits to potential investors. Early stage businesses may benefit from participating in these programs by improving the probability of receiving an investment and by attracting more investors to select the best strategic investor or most favorable financing terms. These benefits could make a significant difference in the viability and success of the early stage business.

The author of this blog post is a third-year student at the University of Wisconsin Law School and serves as a Summer Associate and Law Clerk at Foley & Lardner LLP. This Fall, his Comment on Wisconsin’s early stage tax credit program will be published in the Wisconsin Law Review (available at http://wisconsinlawreview.org).

View This Blog

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Foley & Lardner LLP | Attorney Advertising

Written by:

Foley & Lardner LLP
Contact
more
less

Foley & Lardner LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!