The North Carolina Qualified Business Tax Credit Program

by Poyner Spruill LLP
Contact

Investors and businesses that are seeking to raise capital should be aware of North Carolina’s Qualified Business Tax Credit Program, which provides significant tax benefits to North Carolina taxpayers in connection with their investments in certain types of businesses. The program is administered by the Secretary of State and provides taxpayers a credit (i.e., a dollar-for-dollar reduction in the amount of taxes owed) against North Carolina state income tax liability when they invest in a Qualified Business Venture, Qualified Grantee Business, or a Qualified Licensee Business.

Qualification of the Business

In order for an investment to be eligible for the credit, the company in which the investment is made must complete an Application for Registration as a Qualified Business. The fee for the application is $100. Generally, the company is required to submit a certified financial statement (i.e., reviewed or audited by an independent certified public accountant) with its application. However, a new company formed in the calendar year of its application is not required to submit a financial statement until the following year when the registration is renewed. In addition, a company formed prior to the calendar year of its application may obtain a conditional registration if furnishing the financial statement with the initial application would impose an undue hardship on the company. The conditional registration will be canceled if the certified financial statement is not filed within five months after the end of the company’s fiscal year.
As noted above, there are three types of Qualified Businesses:
• In order to be a Qualified Business Venture, a company must i) engage primarily in manufacturing, processing, warehousing, wholesaling, research and development, or a service-related industry, ii) be organized in the calendar year in which the application is filed, or if organized earlier, have gross revenues of $5,000,000 or less during its most recent fiscal year, and iii) not engage as a substantial part of its business in providing professional services (such as medical or legal services), construction or contracting, selling or leasing at retail, investing, entertainment or recreation, or managing or operating real estate.
• In order to be a Qualified Grantee Business, during the current year or any of the preceding three years, a company must have received funding from a federal agency under the Small Business Innovation Research Program or from a “granting entity.” A “granting entity” must have as its principal purpose stimulation of development of the biotechnology industry or conducting research and development in electronic, photonic, information, or other technologies, or the stimulation of economic development based on the advancement of science, engineering, and technology, and must meet certain other statutory requirements.
• In order to be a Qualified Licensee Business, a company must i) currently be performing under a licensing agreement with The University of North Carolina or another research university for the purpose of commercializing technology developed at the institution, and ii) have $1,000,000 or less in gross revenues for the most recent fiscal year.
There is no requirement that a Qualified Business be organized in North Carolina or have operations in North Carolina. The only required tie to North Carolina is that the investor must have North Carolina income tax liability in order to take advantage of the credit. Some may find this surprising, since the program is presumably intended to encourage investment and job growth within the state of North Carolina. However, this makes the credit all the more attractive to North Carolina investors, who may appreciate the ability to invest, in a tax-advantaged manner, in companies organized and operated in other states.

Amount of the Credit

An individual investor is entitled to a tax credit equal to 25% of the purchase price paid by the investor for the equity securities or subordinated debt of the Qualified Business purchased by the investor in the calendar year, up to a maximum credit of $50,000. “Equity securities” include common stock, preferred stock, partnership interests, limited liability company interests, and subordinated debt that is convertible into any of the foregoing. “Subordinated debt” means unsecured debt that is subordinated to the company’s bank debt and which matures at least five years after its issuance. If the investor uses non-cash consideration to pay any portion of the purchase price for the equity securities or subordinated debt of the Qualified Business, the investor must submit a certified appraisal of the value of the property used to pay for the investment. The credit is first applied against the investor’s North Carolina tax liability for the year following the year of investment, and any unused credits can be carried forward for five additional years.
Subject to certain limitations, investors may also receive the tax credit if they make their investments in the Qualified Business via a pass-through entity (e.g., the equity securities or subordinated debt of the Qualified Business are purchased by an S corporation, a limited partnership, or a limited liability company in which the investor is an owner). A pass-through entity may receive a tax credit equal to 25% of the purchase price paid by it in the applicable calendar year for the equity securities or subordinated debt of a Qualified Business, with a maximum credit of $750,000 per year. The tax credits are allocated to the pass-through entity’s owners, but no owner may receive a tax credit of more than $50,000 in one year, whether by investing directly or through a pass-through entity. The pass-through entity may not reallocate any unused credit among its other owners if this maximum is met.
In order to receive the tax credit, an investor must file an Application for Tax Credit for Qualified Business Investments (Form D-499) with the North Carolina Department of Revenue on or before April 15 of the year following the calendar year that the investment was made. This deadline may be extended, but not past October 15, and an extension to file a North Carolina tax return is not deemed to be an extension to file a Form D-499. The Department of Revenue sends notification of credit approval prior to the end of the calendar year, and the approval must be filed with the taxpayer’s North Carolina income tax return.

Limitations on the Credit

The program contains several limitations that may prevent an investor from receiving the tax credit. It is important to be aware of these limitations when structuring investment transactions, so that the tax benefit is not inadvertently lost. A few of the restrictions are as follows:
Not Available to Compensated Participants. The tax credit is generally not available to anyone who participates in the operation of the Qualified Business for compensation, whether as an employee, contractor, or otherwise. An investor is, however, allowed to participate as an officer, director, or otherwise, as long as he or she does not receive any compensation other than expense reimbursements and/or participation in a stock option and/or stock bonus plan.
No Broker Fees. The tax credit is also not allowed if a broker receives a fee or other similar remuneration for soliciting the investment. Only the brokered investment is disqualified, and other non-brokered investments in the same company may still be eligible for the credit.
Restrictions on Transfer. Subject to certain exceptions (e.g., death, liquidation), the investor forfeits the tax credit and is liable for all tax that would have been due, plus interest, if the investor transfers any of the Qualified Business’ securities within one year after the investment was made or if the Qualified Business redeems the securities within five years after the investment was made.
Total Dollar Limit. The total amount of tax credits allowed to all North Carolina taxpayers in any year is $7,500,000. If the claims made in a year exceed that amount, the Secretary of Revenue will allocate the available credits in proportion to the amounts of the credits claimed.

Renewal

To remain qualified, a Qualified Business must renew its registration each year. The renewal fee is $50, and a renewal application must be filed by the 15th day of the third month following the close of the company’s fiscal year. Note that the renewal deadline may occur earlier than the first anniversary of the company’s initial registration, depending on when the initial registration occurred. If the renewal application is not filed on time, the company’s registration will be revoked, and the Secretary of State will send a notice of revocation to the company. The registration can be reinstated if the company files an application for reinstatement within 30 days after receipt of the revocation notice. The company must, however, pay a late filing penalty of $1,000 in addition to the $50 renewal fee. A business that seeks approval of a new application after its registration has been revoked must also pay a penalty of $1,000 in addition to its application fee. Investments made while the registration is not in effect are not eligible for the tax credit (unless the registration is reinstated, in which case it is treated as if it was never revoked). So a company that anticipates future investments may choose to renew its registration annually, even in years that no investments are sought, in order to avoid paying the penalty to re-register if investments are made in a future year.

Other Interesting Facts

The Secretary of State tracks the effects of the program by requiring companies that renew their registration to submit certain information, including the number of jobs created that are attributable to investments under the program. As of September 28, 2012, 109 companies are registered and 297 jobs were created in 2012 with average wages of $40,866.67 per job.
This article is only an overview and does not cover all the intricacies of the program. Readers should consult an attorney or accountant regarding the applicability of the program to each particular situation. Attorneys at Poyner Spruill LLP have experience with the program and are available to help clients reap its benefits.

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.

© Poyner Spruill LLP | Attorney Advertising

Written by:

Poyner Spruill LLP
Contact
more
less

Poyner Spruill 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!