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TAX CREDITS & INCENTIVES FOR START-UP COMPANIES May 26, 2016 BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the & Incentives for Start-Up Companies BDO KNOWLEDGE Webinar Series ‒ Tax Credits international BDO network of independent member firms.

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WITH YOU TODAY • JOSEPH CARR – SALT Principal, National SALT Business Development & Marketing Leader • JANET BERNIER, J.D. – SALT Principal, Northeast Regional Leader Business Credits & Incentives Practice • THOMAS J. ALBERTE – Senior Director SALT, National Leader Business Credits & Incentives Practice

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INTRODUCTORY COMMENTS

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INTRODUCTORY COMMENTS • As a start-up company, you face many challenges such as: •

Where can I find the financing and investment to conduct the research and run my business while it is still in the development stage?

•

Where can I find the expertise to help develop my business and market my products and services?

• Federal, state, and local governments can help you with these challenges through their incentives offerings. •

Encourage financing for and investment in start-up companies.

•

Provide free expertise.

•

Provide tax incentives such as tax credits to investors and the start-up companies.

•

Subsidized space.

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INTRODUCTORY COMMENTS (CONT’D) • Don’t miss out: •

There are quite a few federal, state, and local incentives that apply to start-up companies.

•

They oftentimes are easy to obtain and usually do not have to be negotiated.

•

Governments are happy to provide incentives to start-up companies because it helps them achieve their goals – a growing economy – and it makes them look good.

• Examples of Incentive Programs •

California (California Competes Tax Credit) •

An income tax credit available to businesses that want to locate in California or stay and grow in California.

•

25% of credits are reserved for small businesses.

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INTRODUCTORY COMMENTS (CONT’D) • Examples of Incentive Programs (Cont’d) •

•

Illinois (EDGE) •

Designed to offer a special tax incentive to encourage companies to locate or expand operations in Illinois when there is active consideration of a competing location in another state.

•

For a company with 100 or fewer employees, must agree to make a capital investment of $1 million and create at least 5 new jobs in Illinois.

New York (START-UP NY) •

Offered to new and expanding businesses that partner with, and are on or near an eligible university or college New York State.

•

Potential to pay zero taxes for 10 years, and direct access to advanced research laboratories, development resources and experts in key industries or schools partnered with.

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AGENDA

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AGENDA • Credits & Incentives Applicable to Start-Up Companies • Federal Tax Credits & Incentives for Start-Up Companies • State & Local Tax Credits & Incentives for Start-Up Companies

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CREDITS & INCENTIVES APPLICABLE TO START-UP COMPANIES

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

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WHAT IS A START-UP COMPANY? • Definition is widely debated • Entrepreneurial venture and/or new business • Corporation (including S corporation), partnership or temporary organization • Designed to search for a repeatable and scalable business model (Steve Blank & Bob Dorf) • Designed to grow fast is the only essential thing (Paul Graham) • Usually newly created, and innovative in a process of development, validation and research for target markets

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CHARACTERISTICS OF A START-UP COMPANY • Small number of employees (small business and limited resources) • Innovative and technological (R&D) • Dependency on private equity (financing and investment) • Lack of history and financial statements • Statistically small rate of survival • Losses in initial years?

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WHY STATES & MUNICIPALITIES OFFER INCENTIVES • Encourage business to create or retain jobs •

How many jobs created or retained?

•

What is the quality of those jobs?

• Encourage businesses to make an investment •

How much is the capital investment?

•

How much is taxable?

• Promote development of distressed/rural areas • Promote a specific behavior (e.g., R&D or investment)

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STATUTORY & NEGOTIATED (DISCRETIONARY) INCENTIVES • Statutory incentives •

Incentives that are found in the federal, state or municipal statutes

•

Are generally available if certain performance criteria and administrative requirements identified in the statute are met (e.g., job creation and investment)

•

Do not have to be negotiated

•

Primary incentives offered to start-up companies

• Negotiated (Discretionary) incentives •

Offered on a case-by-case basis

•

Require negotiation

•

Not usually available to start-up companies, unless significant job creation or capital investment

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FEDERAL INCENTIVES FOR START-UP COMPANIES

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FEDERAL INCENTIVES AVAILABLE • Small Business Innovative Research Grant Program (“SBIR”) • Small Business Technology Transfer Grant Program (“STTR”) • Federal & State Technology Partnership Program (“FAST”) • Research & Development Credit (IRC § 41) • Small Business Stock Gain Exclusion (IRC § 1202) • Conversion of Capital to Ordinary Loss on Sales of Small Business Stock (IRC § 1244)

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SBIR GRANT PROGRAM OVERVIEW •

BDO’s Government Contracts & Grant Advisory Services Practice

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Federal program coordinated by the Small Business Administration

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For small businesses to help fund R&D

•

Funding though contracts or grants

•

Projects must have the potential for commercialization and must meet specific U.S. Government R&D needs.

•

Support scientific excellence and technological innovation

•

Provides funding for early-stage innovation ideas that are too high-risk for private investors

•

“Small business" is defined as a for-profit business with fewer than 500 employees, owned by one or more individuals who are U.S. citizens or permanent resident aliens.

•

Around $2.5 billion awarded each year BDO KNOWLEDGE Webinar Series ‒ Tax Credits & Incentives for Start-Up Companies Page 17

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SBIR GRANT PROGRAM OVERVIEW •

The United States Department of Defense (“DoD”) is the largest agency in this program with approximately $1 billion in SBIR grants annually.

•

Over half the awards from DoD are to firms with fewer than 25 people and a third to firms of fewer than 10.

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STTR GRANT PROGRAM OVERVIEW •

Expands funding opportunities in innovation

•

Expansion of joint venture opportunities for small businesses and nonprofit research institutions

•

Business must formally collaborate with a research institution

•

Bridges the gap between performance of basic science and commercialization.

•

Supports scientific excellence and technological innovation

•

Fosters technology transfer through cooperative R&D between small businesses and research institutions

•

Increases private sector commercialization of innovations derived from federal R&D

•

Highly competitive program

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STTR/SBIR GRANT PROGRAM THREE-PHASE PROGRAM • Phase I •

Establish the technical merit, feasibility, and commercial potential of the proposed R&D

•

Determine the quality of performance of the small businesses prior to providing further support in Phase II

•

Phase I awards normally do not exceed $150,000 for 1 year.

• Phase II •

Continue the R&D in Phase I

•

Funding based on Phase I results, the scientific and technical merit, and commercial potential

•

Phase II awards normally do not exceed $1,000,000 for 2 years.

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STTR/SBIR GRANT PROGRAM THREE-PHASE PROGRAM (CONT’D) • Phase III •

The small business pursues commercialization objectives resulting from the Phase I & II

•

No funding in Phase III under STTR/SBIR

•

May involve non-STTR/SBIR funding or production contracts for products, processes or services intended for use by the U.S. Government

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FAST PROGRAM •

Competitive grant program designed to strengthen the technological competitiveness of small businesses

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Supports the SBIR and STTR programs

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Encourages participation of small technology firms in the innovation and commercialization of new technology

•

All 50 states may receive funding for an array of services such as: •

Outreach

•

Technical assistance

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RESEARCH & DEVELOPMENT CREDIT •

Credit against the corporate and individual income tax for conducting R&D in the U.S.

•

Any business that designs, develops, or improves products, processes, techniques, formulas, inventions, or software may be eligible.

•

Qualified Small Businesses (“QSBs”) may make an election to take up to $250,000 in credits against the employer portion of their payroll (FICA) taxes.

•

•

Corporations, partnership, or person

•

Average gross receipts for the three taxable year preceding the year the credit is allowed < $5 million, and

•

No gross receipts for any of the 5 taxable years preceding the 5 year period ending with the year in which the credit is allowed

Eligible Small Businesses (“ESBs”) may claim the credit against AMT. •

Closely held corporations, partnerships, and sole proprietorships

•

Annual gross receipts for the three preceding tax years average no more than $50 million

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SMALL BUSINESS STOCK GAIN EXCLUSION •

IRC § 1202 provides for an exclusion from income for individuals of up to 100% of gain on the sale of small business stock held for > 5 years.

•

Excluded gain is not considered an AMT preference item.

•

Excluded gain is not subject to a 3.8% Obamacare tax on “net investment income” from capital gains.

•

The 100% exclusion applies to investments made after Sept. 27, 2010 (smaller % applies for investments made before this date).

•

Limited to a lifetime exclusion of the lesser of: •

$10 million per issuer; or

•

10 times the adjusted basis of the taxpayer’s stock in issuer.

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SMALL BUSINESS STOCK GAIN EXCLUSION (CONT’D) •

•

To qualify for the exclusion: •

The issuer must be a C corporation.

•

The stock must be acquired from the issuer (or underwriters).

•

For substantially all of the holding period, the corporation must use at least 80% of its assets in an active trade or business.

•

10% or more of its total asset value cannot consist of real estate not used in the active conduct of a trade or business.

•

The stock was issued for money or property or as compensation for services.

•

At the time of issue, the corporation’s gross assets are $50 million or less.

The PATH Act made this a permanent incentive.

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LOSSES ON SMALL BUSINESS STOCK •

IRC § 1244 converts all or a portion of capital losses of an individual (or partnership) on the sale of “Section 1244 stock” into ordinary loss.

•

The annual maximum is $100,000 for married filing jointly, and $50,000 for others.

•

IRC § 1244 Stock is stock in a domestic corporation if: •

At the time of issuance it was a small business corporation (“SBC”). •

SBC ≤ $1 million in equity at the time the stock was issued

•

The stock was issued for money or property.

•

For the corporation’s 5 most recent tax years, it derived < 50% of gross receipts from other than royalties, rents, dividends, interests, annuities, and gains on sales or exchanges of stock and securities.

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STATE INCENTIVES FOR START-UP COMPANIES

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STATE & LOCAL INCENTIVES AVAILABLE • Government Resources & Assistance • Direct Government Financing • Direct & Indirect Private Investment Incentives • Research & Development Incentives • Federal SBIR & STTR Grant Program Related Incentives • Tax Credits for Start-Up Companies • Sales/Use Tax Exemptions • Property Tax Exemptions

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GOVERNMENT RESOURCES & ASSISTANCE • Overview •

Development Centers

•

Free or low cost services (e.g., accounting, technical, training, marketing, trade, procurement)

•

CA, CT, ID, IN, IA, LA, MD, MA, MI, MN, MO, NV, NH, NJ, NM, NY, OH, PA, SC, SD, TN, UT, VA, WA, WY, WI

• Examples •

California Small Business Development Centers •

Provides small business owners and entrepreneurs with direct and personal technical assistance through professional consulting, low-cost or free seminars, and conferences

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GOVERNMENT RESOURCES & ASSISTANCE (CONT’D) • Examples (cont’d) •

Pennsylvania Tech Incubators •

•

Provide management guidance, technical assistance, and consulting for young growing companies. Incubators provide access to rental space and flexible leases, shared basic business services and equipment, technology support services, and assistance in obtaining financing

Connecticut Venture Group •

Helps high-growth emerging companies at various stages of growth connect with investors seeking investment opportunities

•

Produces technology-focused seminars and expositions, updates on financing and market trends, university tech transfer conferences, and an annual venture fair

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DIRECT GOVERNMENT FINANCING • Overview •

Government funds that provide or support financing such as loans, grants and loan guarantees

•

AL, AK, AR, CA, CT, DC, HI, ID, IL, KY, KS, LA, ME, MI, MD, MS, MN, MO, NH, NJ, NM, NC, OH, OR, PA TN, TX, VT, WA, WI

• Examples

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DIRECT & INDIRECT PRIVATE INVESTMENT INCENTIVES • Direct Private Investment – Overview •

Provide subsidies (usually in the form of tax credits or deferral or exemption of capital gains) to investors who invest in start-up companies

•

Angel and Seed Capital Investment Incentives

•

Other than exclusion or deferral of gain on investment – AR, CO, GA, HI, IL, IN, KS, LA, ME, MD, MA, MI, MN, MO, NJ, NY, ND, OH, OK, SC, WI

•

Exclusion or deferral of gain on investment – States with income tax conform to all or part of IRC § 1202, except for CA and WI (has its own set of rules).

• Indirect Private Investment – Overview •

Provide subsidies (usually in the form of tax credits or deferral or exemption of capital gains) to investors who invest in entities (Government or Private) that invest in start-up companies

•

Venture Capital or Early Stage Funds Investment Credit

•

Other than exclusion or deferral of gain on investment – AR, IA, KS, KY, LA, OH, ME, MI, MO, MT, ND, SC, UT, VT, WV, WI

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DIRECT & INDIRECT PRIVATE INVESTMENT INCENTIVES (CONT’D) • Examples of Direct Private Investment •

Wisconsin - Angel Investment Income Tax Credit •

Income tax credit = 25% of the investment made directly in a “Certified Qualified New Business Venture”

•

Certified Qualified New Business Venture

•

•

It is certified by Wisconsin (this should be done annually)

•

Upon initial certification it had < 100 employees and has been operating in Wisconsin for < 10 years

•

It has not received private equity cash of > $10 million

•

Is headquartered in Wisconsin

•

> 50% of its employees are employed in Wisconsin

•

It has potential to create jobs and/or increase capital investment in Wisconsin

15 year carryforward

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DIRECT & INDIRECT PRIVATE INVESTMENT INCENTIVES (CONT’D) • Examples Indirect Private Investment •

Wisconsin – Early Stage Seed Investment Income Tax Credit •

Income tax credit = 25% of the investment in a fund that invests in “Certified Qualified New Business Ventures” (see prior slide)

•

Credits can be transferred (but the rules make it next to impossible to do so)

•

15 year carryforward

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RESEARCH & DEVELOPMENT INCENTIVES • Overview •

Usually in the form of nonrefundable income tax credits for conducting research in the state

•

Many piggy-back some of the federal R&D rules

•

Might not be of value to start-up companies in the early years and could lose before they are monetized

•

Some state credits are refundable (e.g., NJ & CT)

•

AZ, AR, CA, CO, CT, DE, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, ME, MD, MA, MN, MS, NE, NH, NJ, NM, NY, NC, ND, OH, OR, PA, RI, SC, UT, VT, VA, WV, and WI

• Examples •

Connecticut Incremental Research and Experimental Expenditures •

Credit for increases in incremental research and experimental expenditures (as defined in IRC § 174)

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RESEARCH & DEVELOPMENT INCENTIVES (CONT’D) • Examples (cont’d) •

Florida R&D Credit •

•

Credit for targeted industry businesses for qualified R&D expenses that qualify for the federal credit under IRC § 41 for in-house research expenses

Kentucky Facilities Credit •

Nonrefundable credit against corporate or personal income tax is available for a portion of the construction costs of research facilities.

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SBIR/STTR/FAST GRANT PROGRAM RELATED INCENTIVES • Overview •

Matching grants

•

Assistance in accessing funds (e.g., preparation of applications) from the SBIR and STTR Programs

•

AR, CT, IN, MA, MI, MN, MO, MT, NC, SD, WV, WY

• Examples •

Michigan Emerging Technologies Fund •

Provides funds to match federal funding awards for SBIR/STTR projects.

•

Targeted areas - life sciences; homeland security and defense; advance automotive, manufacturing, materials, information and agricultural processing technology; and alternative energy.

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SBIR/STTR/FAST GRANT PROGRAM RELATED INCENTIVES (CONT’D) • Examples (cont’d) •

Minnesota SBIR/STTR Assistance •

Assists small technology companies in applying for SBIR/STTR grants.

•

Helps identify appropriate federal agencies and strategies, assemble a research team, connect to scientific and technical resources, develop and review Phase I and II proposals and budgets, and provides topic specific workshops.

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SALES/USE TAX EXEMPTIONS • Overview •

R&D machinery & equipment

•

Small business exemption

•

AZ, FL, ID, IN, MD, MA, NJ, NY, NC, OH, OK, SC, TN, TX, VA, WA, WV, WI, and others

• Examples •

Arizona R&D Exemption •

•

Maryland R&D Exemption •

•

Sales of machinery or equipment used in R&D are exempt from the sales/use tax. Sales of tangible personal property for use or consumption in R&D are exempt from sales/use tax.

Massachusetts Small Business Energy Exemption •

Gas, steam, electricity, and heating fuel are exempt if sold for use by a business that has 5 or fewer employees.

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PROPERTY TAX EXEMPTIONS • Overview •

R&D machinery & equipment

•

Small business exemption

•

Incubators

•

ID, MA, MI, MS

• Examples •

Massachusetts Small Business Exemption •

Cities and towns can provide an exemption for commercial property

•

Must have assessed valuation of less than $1 million

•

Occupied by a business that had a total average annual employment of less than 11 during the previous year

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PROPERTY TAX EXEMPTIONS (CONT’D) • Examples (cont’d) •

Mississippi Business Incubator, Start-Up Companies Exemption •

Exemption is allowed for all property of nonprofit entities that provide support to and operate technology incubators for start-up companies

•

Exemption also is effective for up to the first 5 years that a start-up company remains a tenant of a technology incubator

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TAX CREDITS • Overview •

Primarily Income Tax Credits

•

Refundable and Non-refundable

•

Investment tax credits for investing in R&D equipment

•

Employee health insurance credits (federal)

•

Credits for setting up pension plans (federal)

•

Small business credits

•

Minimal Job creation

•

Location Specific

•

AR, FL, HI, KY, ME, MI, MO, MN, MS, NB, NC, NY, OH, OK, RI

• Examples •

Oklahoma Small Business Administration Guaranty Fee Credit •

Small businesses may claim a corporate income tax credit for any amount paid to the U.S. Small Business Administration as a guaranty fee

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TAX CREDITS (CONT’D) • Examples (cont’d) •

Nebraska Advantage Act •

Provides a refundable corporate income tax credit based on the amount of a taxpayer's investment, hiring, and wages paid in the state

•

Hiring and investment requirements are relatively low

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CONCLUDING COMMENTS

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CONCLUDING COMMENTS • As discussed, there are multitude of incentives available (e.g., grants, financing, tax credits, etc.) for businesses that increase jobs and investment, and many are specifically geared toward start-up companies. • Some are easy well publicized and others not as much, and qualification for some requires initiating the application process before investment or expansion begins. • If you are starting (or even expanding) a business, please reach out to Janet or Tom who can help you to identify which incentives may be available to your business, and can assist with all stages of the process, as this may minimize the cost of investment, and maximize your return.

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QUESTIONS?

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SPEAKER BIOGRAPHIES

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BIOGRAPHY With 18 years of combined experience in state and local taxation, financial statement auditing, and operational auditing, Joe has worked with a broad range of the Firms’ largest clients including manufacturing, retail, distribution, financial institutions, investment companies, and business services. He specializes in state and local tax issues with an emphasis on income/franchise taxation and unclaimed property compliance and consulting.

Joseph Carr, J.D. Principal, State and Local Tax [email protected] Direct: +315 6161 3946 Fax: +312 856 1379 BDO USA LLP 330 North Wabash, Suite 3200 Chicago, IL 60611 UNITED STATES +312 856 9100 www.bdo.com

Joe leads BDO’s National State and Local Tax Business Development and Marketing function. In this role, Joe touches many folks in the corporate community through dedicated BDO Knows Webinar Series on various topics, Alerts, pressing notices and other educational outreach efforts. Joe also maintains a standing column with State Tax Notes entitled “A View from the Windy City” where he along with his colleagues discuss various state and local topics important to the taxing community at large. Recent articles have included: (a) State and Local Tax Due Diligence Exposures and Procedures, (b) Extension of Delaware’s Friendlier Voluntary Disclosure Program, (c) Chicago Taxes Cloud-Based Services and Amusements and (d) Unclaimed Property Concerns for the Healthcare Industry. Mr. Carr is a frequent speaker at firm and organizational events on unclaimed property and other state and local topics. In addition, Joe manages the SALT practice for the Firm’s Chicago office and heads-up the firms National Unclaimed Property practice. He has had success in mitigating client escheat exposures in VDA and audit settlements before many state escheat divisions. Joe, in concert with his colleagues, works closely with clients to enhance their accounting practices, systems and ongoing efforts for operational efficiency through Accounting Assessment Reviews. This success is largely attributable to his deep understanding of accounting principles, transaction flow, and unclaimed property law. Having evaluated financial and operational corporate risks, Joe offers clients facing escheat issues valuable accounting experience and an unique perspective in dealing with unclaimed property matters. Prior to joining the Chicago office of BDO USA, LLP, Joe worked with KPMG LLP and Deloitte & Touche LLP in state and local tax and audit divisions, respectively. In addition, Joe also managed the Internal Audit Division of a middle market food cooperative.

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BIOGRAPHY Janet Bernier brings more than 25 years of public accounting experience, as well as tax litigation experience to her clients. Janet’s client services have concentrated on securing state and local tax credits and financial incentives in dozens of states as well as securing federal WOTC tax credits. Her in-depth background includes assisting companies and local governments with creating and sustaining jobs through financing opportunities, tax credits and incentives, and private-public relationship building. Janet Bernier, J.D. Principal, State and Local Tax [email protected] Direct: +212 515 5405 Fax: +212 697 1299

Her relationships with tax and economic development authorities have resulted in unprecedented and ground-breaking tax and financial benefits packages for clients ranging from $500,000 to $450 million in tax incentives. She was instrumental in the creation and adoption of the North Carolina Economic Stimulus and Job Creation Act in 2002 which is highly regarded by businesses and government as an effective economic development tool.

BDO USA LLP 100 Park Avenue New York, NY 10017 UNITED STATES +212 8858000 www.bdo.com

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BIOGRAPHY EXPERIENCE

Tom works out of BDO’s Milwaukee office. He has over 29 years of experience with federal and multi-state tax and federal, state and local credits and incentives. As the leader of BDO’s Credits and Incentives Practice, Tom specializes in assisting businesses in procuring government incentives packages that result from changes in operations or other business conditions.

Thomas J. Alberte Sr. Director, State and Local Tax [email protected] Direct: +414 615 6775 Fax: +414 272 1090 BDO USA LLP 330 E. Kilbourn Ave., Suite 750 Two Plaza East Milwaukee, WI 53202 UNITED STATES +414 272 5900 www.bdo.com

Tom also specializes in minimizing federal and state income and franchise tax liabilities for businesses across the financial, insurance, high technology, retail, manufacturing and other specialized industries and in the multi-state aspects of mergers, acquisitions, consolidations and dispositions. Just prior to joining BDO Tom was a partner with Reinhart Consulting Services, LLC. Prior to that Tom was a member of Andersen’s and Deloitte’s multi-state tax and incentives groups. Earlier in his career he was the head of the tax department at the Wisconsin Blue Cross & Blue Shield Plan and its public subsidiaries.

EDUCATION BS MBA MST

University of Wisconsin-Madison Finance, University of Wisconsin-Madison DePaul University

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@BDO_USA_Tax

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