TAX INCENTIVES FOR EMERGING COMPANIES

  1. Introduction
  2. What are Tax Incentives?
  3. General Definition
  4. Relief from payment of a tax you would otherwise owe to the Louisianastate and/or local government as a result of carrying on your business activities in Louisiana.
  5. There are numerous tax incentives on the books in Louisiana and each one of them is designed to encourage some activity, generally business activity, that the state believes will produce economic and other benefits that exceed the dollars lost from the taxes given up.
  6. Benefit of Tax Incentives
  7. Some tax incentives, such as a tax exemption, simply allow you to not pay the tax you would otherwise owe.
  8. For example, you may qualify for a property tax exemption by building your new office building in a particular parish in the state which means for a given period of time the property tax you would pay on that property is reduced or even eliminated.
  9. More often than not, Louisiana tax incentives come in the form of tax credits
  10. Depending on the particular Louisiana tax credit involved, they can be equal to a percentage of equity investment in your business or a percentage of your business expenses or a percentage of payroll for newly-created employment positions in your business.
  11. Tax credits earned are expressed in dollar amounts and can be claimed on your tax return to satisfy your tax liability dollar for dollar.

(1)For example, $100 worth of tax credits can be claimed on your tax return to pay $100 of tax liability. Instead of having to pay your tax liability with cash from your pocket, you can use the tax credit like cash to pay your tax liability.

(2)In this way the tax credit is similar to a tax exemption; it allows you to not pay tax you would otherwise owe.

  1. However, tax credits are a little more complex than that. There are a variety of Louisianatax credits, each differing in the way that you benefit from them. With many of the Louisiana tax credits, you can do more than just claim them on your return to satisfy your tax liability. Many of them allow you to put extra cash in your pocket.

(1)Some tax credits are refundable – if you claim these tax credits and they exceed your tax liability for the year in which you are claiming them, the taxing authority will give you cash back in the amount of the excess credits

(2)Some tax credits are subject to rebate– once earned, these tax credits are simply given back to the taxing authority for cash equal to the amount of the credits

(3)Some tax credits the state will buy back from you –the taxing authority will buy them back from you for a certain percentage of their face value, for example, 85 cents on the dollar or whatever price is specified in the governing statute or regulations

(4)Some tax credits are transferable–you can sell these tax credits to any third-party purchaser for a negotiated purchase price and in some cases that purchaser can resell the credits to a second purchaser

(5)Carry Forward/Carry Back – if the tax credits you have earned exceed your tax liability in the year in which you earned the tax credits, some tax credits can be carried backward and claimed against a previous tax year’s tax liability and/or carried forward and claimed against a future year’s tax liability, the number of years depending on the particular credit

(6)Some tax credits are allocable – if these tax credits are earned by an entity that is a pass-through, that is, it does not pay tax (like an limited liability company taxed as a partnership or an S corporation), then the entity may allocate the credits to its owners in agreed upon proportions

(7)Combination – some Louisiana tax credits have a combination of the foregoing characteristics

  1. At what stage of planning your business should you be thinking about tax incentives?
  2. As early on as possible
  3. Certainly as you are seeking financing for your business,you should be thinking about what Louisiana incentives you might qualify for, because the potential for earning tax incentives can impact your financing, in terms of the timing and the amount and kind of financing that you are able to secure
  4. Knowing that you will have less expenses (in that the tax incentives will allow you to pay less tax from your business operations) or that you will have additional revenue (in that you will be able to turn the tax incentive into cash) certainly will have an impact on the amount of financing you may need. Either in the short-term on the long-term, you will need less funding from other sources because of the benefit of the tax incentives.
  5. Knowing the type of tax incentive you will potentially earn in connection with your business operations is important as the type of tax credits can also affect not only the amount of funding from other sources but the required timing of that funding

(1)For example, if the tax incentive you are likely to earn is one that is only refundable, then the benefit from this credit will only come once your tax return is filed and the credits are claimed and a refund is issued which could be as much as a year after the financing is needed. With this kind of tax incentive, you may need to finance a larger amount early on to fund your operations.

(2)In contrast, with tax incentives that give you the option to sell them back to the taxing authority or a third-party purchaser when earned, the cash infusion is more immediate.

  1. Knowing that you will be earning tax incentives from your business may allow you to obtain equity and/or debt financing when you otherwise would not have qualified, or at least it may make the deal more attractive to the lender or equity investor. Often the tax incentives will cause an investment in your business to yield a higher and more secure return.
  2. Knowing that you will be earning tax incentives also may expand the pool of potential lenders and investors.

(1)There are lenders that will make loans against the tax incentives you will earn, providing a loan equal to some percentage of the value of your tax incentives, in this way allowing you to get cash upfront for tax incentive benefit you may not be able to harvest until later.

(2)There are brokers and organized buyers that buy transferable tax incentives and in some cases will pay a discounted price upfront before the credits are earned.

  1. Perhaps even at the stage of forming your company, you need to have a decent grasp on what Louisiana incentives you may be eligible for.
  2. For example, it may be that your business will not initially generate enough tax liability to absorb all of the tax incentives to be earned and so you may want the business entity to be able to allocate the credits to its owners. Generally, credits cannot be allocated from a corporation to its owners. To allocate credits, the entity must be taxed on a pass-through basis.
  3. I am not suggesting that in most cases you will be making your choice of entity based on what tax incentives you are likely to earn. In most cases, other factors will dictate your choice of entity, overall tax consequence or the demands of your investors,
  1. Why should you concern yourself with incentives?
  2. If you don’t you are potentially leaving money on the table. As you will see from the discussion of particular Louisiana incentives below, some are lucrative.
  3. It is not just the reduction of tax liability or the additional cash that results directly from earning the tax incentives; as discussed above, earning tax incentives can make your company more attractive to equity investors and lenders and in some cases serve as the direct source of their returns.
  1. How do you qualify for incentives?
  2. In addition to engaging in the particular business activity the incentive was meant the encourage, in many cases, qualifying for a Louisiana tax incentive involves a two-part application.
  3. The first part involves submitting an application to the Louisiana government agency charged with administering the incentive to obtain acertification from such governmental agency that the business activity described in your application will be eligible to earn the tax incentive if it is conducted in the manner described. This is often called a “pre-certification” or “initial certification.”
  4. The second part of the application process usually involves submitting documentation to the same governmental agency sufficient to show that you actually engaged in the activity that was approved in response to your initial application. In many cases, for those tax incentives that are a percentage of business expenditures in the state, this part of the application involves submitting financial statements which show that the expenditures were actually paid and that they were paid for the certified business activity. In some cases the financial statements must be audited by an independent Louisiana CPA. The certification issued in response to this second application which will indicate the amount of the tax incentive earned is often called a “tax credit certification.”
  5. In some cases, it is simply a matter of claiming the incentive on your tax return.
  6. Particular Louisiana Tax Incentives
  7. Angel Investor Tax Credits
  8. How they are earned
  9. Granted to individuals and entities that are accredited (as defined under Regulation D of the Securities Act of 1933) and who invest in certain early-stage, wealth-creating businesses located in Louisiana and maintains the investment for 3 years from the date the credits are certified
  10. To qualify the business must satisfy all of the following:

(1)be domiciled in Louisiana

(2)have less than 50 employees,

(3)have grosssales of less than $10 million,

(4)have a net worth of less than $2 million,

(5)have its principal business operationsin Louisiana,

(6)derives more than 50% of its sales from outside Louisiana,

  1. Businesscannot be engaged primarily in retail sales, real estate, professional services, gaming or gambling, natural resource extraction or exploration or financial services
  1. How many credits can be earned
  2. The credit is 35% of the investment amount
  3. The credits are paid out to the investor in equal installments over 5 years
  4. Payout does not begin until 2 years after the investment is certified by the state
  5. How to benefit from the credits
  6. each $1.00 of tax credit earned can be used by the investor to satisfy $1.00 of his/her/its Louisianaincome or franchise tax liability
  7. investor may transfer the credits by sale toother Louisiana taxpayers
  8. the investor may carry unused credits forward for 10 tax years
  9. if the investor is an entity taxed on a pass-through basis, the investor may allocate the credits to its owners.
  10. Special Rules to Consider
  11. Without further legislative action, this tax credit program will terminate on July 1, 2015.
  12. How to apply for the credits
  13. The first step is for the business to obtain certification as a qualified business which basically means submitting an email to the Louisiana Department of Economic Development including its business plan including financial projectionsand showing that the business will satisfy all the conditions for earning the credits.
  14. Once the business receives a certification letter, the certification is good for a year.
  15. Once certified, the business can then apply for credits to be received by its investors.

(1)There is a $5 million cap on the amount of credits that will be granted by the State in any calendar year

(2)Credits are granted on a first-come first-served basis (based on when the business’ application is submitted relative to everyone else) until the annual $5 million cap is reached. Every business submitting an application on the day the cap is reached receives a prorated amount of the credits remaining on that day.

  1. Once the business submits an application, it has 60 days to submit proof that its investors have made the requisite investment needed to earn the credits applied for. Any credits not backed by this proof are returned to the pool to fill the applications in line to receive the credits on a first-come first-served basis until the cap is reached on which day the remaining credits are prorated for applications received on that date.
  2. A business must submit a new application for each year's round.
  1. Research and Development Tax Credits
  2. How they are earned
  3. Any Louisiana business employing less than 50 employees and

(1)claims the federal R&D tax credit as evidenced by a federal income tax return; or

(2)(i) unless waived by the LED, the business provides the LED with a report from a certified public accountant authorized to practice in the state of Louisiana; and (ii) provides all supporting documentation required by the department to show the amount of qualified research expenses for such taxable year

  1. Any Louisiana business employing 50 or more employees and that claims the federal R&D tax credit as evidenced by a federal income tax return
  2. Any Louisiana business that receives a federal Small Business Innovation Research Grant
  1. How many credits can be earned
  2. If the business employs 100 or more persons, the credit is equal to 8% of its Louisiana R&D expenses minus 70% of its average Louisiana R&D expenses (if any) for theprevious three years.
  3. If in any tax year the business employs 50 or more persons but no more than 99 persons,the credit is equal to 20 percent of its Louisiana R&D expenses minus 70% of its average annual Louisiana R&D expenses (if any) for the previous three years.
  4. If the business employs less than 50 persons, the credit isequal to 40 percent of its Louisiana R&D expenses for the tax year.
  5. If the Louisiana business receives a Federal SmallBusiness Innovation Research Grant, the business is eligible to receive a credit equal to 40 percent ofthe grant received for the tax year.
  6. How to benefit from the credits
  7. each $1.00 of tax credit earned can be used by the entity that earns the credits to satisfy $1.00 of itsLouisianaincome or franchise tax liability
  8. the credit is a refundable -- meaning that the State will refund to the business in cash anycredits that the business claims in excess of its tax liability
  9. if the business entity that earns thecredits is taxed on a pass-through basis (e.g. a limited liability company taxed as a partnership), the entity may allocate the credits that it earns to its owners
  10. Special Rules to Consider
  11. A business cannot receive other incentives administered by the LED for the same R&D expenditures
  12. no Louisiana R&D credits will be awarded for R&D expenditures made and/or Federal SmallBusiness Innovation Research Grants received after December 31, 2019
  13. Software development activities will generally qualify for thecredit if the software is to be held for sale, lease, license or use in a trade or business
  14. How to apply for the credits
  15. To claim the credit, a business must submit an application with theLouisiana Department of Economic Development including, among other information, a descriptionof the R&D conducted, employee information, federal tax returns and proof of the Federal SmallBusiness Innovation Research Grant award, if any.
  1. Louisiana Entertainment Incentives
  2. Louisiana Motion Picture Investor Tax Credit
  3. How they are earned

(1)The production in Louisiana of a nationally or internationally distributed feature-length film, video, television pilot, television series, television movie of the week, animated feature film, animated television series, or commercial made for theatrical or television viewing

(2)does not include the production of television coverage of news and athletic events

(3)a production company must spend at least $300,000 in the state on a particular production to qualify

  1. How many credits can be earned

(1)30% of in-state spend plus 5% for Louisiana resident payroll

  1. How to benefit from the credits

(1)each $1.00 of tax credit earned can be used by the entity that earns the credits to satisfy $1.00 of itsLouisianaincome tax liability

(2)production companymay transfer the credits by sale toother Louisiana taxpayers

(3)the production company may carry unused credits forward for 10 tax years

(4)if the production company is an entity taxed on a pass-through basis,the production companymay allocate the credits to its owners

(5)the state will buy the credits back for 85 cents per credit at the time they are certified

  1. Special Rules to Consider

(1)A production company may aggregate its productions that do not meet the $300,000 spend threshold and treat the aggregated productions as one for purposes of qualifying for the credits