Here in New York State, the federal and state governments offer certain types of programs that can incentivize companies as they start and grow their business. Our team recently presented this topic to the Genesee County (N.Y.) Chamber of Commerce.
You can see the video of the full presentation here.
10 Programs and Tax Credits for New York Start-ups to Consider:
While there are many programs and credits available to start-ups, here is our list of the top 10 to consider:
1. The U.S. government provides the federal research tax credit for companies that are innovative and are creating something new to their business or industry, or that are expanding a business into a new area.
2. NYS has designated 10 Innovation Hot Spots in each of the state’s economic development regions. This a tax credit program whereby your company can potentially avoid income taxes and sales taxes for five years.
3. START-UP NY offers new and expanding businesses the opportunity to operate tax-free for 10 years on or near eligible university or college campuses in the state.
4. The Excelsior Jobs program, which provides tax credits for such strategic businesses as high tech, bio-tech, clean-tech and manufacturing that create jobs or make significant capital investments, also applies to innovative companies.
5. The Investment Tax Credit applies if you or your business placed qualified property into service during the tax year. If your application is properly structured, as a new business you can potentially get cash back from NYS for up to five years.
6. The Qualified Emerging Technology Company (QETC) credit is for innovative companies looking to fulfill a key need: investment capital. This particular credit is for the investor who puts money into your company.
7. Companies starting up that are also doing R&D activities can realize a break in paying sales tax.
8. Grants for NYS start-ups come in many varieties: research, educational, energy-efficient improvements to your manufacturing facilities, capital investments. Grants can also come from many sources, such as Empire State Development.
9. With employment-based tax credits, if you’re looking to hire employees, you should be screening those employees for qualification for potential tax credits.
10. If you’re a manufacturer in NYS, you now pay 0% tax. That brings home the importance of looking for tax credits that give you cash back.View full article
Cash is king in the early days of a new company, and you may be able to use federal R&D credits to generate much needed cash during the initial years of your new company.
R&D and the QSB Election
The R&D credit, which rewards companies for increasing research expenditures, was permanently extended by the Protecting Americans from Tax Hikes (PATH) Act of 2015. In addition, for tax years beginning after December 31, 2015, the PATH Act allows qualified small businesses (QSBs) to elect to offset the employer portion of Federal Insurance Contributions Act (FICA) payroll taxes with R&D credits.
A QSB is a corporation, including an S corporation or partnership that has gross receipts of less than $5 million for the current tax year and did not have gross receipts in any tax year preceding the five-tax-year period that ends with the current tax year.
Start-up companies generally incur losses during the initial years of operations and are unable to use R&D credits. The QSB election allows start-up companies to use R&D credits that might otherwise go unused or are not claimed. In addition, claiming R&D credits in the initial years of operations can generate larger tax credits in future years when research expenditures increase and profits grow.
The QSB election must be made on a timely filed tax return, including extensions, and can be made for up to five tax years. A QSB can elect to apply up to $250,000 of current year federal R&D credits against their employer portion of FICA payroll tax liability beginning with the calendar quarter following the date on which the tax return is filed. Any excess elected amount exceeding the employer portion of FICA payroll tax liability is carried forward to the next calendar quarter. A QSB must also file IRS Form 8974 with Form 941each quarter.
For example, let’s say your new company is a QSB and has R&D expenditures of $25,000 per year for the first five years of operations. As a result, your new company generates $2,500 of R&D credits each year. By making the election to apply R&D credits against the employer portion of FICA payroll tax, your company enjoys $12,500 of cash savings.
Do You Qualify?
Basic questions to determine whether your company is eligible to claim R&D credits include:
- Do you have payrolled employees?
- Are you developing a new products or processes? What’s in the pipeline?
- Do you have wages associated with that development? Who’s doing the R&D?
- Do you retain rights to what you developed? To qualify, you don’t need to hold exclusive rights, just significant ones. For instance, can you take what you’re developed and apply it to your next project without anyone’s legal permission?
Be Wary: Not All Startups are Worth the Risk
Author: Eric Adornetto, Supervising Field Examiner
While entrepreneurship is the pinnacle of free enterprise in the United States, almost all banks tend to shy away from startups. Truth is, companies in this segment are much more likely to fail than not, at least according to the Small Business Administration. But there are some bright spots that offer lucrative lending opportunities for diligent, adventurous lenders.
Defining a “startup”
Startups are mostly small businesses that have a limited operating history. They often start as an idea that’s fleshed out via research and development. The business model is then formulated and the owner or owners start selling. At this point, the startups are funded by the owner’s personal resources, including savings, retirement accounts, credit cards and home equity loans.
Most lenders classify a business as a startup when it has operated for at least five years. But somewhere around the two-year mark, lenders might consider underwriting a loan. Community banks have long been a go-to source for entrepreneurs. But some big banks — including Wells Fargo and Bank of America — are starting to loosen up their purse strings to startups.
Evaluating the business
So, what do underwriters want the most from startups? For starters, the business plan should show that management has thought about potential risks and threats, such as hidden costs and seasonal cash flow shortages. But the real proof is in the startup’s actual results. If they can offer two or three years of CPA-prepared financial statements, the underwriters will have significantly greater peace of mind than with just a business plan.
Lenders also need to evaluate the startup’s concept. Ask yourself this question … would you buy it? How is this product/service different from that of the rest of the competition? It’s true … many entrepreneurs are blinded by love for their concept. So, it’s up to the lender to stay grounded and play the devil’s advocate. A startup’s growth projections should jibe with industry trends and historic results.
Franchised startups tend to bear a lower risk than nonfranchised ventures. For example, large publicly traded franchisors (such as Toyota or McDonald’s) typically provide a proven business model and marketing support for its franchisees, particularly during the startup phase.
Management quality is key
What’s even more important than the startup’s concept is the quality of its management. In the wrong hands, even the best idea can be doomed to failure. So, when you start evaluating the people behind the idea, make sure you look at their areas of expertise, employment history, credit scores and personal balance sheets. Key person insurance policies, personal guarantees, personal asset pledges, and co-signing are commonplace when lending to startup companies.
Take, for instance, a single-owner business that’s run by a technical expert (such as a former operations or R&D manager). Who will handle the administrative tasks (such as financial reporting and HR) as the business grows? Look for owners who can admit to their shortcomings and hire employees to help supplement tasks outside their areas of expertise.
Beating the odds
In the long run, lenders want assurance that a startup will be able to repay its debt, either from personal resources or operating cash flows. If your underwriters are sitting on the fence regarding a startup prospect, offer a little extra handholding in order to get the loan approved.
You’ll first need to educate the startup’s management team about what your bank is seeking. Typically, that will require a solid business plan, some two to three years of audited financial statements, and last, operating results that are above specific profitability, turnover, leverage and liquidity levels. As you can imagine, specific financial benchmarks will vary from industry to industry.
If at all possible, arrange for the entrepreneur(s) to pitch the business’s request directly to the underwriting committee and then field any questions. Transparency on both ends of the lending decision can, indeed, help push the deal through.
In addition, recommend Small Business Administration (SBA) loans to any “fence-sitters.” Companies that have less than $7 million in tangible net worth and $2.5 million in net income should investigate SBA 7(a) operating loans and 504 equipment loans, as they provide partial guarantees from the federal government in case of default. If your bank participates in such programs, an SBA-backed loan might be the final push that turns a “maybe” into a “yes.”
Worth the legwork
While lending to startups won’t be easy, it’s often worth the extra legwork. Why? Because, in addition to reaping higher interest rates for their incremental risk, most startup loans will reward diligent lenders with the satisfaction of helping struggling business owners make their dreams a reality. The bonus is that your bank might gain new long-term customers. With solid business planning and transparent communications, startup loans can be a win-win for both borrower and lender.
If you have any questions about lending to startups or any other asset based lending issue, give us a call at 716.847.2651, or you may contact us here.