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?
By Joe Burwick, CPA
Crowdfunding is not a new concept, as grassroots fundraising dates back to 1997. But with new platforms, like that of IndieGoGo and Kickstarter, crowdfunding has gained traction in raising revenues for donations, charities, and businesses.
What types are there?
Crowdfunding relies on the concept of asking large groups of organizations and individuals, to contribute to a project. There are three primary types of crowdfunding:
Donation or Reward. When people give money towards a project and receive a gift or promise of one of the finished products in return.
Debt. Receiving funding from people with the expectation they will be paid back with interest in the future.
Equity. This involves getting a large number of people to buy into an idea in return for equity in the project or business.
Depending on the structure of the transaction (Equity, Debt, or Donation/Reward) there are differing tax implications and reporting requirements. For instance, donations/rewards where the investor receives something in return is a taxable event and must be included in gross receipts. However, if deductible business expenses exceed your crowdfunding revenue and other operating revenue, then you won’t owe income tax (but may owe franchise or minimum taxes).
Depending on how the payments are received, the crowdfunding recipient may get Form 1099-K. If payments are made by credit card or if payment in settlement of third party network transactions (i.e. PayPal) where gross payments exceed $20,000 and there are more than 200 transactions, you may receive one of these forms. The IRS will look to match (and analyze) the income on your return to Form 1099-K you receive.
In response to the growing popularity of Crowdfunding, the JOBS act set the Crowdfunding exemption for equity interest offered to the public at a ceiling of $1,000,000 for the aggregate amount sold to all investors in a twelve month period. Prior to this act you had to either register with the SEC or meet another exception before offering securities to the public.
The act further limits the amount sold to any individual investor based upon their annual income or net worth as follows:
If annual income or net worth is less than $100,000; the aggregate amount sold to such investor cannot exceed $2,000 or 5 percent of net worth / annual income.
If annual income or net worth is greater than $100,000 the aggregate amount sold to such investor cannot exceed ten percent of the annual income or net worth of the investor (not to exceed a maximum aggregate amount of $100,000).
You should consult a tax advisor to determine if the amounts received can be excluded from income (i.e. under Internal Revenue Code Section 118 for a Corporation).
What are the Financial Reporting Requirements?
Not only are there potential tax implications to these equity investments, but you must meet various financial reporting requirements as well. Here is what you have to know to meet the financial condition requirements clause of the JOBS act:
Different offering amounts have different SEC financial reporting standards. Congress has set forth the standards as follows:
If the target offering is $100,000 or less, the most recently completed income tax return and financial statements certified by the principal executive officer of the issuer must be provided.
If the target offering is more than $100,000, but not more than $500,000, financial statements reviewed by a public accountant independent of the issuer must be provided.
If the target offering is $500,000 or more, audited financial statements reviewed by a public accountant independent of the issuer must be provided.
As new provisions of the JOBS Act are rolled out, it seems to have raised more questions than answers for entrepreneurs and online start ups. While the bill was designed to help companies tap investors for the early cash they need to get established and hire workers, easing federal requirements for completing private share offerings; a young company would then be bound by SEC rules protecting the rights of their new stockholders, as well as certain state laws.
Don’t expect state security regulators to ease up anytime soon. As crowdfunding gains traction (and the dollars associated with it grow), so too will the scrutinizing of start-ups that issue shares through crowdfunding. Due to the complexities of parts of the JOBS Act and SEC rules toward crowdfunding, entrepreneurs should talk to a tax consultant; to be aware of all the state and federal regulations and the impact it may have at tax time.
Freed Maxick CPAs
Freed Maxick tax auditors will keep you up to date on the most pressing tax issues. If you would like to know how crowdfunding may affect your business at tax time Contact us and connect with our experts.