Tax Credits that Might Attract Investment Money to Your Business

Money is hard to find for new and expanding businesses, but some is out there.  One form of investment (remember: NOT free money.  Remember our motto:  if money were easy to get everybody would have lots of it) is “equity investment.”  Simply put, it means that an investor buys a part of your business in exchange for the infusion of cash.  This is opposed to a loan, in which money is loaned for a particular rate of interest.  Equity investments are riskier because while there is a legal guarantee of responsibility to pay the debt, equity investors may see their investment crash and burn without getting a penny.  How then, can the government make this more attractive?  By giving a tax credit.

 This is called “tax equity.”  As described by the U.S. Partnership for Renewable Energy Resources:

 

“’Tax equity’ is a term that is used to describe a passive ownership interest in an asset or a

project, where an investor receives a return based not only on cash flow from the asset or

project but also on federal and state income tax benefits (tax deductions and tax credits). Tax

equity investors are usually large tax‐paying financial entities such as banks, insurance

companies and utility affiliates that use these investments to reduce future tax liabilities. Tax

equity is distinct from traditional “corporate equity,” where an investor makes an active

investment and is actively involved in corporate governance.”

That’s what the state of Ohio is now offering for small businesses and investors.  The Department of Development unveiled InvestOhio, in which small businesses and investors come to an agreement about the size and nature of the equity investment (how much money, how much the investor owns of the company), and then they both register with the state to become eligible to take part in the program.  Then one of the parties will register the investment at the Ohio Business Gateway site and wait for the Department of Development to approve.  If they do, the investor must invest, and the small business in the partnership must purchase the materials funded by the investment within a six month period.  There are specific categories that are eligible to be purchased with the investment money.  For the tax credit to kick in, the invested company must hold onto the material for two years and the investor must likewise hold onto their investment in the company for two years.  In the future, starting in June 2013, that will extend to a five year period. 

For more details, see the Department of Development website or call 1800-848-1300.  If you run a business in another state your state might offer similar tax credits for your potential equity investors.   In 2010, the Office of Legislative Research for the state of Connecticut did an article on 21 states that offered tax credits to “angel investors,” with details on their plans.  All plans are different, with different goals and restrictions.  For instance, the Arkansas plan is aimed at high-tech businesses.  Maine and Virginia have different plans, too. To find out if your state offers this, check your state's development office.