While so much attention has been focused in Indiana on the dislocations arising from the revamped property tax system, too little attention has been focused upon new business tax credits which offer the promise of much needed business development.
Beginning Jan. 1, 2004, a new Venture Capital Investment Tax Credit is available to certain taxpayers in Indiana (I.C. 6-3.1-24-1 et seq.). This credit equals 20 percent of all qualified investment capital provided to a qualified Indiana business by a taxpayer in its taxable year. Investors and businesses must become familiar with these concepts to seize the opportunities that the legislature has provided.
This credit applies to both debt or equity capital that is provided to a qualified Indiana business. A qualified Indiana business is an independently owned and operated business that must be certified as such by the Indiana Department of Commerce.
The definition includes the following requirements:
* Headquarters in Indiana
* Primarily focused on commercialization of research and development, technology transfers or the application of new technology or have significant potential to bring substantial capital into Indiana, create jobs, diversify the business base of Indiana or significantly promote the purposes of the venture capital program in any other way
* Average annual revenue of less than $10 million in the two years preceding the year when the business receives the capital
* At least 50 percent of employees residing in Indiana or at least 75 percent of assets located in Indiana
A taxpayer can use the credit to offset its Indiana tax liabilities under the adjusted gross income tax, sales and use tax, financial institutions tax and insurance premiums tax. However, the taxpayer is limited to the lesser of 20 percent of the qualified investment capital or $500,000. If the taxpayer is a pass-through entity, the credit can be utilized by the shareholder, partner or member to whom it flows. If a credit cannot be used, it is carried forward indefinitely.
Unfortunately, the program has been capped at an aggregate amount of tax credits in a calendar year of $10 million. Priority is granted in the order of filing of applications for certification to the Department of Commerce. The legislature has only provided for this credit through Dec. 31, 2008.
Another credit not to be overlooked is the Hoosier Business Investment Tax Credit (I.C. 6-3.1-26-1 et seq.). This credit equals 30 percent of the amount of a qualified investment and may be used to offset Indiana adjusted gross income tax, financial institutions tax and insurance premium tax but only in 2004 and 2005.
A qualified investment is defined to include expenditures for the following (partial list):
* Modernization of existing or construction or purchase of new telecommunications, production and manufacturing equipment
* New computers and related equipment
* Costs associated with the construction of special purpose buildings and foundations for use in the computer, software, biological sciences or telecommunications industry
The credit available to a taxpayer (including pass-through entities as above) is the lesser of 30 percent of the qualified investment or the taxpayer’s state tax liability growth. This growth is measured by the difference between the tax liability in the taxable year less the greater of the tax liability in the immediately preceding taxable year or in the most recent prior taxable year in which part of a credit was claimed.
Approval must be obtained from the Economic Development for a Growing Economy Board (EDGE). The credit is specifically linked to the fostering of job creation and higher wages in Indiana. Taxpayers must enter into various agreements with EDGE, including certain requirements to maintain operations at the project location.
These two credits typify the types of action which must be taken by the legislature and supported by the public to enhance long-term development and growth in Indiana.
Ronald M. Soskin ([email protected]) is a partner with Bose McKinney & Evans LLP and chair of the Taxation Group. Reach him at (317) 684-5186.