Under the InvestOhio program, a new resource for Ohio small businesses, those who invest in a small business enterprise located in the state can receive a 10 percent income tax credit if the investment is held for two years. The small business enterprise must meet certain qualifications to be a qualified business for the credit.
And that credit applies even if the investor is the owner of the business, says Mary Jo Dolson, CPA, director in tax at SS&G.
“It doesn’t have to be a new investor,” says Dolson. “You can invest in a company that you own, then get the credit on your individual income taxes. More and more businesses are buying equipment or expanding their buildings, both activities that would qualify. So why not invest as an individual and get the credit for dollars the business is going to be spending anyway?”
Smart Business spoke with Dolson about how to take advantage of the InvestOhio program by investing in your own business, or in someone else’s.
What is InvestOhio, and how does it work?
InvestOhio is part of the budget bill passed in June 2011 that took effect July 1 and runs through June 30, 2013.
To participate, an individual or a pass-through entity that wants to invest in a small business must register themselves as an investor. The small business enterprise must also register itself as a small business entity. Then the two parties, the investor and the small business enterprise, decide how much to invest and when. The investor must receive an ownership interest in the small business enterprise.
For example, if someone decides to invest $1 million in a company, both sides register, and they each get an ID number. Together they would create one application that indicates that, for example, on May 1, that taxpayer is going to invest in that company. That investment then has to be made within 30 days before or after that date. The business entity then has to spend the money invested on qualified items within six months of the investment, or that credit would potentially be lost.
Finally, there is a two-year holding period. If a taxpayer invests on May 1, 2012, that investment and the assets acquired have to stay in place for two years, until May 1, 2014. As long as that condition is met, the taxpayer who invested $1 million then gets a 10 percent non-refundable tax credit, with $100,000 coming right off that individual 1040 return. And if you can’t take the whole credit amount in one year, it can be carried forward for seven years.
Individuals can invest up to $10 million, and the $100 million tax credit program is expected to generate at least $1 billion in new private investment in Ohio small businesses by 2013.
What kinds of companies are eligible to participate?
Qualifying entities need to have less than $50 million in assets, or less than $10 million in sales. Companies must also have employees who are located in the state. All registrations and applications for the credit are completed through the Ohio Business Gateway. The individual investors might have to set up an Ohio Business Gateway account but probably most small business enterprises will already have a gateway account.
How complex is the application process?
Even though investors and small businesses have to register, it is not a voluminous application. It is about 10 questions, and they are simple, such as your Social Security number, whether you are a pass through entity investing in another entity and your federal ID number. There are also a lot of links for small businesses to secure the information they need quickly from the state website.
Are there drawbacks?
As long as you follow through with the requirements of the application, there really are not any drawbacks for the credit. If you complete the application and say you’re going to invest $1 million, and then you only invest $250,000, the state has indicated they will deny the credit — at least 50 percent of what you indicated you were going to invest must be invested to secure the credit. Also, if you just own rental real estate and have no employees, you can’t participate. There is an employee requirement for the small business enterprise to qualify for the credit.
Finally, it has to be an individual or another pass-through entity investing. The small business enterprise cannot secure a loan and have the investors pay it off. This will not qualify. The actual individual and/or entity investing must actually put the funds into the business. The individual and/or entity investing can borrow the investment money from a bank .
What can a business use the money to invest in?
Fixed assets, tangible personal property and real estate are included, among other items. A business can also spend the investment on wages, but it cannot be for wages for owners or officers of the company. Motor vehicles also qualify, as long as they are titled in Ohio. The key is the assets being purchased must be utilized and located in the state of Ohio.
How will businesses account for the money?
Reporting will be required after a company spends the investment through the Ohio Business Gateway. The state does not currently have those forms available, but they are anticipating they will be available by April 1.
Will the program continue after 2013?
As part of the budget bill, the program exists in the next biennium, as well, from July 1, 2013, to June 30, 2015. However, there is one major change: the holding period for assets goes from two years to five years. There is also supposed to be another round of funding in the next biennium, from July 1, 2015, to June 30, 2017, with the holding period increasing to seven years. Right now is the shortest holding period investors are going to get, so investing sooner rather than later will provide a bigger bang for your buck more quickly.
Mary Jo Dolson, CPA, is a director in tax at SS&G. Reach her at (330) 668-9696, (800) 869-1835 or [email protected]