What is the Indiana Venture Capital Investment Tax Credit?
Indiana provides a significant incentive to investors in early stage Indiana companies through the Indiana Venture Capital Investment Tax Credit (VCI Credit). The VCI Credit was established to facilitate capital access for emerging Indiana companies by providing state tax credits to investors in qualified Indiana businesses. If an Indiana company qualifies, its investors can receive Indiana state tax credits in an amount equal to 20% of their qualifying investment.
What Companies Qualify?
The VCI Credit is available to any company determined by the Indiana Economic Development Corporation (IEDC) to be a “qualified Indiana business” (QIB). To become a QIB a company must satisfy all four of these requirements:
- Indiana Headquarters. The company must have its headquarters in Indiana;
- Indiana Operations. The company must have at least 50% of its employees residing in Indiana, or at least 75% of its assets located in Indiana.
- Involved in Technology, Innovation, Motor Racing or Other Valued Industry. The company (a) must be primarily focused on professional motor vehicle racing, or (b) must be primarily focused on commercialization of research and development, technology transfers or the application of new technology, or (c) must otherwise be determined by IEDC to have significant potential to: bring substantial capital into Indiana; or create jobs; or diversify the business base of Indiana; or significantly promote the purposes of the VCI Credit in any other way.
- Startup/Emerging Growth Stage. The company must have had average annual revenues of less than $10 million in the two years preceding the year in which the business receives qualified investment capital from an investor claiming a VCI Credit.
Unfortunately for those businesses which deal in technology and innovation but in supporting roles, there are other limits on their ability to qualify for the VCI Credit. The VCI Credit is not available to any business involved primarily in real estate; real estate development; insurance; professional services provided by an accountant, a lawyer or a physician; retail sales (except when the primary purpose is development or support of electronic commerce over the Internet); or oil and gas exploration.
Which Investors and Investments Qualify?
Generally speaking, the VCI Credit is available to an individual or entity providing debt or equity capital to a QIB if the investor receives prior approval from IEDC (described below).
Pass-through entities with Indiana tax liabilities may use the VCI Credit themselves. A pass-through entity with no available Indiana tax liabilities may also pass the VCI Credit on to its owners on a pro rata basis (i.e., based on the percentages at which net income and net losses are passed through to the owners).
Despite the broad application of the VCI Credit program, some investors and investments will not qualify for the VCI Credit:
- Investments by Control Persons. Investors providing additional capital who already (pre-investment) own a majority interest in the QIB cannot use the VCI Credit. In determining an investor’s ownership percentage, ownership by family members and affiliates (other entities, trusts, etc., in which the investor has a stake or over which the investor exercises control) is attributed to the investor.
- Investments by Investors Acquiring Control. An investor who acquires a majority ownership position in a QIB may only claim the VCI Credit in the control acquisition transaction up to the 50% threshold. Amounts invested that carry the investor over 50% do not qualify. Again, attribution rules apply for determining ownership percentages as described above.
- Debt Investments from Financial Institutions with First Priority Security Interests. The VCI Credit is not available to financial institutions in connection with the provision of debt that is secured by a mortgage or other security interest that is superior in priority to all collateral or security interests of other Indiana taxpayers who provide qualified investment capital.
- Provision of Short-Term Debt. Finally, debt investments likely will not qualify for the VCI Credit if principal is required to be repaid, or may be repaid, within 36 months of the investment date.
There is also a company-based limit on the amount of VCI Credits that can be used by investors. The maximum amount of tax credits available to a QIB’s investors for capital provided in a given calendar year is equal to 20% of the qualified investment capital provided to the QIB in that calendar year, up to a maximum of $1 million of tax credits.
How Do We Get the VCI Credit?
These are the steps companies and investors will need to take to qualify for and utilize the VCI Credit program:
- Company Application. First, before accepting investments intended to qualify for the VCI Credit, a company must file an application with IEDC and also certify to IEDC that it will meet the QIB standards described above for two years. If approved, IEDC will provide a certification letter to the QIB which will include the amount of VCI Credits available for use by the QIB and its investors. This application may be submitted online to IEDC via its website.
- Investor Application. Second, before making an investment intended to qualify for the VCI Credit, the investor must apply to IEDC for approval of its proposed investment plan. The application must include the name and address of the investor, the name and address of the proposed recipient of the investment, the amount of the proposed investment, and a copy of the recipient company’s QIB certification letter from IEDC. This application may be submitted online to IEDC via its website. Even an approved investment plan is not good forever; an investor must make the investment within two years of IEDC’s approval in order to claim the VCI Credit for that investment. (An investor should also be mindful of the VCI Credit program’s December 31, 2016 sunset provision which is discussed below.)
- QIB Confirms Investment. Third, after the investor makes a qualifying investment, the QIB must provide a letter to the investor verifying the amount invested.
- IEDC Provides Tax Credit Certificate. Fourth, the investor must submit the letter from the QIB verifying the investment, along with a copy of the fully-executed investment document(s) (subscription agreement, promissory note, etc.) and a copy of the cancelled check or evidence of the wire transfer for the investment, as applicable, to IEDC. Upon receiving this qualifying documentation, IEDC will provide the investor with a certificate verifying that the investor is entitled to a VCI Credit.
- Claim VCI Credit on Tax Returns. The investor should then claim the VCI Credit on the applicable state tax return(s) and submit a copy of the VCI Credit certificate from IEDC along with the return(s). If the amount of the credit for an investor exceeds the investor’s state tax liability for the tax year in which the investment is made, the excess VCI Credit may be carried forward for up to five years but may not be applied to taxes for prior years.
What Else Should I Know?
The Indiana State Legislature has placed limits on the dollar value of credits that IEDC can approve. Under current law, IEDC may approve up to $12,500,000 of VCI Credits for a particular calendar year. Interested companies may want to apply early in the year in order to ensure VCI Credits are available.
Also, current law provides a sunset provision for the VCI Credit program. Unless extended by the legislature, VCI Credits will not be available for investments made after December 31, 2016. However, for qualifying investments made before January 1, 2017, the VCI Credits may be carried forward into 2017 and beyond (subject to the five-year carry-forward time limit described above).