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KSM Blog | Katz, Sapper & Miller CPA

How to Get and Maximize State Incentives to Help Fund Your Start-Up

Posted 12:00 PM by

Tax credits, training grants, and other state economic development incentives are usually in the news when they are going to the big guys — large employers who are bringing hundreds of new jobs and investing millions of dollars in the community. What you might not know is that many of those same incentives are available to small businesses and start-ups.

With a little bit of know-how and some long-term planning, you can secure incentives that are as good as cash to help you fund your business. And since fundraising is already hard enough as it is, anything that stretches a dollar and protects your personal share of equity should be welcomed with open arms by owners and entrepreneurs.

Now, you might be thinking that state incentives are government programs so they are going to be too complex with too much bureaucracy to navigate to make it worth the effort. It’s true that there is some complexity to the process, but the Indiana Economic Development Corporation (IEDC) does an excellent job of keeping things as simplified as possible while maintaining a healthy skepticism that makes them good stewards of tax-payer dollars.

As is often the case with legal and financial matters, hiring a professional to guide you through the state incentives process could make a big difference in the amounts you secure and dramatically increase your growth trajectory. It is always better to get professional help as early in the process as possible because some incentives are time sensitive and the rules governing them are strictly enforced.

What costs do incentives cover?

State incentives are negotiated on a case-by-case basis so they vary from company to company, but the cash-back from tax credits and training grants can specifically help you pay for things like:

  • Hiring new employees
  • Paying employee salaries
  • Relocating new employees from out-of-state
  • Reimbursing employee college tuition
  • Sending employees to seminars and conferences
  • Bringing a trainer on-site to your company
  • Paying employee salaries while they are being trained or job-shadowed

While some things are covered and some things are not — food and lodging at a conference is covered, but alcohol is not — it is better to look at incentives as a revenue category similar to sales forecasts. For example, if you hire 20 new employees over 5 years and execute a specific training plan your company will receive $500,000 via tax credits and training grants.

How do incentives work?

There are four key state economic development incentive programs that you should know about and pursue to help you fund your start-up.

  1. EDGE Refundable Tax Credit
  2. Skills Enhancement Fund (SEF)
  3. Hoosier Business Investment (HBI) Tax Credit
  4. Local Incentives

EDGE Refundable Tax Credit — EDGE stands for Economic Development for a Growing Economy, and the state awards it to you based on the creation of new jobs, especially higher-wage jobs.

Because it is a refundable credit, it means you actually get the cash value of the credit in the form of a check. EDGE is also cumulative so your credit will get bigger every year. If you don’t create any new jobs you don’t get the tax credit, but there aren’t any penalties or anything if you don’t hit the projected numbers. EDGE tax credits are usually paid out over 10 years.

  • Caution: Do not make new-hire decisions before you have an EDGE credit in place. These are incentives not rewards, so the state is not going to reimburse you for people you have already hired.

Skills Enhancement Fund (SEF) — The SEF program covers 50% of qualified training costs for both new and retained jobs. SEF grants can be used for a wide variety of costs related to helping your employees acquire skills and knowledge. This applies to in-house training like job-shadowing, too.

Training is pretty liberally defined under this program, so if you aren’t using the full benefit, you aren’t trying hard enough. Most start-ups need the very best sales team they can afford, but you can also hire people with raw talent and help them acquire better sales skills through training.

  • Caution: These grants only last for two years, so it is important to have a plan that accounts for long-term skills needs and training opportunities that utilize every last dollar available to you.

Hoosier Business Investment (HBI) Tax Credit — HBI is a 20% non-refundable tax credit, which means it is not a cash equivalency and may only be applied to an individual investor, angel investing network or venture fund with Indiana tax liability. Basically, if your investor lives in California and she doesn’t have any personal or business interests in Indiana for which taxes are assessed, the credit doesn’t apply.

The rules governing HBI are fairly straightforward. Your company has to have an Indiana address, 50% of your employees have to live in Indiana and 75% of your assets must be in Indiana. For investors, pretty much everybody qualifies as long as they don’t own more than 50% of the company.

  • Caution: Make sure you plan ahead and get approved for the HBI credit a few weeks before you expect to close on an investment. If you receive a check or funds transfer dated prior to being approved your tax credit will be denied.

Local Incentives — Local economic development organizations, counties, cities and sometimes regions also offer incentives like tax abatement, lease subsidies and Tax Increment Financing (TIF). These are usually negotiated at the same time as state incentives on a parallel track.

Local incentives might not seem as flashy as state incentives, but locating your business on one street versus another can make a big difference if one building is within a TIF district.

  • Caution: Don’t overlook the benefits of local incentives because your physical space impacts your effectiveness at recruiting the right talent that you need to help you advance to the next level.

This article appeared in TechPoint's Dec. 2015 newsletter. 

About the Author
Tim Cook is the CEO of KSM Location Advisors, part of the Katz, Sapper & Miller Network. Tim works closely with companies across the country during the site selection process, assisting in negotiating and securing economic development programs. Connect with him on LinkedIn.

 

About the Author
Katie Culp is president of KSM Location Advisors, part of the Katz, Sapper & Miller Network. She commands swift and ethical expertise in the incentives, site selection, and state and local tax arenas. Connect with her on LinkedIn.

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