InvestOhio to Encourage New Capital Investment in Ohio
Date: July 08, 2011
Governor John Kasich signed Ohio’s budget legislation on June 30, 2011, which contains a tax credit against Ohio individual income taxes for 10 percent of the cash invested through an entity in certain projects. The following is a brief summary of the provision describing the new tax credit, followed by a brief list of points for consideration regarding the application of the credit. The credit is available for qualified investments in what are referred to as small business enterprises (SBEs). Newly formed and existing entities can qualify as SBEs. The tax credit is available only at the individual level, so either individuals or some form of pass-through entity (which has individual owners at some point up the chain) must make the required cash investment. Cash investments into SBEs starting July 1 are eligible for the tax credit.
InvestOhio is intended to encourage new capital investment in small businesses in Ohio and thereby promote the economic welfare of all Ohioans. InvestOhio is an income tax credit available for individuals, trusts and estates who invest in small businesses in Ohio. The credit can also be available through pass-through entities that invest in small businesses. The program provides a nonrefundable credit to investors who: (1) make a qualifying investment in certain small businesses, (2) hold the investment for the holding period and (3) cause the small business to register and receive the necessary certification.
A “small business” is one that has less than $50 million in assets or whose annual sales do not exceed $10 million; employs at least 50 full-time employees (or possibly as few as one employee) in Ohio; and within six months following the receipt of the investment spends the cash received toward the purchase of equipment or real property or toward the cost associated with certain intangibles or an expanded workforce all within Ohio.
The “holding period” varies depending on the date the investment in the SBE is made. For investments made between July 1, 2011 and June 30, 2013, the holding period is two years. For investments made on or after July 1, 2013, the holding period is five years. The holding period begins on the date the investment into the small business is made.
This credit may be claimed for the taxable year in which the last day of the holding period occurs. This defers the fiscal impact of the credit to future budgets.
The credit equals 10 percent of the qualifying investment into the SBE, up to a maximum of $1 million for an individual or $2 million for a married couple filing a joint return (if both spouses make qualifying investments). Excess credits can be carried forward for seven years.
Total InvestOhio tax credits are limited to $100 million every two years. The allocation process is on a first-come, first served basis.
Very Simple Example
During September 2011, Beth and Jim each invest $1 million cash in a newly formed LLC and, with some accompanying financing, the cash is used immediately by the LLC to purchase an existing real estate project located in Ohio from an unrelated person. The real estate project is a strip mall with existing tenants. The LLC has two full-time employees who work security and maintenance with respect to the purchased real estate project. Taxes are withheld from the compensation paid to the employees, as they would be with respect to any employees. Both the investment in the LLC and the property purchased by the LLC are held past 2013. The investors sign a statement that they plan to hold the property for such period. Application is made and approved by the Ohio Department of Development Office certifying the LLC as an SBE. Beth and Jim would each be entitled to a tax credit against their Ohio income taxes starting in 2013 in an amount of $100,000 (10 percent of the investment into the LLC), with a carry forward for seven years to the extent that the tax credit exceeds their individual tax liability.
The following are general points for consideration with respect to the scope of the tax credit and the type of structuring that might be necessary for qualifying investments. Because the tax credit is in its infancy stage, there are various open questions that we plan to tackle through the Ohio Department of Development Office and the Jobs Ohio office. We have prepared a white paper on the tax credit and a list of questions that need to be addressed, which will be discussed with the appropriate persons.
- The provision, as written, seems to be applicable to both new and used real property and equipment, and also seems to be available for property that is leased.
- As written, the purchase of stock by an SBE would not be eligible for the tax credit. We are requesting that the appropriate agency consider a look-through rule so that the purchase of all (or substantially all) of the shares of a corporation by an SBE could also be eligible for the tax credit.
- Consideration should be given to whether any existing individually owned partnerships or LLCs satisfy the asset/sales test. If not, the test might be satisfied by the formation of new entities.
- Cash must be invested in exchange for an equity interest in the SBE. Future guidance should address mechanical aspects of this issue and whether an existing qualifying LLC/SBE can simply use undistributed cash to make qualifying purchases.
- A requirement that more than one-half of the SBE’s total employees are located in Ohio might be satisfied by only having one employee. This requirement (regardless of the number of permitted employees) could be the most difficult challenge for real estate projects, which typically do not have employees. We plan to get clarity on this very important issue for the real estate industry. Other states have provided relief with respect to comparable credits and we will raise these approaches in our discussion with the state of Ohio.
- If financing is used in the acquisition, consideration should be made to having the individual investors borrow and contribute the cash to the existing or newly formed SBE to qualify such borrowed amount for the tax credit. The use of refinancing proceeds to generate distributions might need to be limited during the required holding period in order to maintain the qualifying investment.
- The certification process will require that many open questions be resolved. In view of the total cap on the amount of credits that can be certified, there is an incentive to apply for the credit as early as possible.
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