Louisiana offers numerous business incentives to encourage development and growth in key industries and to promote economic development throughout the state. Tax credits are one such mechanism in which the state offers a below-the-line, dollar-for-dollar credit against the company’s tax liability. Many of Louisiana’s credits are both refundable and transferable. Transferability is important because it allows a company with more credits than needed to transfer or sell them. Refunds offer another way for businesses to monetize these credits. Currently, Louisiana Economic Development (LED) will buy back many credits at eighty-five cents on the dollar. Of the numerous credits offered by LED, here are four that start-ups may want to pay particular attention to.
Louisiana’s Angel Investor Tax Credit
The Angel Investor Tax Credit (AITC) encourages accredited investors to invest in early-stage, small, wealth-creating Louisiana businesses that seek startup and expansion capital. The credit provides a 35% tax credit on investments by accredited investors who invest in businesses certified by Louisiana Economic Development as Louisiana Entrepreneurial Businesses (LEB).
To become a certified Louisiana Entrepreneurial Business (LEB), the business must meet the following requirements:
- Principal business operations and primary place of employment must be in Louisiana;
- The business must possess a fully developed business plan that includes all appropriate long and short term forecasts and contingencies of business operations, including research and development, profit, loss and cash flow projections, and details of expenditure of angel investor funding;
- The business must have a Louisiana Tax Identification Number;
- The business must have either gross annual sales of less than $10 million or a business net worth of less than $2 million;
- The business must employ 50 or fewer full-time employees;
- The business must demonstrate that it will create quality jobs in the state; and
- The business must have a plan of progression through which more than 50% of its sales will be derived from outside of Louisiana.
To be considered an “Accredited Investor,” the investor must meet certain net worth or annual income thresholds. An individual must either have a net worth exceeding $1 million at the time of the investment or have an individual income exceeding $200,000 or joint income with a spouse exceeding $300,000. With a pool of investors, each investor must individually qualify in order for the pool to be considered an accredited investor.
This tax credit does not apply to retail, real estate, professional services, gaming or gambling, natural resource extraction or exploration, or financial services, including venture capital funds. On top of limiting industries that qualify, there are some limits on how to use the credit. Qualifying uses of investment funds include capital improvement, plant equipment, research and development, and working capital. Non-eligible uses of investment funds include paying dividends, repaying shareholders’ loans, redeeming shares, or repaying debt.
This credit has a $5 million annual program cap that operates on a first-come, first-served basis. It can be quite competitive, so get those applications in as early as possible. Additionally, the same expenses will not qualify for both the Research and Development credit (discussed infra) and the Angel Investor Credit, so be sure to consider how to maximize your tax credit opportunity. There are also individual limits. Investors can invest $1 million per business per year and $2 million per business over the life of the program.
Research and Development Tax Credits
The Louisiana Research and Development Tax Credit provides up to a 40% tax credit on qualified research expenditures incurred in Louisiana, with no cap and no minimum requirement. The research must occur in Louisiana and must meet the four requirements of “Qualified Research”:
· Qualify as a business deduction under Internal Revenue Code §174;
· Be undertaken to discover information that is technological in nature;
· Be undertaken to discover information intended to be useful to develop a new or improved business component of the taxpayer; and
· Substantially all activities must involve a process of experimentation. “Substantially all” means that 80% or more of the research activities involve a process of experimentation.
The true beauty of the Research and Development Tax Credit is that it can be coupled with the Federal Research and Development Tax Credit. The federal credit is neither transferable, nor refundable, and qualifying credit falls under the general business credit. The federal credit allows a company to deduct research and development expenditures but may require amortization if the expenses are considered capital outlays. The requirements for the federal credit are similar to the Louisiana credit, but there exist key differences that start-ups will need to watch out for.
Technology Commercialization Credit
The Technology Commercialization Credit and Jobs Program provides a 40% refundable tax credit for companies that invest in the commercialization of Louisiana technology and a 6% payroll rebate for the creation of new, direct jobs associated with the commercialization. This credit is designed to encourage the business community to work with universities in bringing patented technology to the market. To qualify for this credit, the technology must be created by a Louisiana business and researched by an accredited Louisiana university, college, or technical school.
Digital Interactive Media and Software Development Credit
Finally, if you are involved in the industry, the Digital Interactive Media and Software Development Incentive provides a 35% credit on in-state payroll expenses and a 25% credit for qualified production expenses. In order to qualify, the development work must be physically performed in Louisiana, and the equipment must be purchased through Louisiana businesses. The incentive does not apply to software developed for gambling (gaming), for institutional, internal, or private purposes, or for primarily static websites. Qualifying development projects include digital media and games, web-based and mobile applications, software development, interactive devices and consoles, and embedded systems.
The program distinguishes qualifying and non-qualifying labor and production expenses. Eligible employees include, but are not limited to, project managers, engineers, programmers, designers, composers, artists, management, and legal staff. Non-eligible employee groups include customer service, business development, secretaries, marketing, accounting, janitorial, and manufacturing staff. Eligible production expenses includes production equipment directly related to development, rent for where direct development occurs, office supplies related to development, and licenses and permits for development. To name just a few, the very long list of non-eligible production expenses includes furniture, domain licensing and hosting fees, communications, utilities, and advertisements.
LED Offers Many Ways to Help Businesses Grow
For more information on all of these credits and to see case studies of companies successfully using these tax credits to start and grow their businesses, see Louisiana Economic Development.
Allen & Gooch is providing this legal update for informational purposes only. This article should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. You should consult your own attorney concerning your particular situation and any specific legal questions you may have.