State and local tax alert: Consider the InvestOhio tax credit
As you may know, InvestOhio provides a nonrefundable personal income tax credit to investors who invest new equity(cash) into certain approved Ohio small business entities to acquire an ownership interest in the company. This credithas been available since 2011, with certain changes and updates with each legislative renewal. The currentInvestOhio program is accepting new applications for the investment period July 1, 2017 – June 30, 2019.
The investor should confirm that the entity will be classified as a “small business enterprise” for the purposes ofInvestOhio. In addition to being in good standing and other criteria, in order to qualify, the small business:
- Must have less than $50 million in assets or less than $10 million in annual sales.
- Must have at least 50 full-time equivalent employees in Ohio OR more than half of total employees areemployed in Ohio and are subject to withholding requirements.
The small business is required to reinvest that infusion of cash into one of five categories of allowable expenses withinsix months of its receipt. The tangible and intangible property listed must be used in business in this state from thetime of its acquisition until the end of the holding period:
- Tangible personal property used in business
- Motor vehicles purchased and registered in the state and used primarily for business purposes and necessaryfor the operation of the business
- Real property used in business
- Intangible property used in business
- Compensation of new employees (including newly hired or retained employees) whom Ohio income taxes arewithheld
The investor must retain his or her ownership interest for a two-year holding period. The small business must similarlyretain the property that it purchased from the cash infusion for the entire two-year holding period.
How to apply
In order to be awarded a small business investment certificate (an InvestOhio tax credit), there are several steps tofollow. Detailed information can be found on the Ohio Department of Development’s website, including tutorials andfrequently asked questions (FAQ). Some highlights to consider are:
- Both the investor and the small business must register for InvestOhio through the Ohio Business Gateway.At the end of registration, each registrant will receive an InvestOhio User ID. This number will be required tocomplete the application process.
- The parties on a given transaction will decide who is responsible for applying to the InvestOhio program.Regardless of whether it is the investor or the small business, the party that applies must obtain theInvestOhio User ID of the other party on the transaction. They must also reach an agreement with that partyabout when the investment will take place and the amount of the investment.
- The party that is responsible for applying will do so on Ohio Business Gateway, starting July 1, 2017. Thetiming of when an eligible investor or small business applies is critical, as credits are awarded on a firstcome,first-served basis. Additionally, an application must be filed in the same state biennium as theinvestment (currently July 1, 2017 - June 30, 2019). Once a party has completed an application, he or she willbe given an InvestOhio Transaction ID number. This number will determine the priority for that transaction.
- Regardless of whether a transaction has the necessary priority to be awarded an InvestOhio tax credit atthe time of application, the investor must make the investment on or around the date described in theapplication. Some transactions that were initially eligible may be disqualified for failure to follow the programrules.
- Those transactions that have the necessary priority at the time of application will be notified by email oftheir eligibility. The investor must make the investment on or around the date described in the applicationand provide evidence of the investment to the director within 30 days.
- The small business must then make allowed expenditures and provide evidence to the director within 30days of completing the expenditures or within seven months of the investment, whichever occurs first.
- Both the investor and the small business must retain ownership interest (investor) and property(small business) for the duration of the holding period (two years). Both parties must provide evidence ofcontinued ownership to the director upon the completion of the holding period.
There are additional reporting requirements and qualifications that must be satisfied during the process to ensure theInvestOhio tax credit will be awarded. We can discuss those details with you throughout the process.
Ohio income tax credit available
When approved, a tax credit certificate is issued to the taxpayer. The income tax credit equals 10 percent of thequalifying amount of the taxpayer’s investment. The tax credit is available against income tax and is nonrefundable.Any unused amount may be carried forward for seven years.
If you have any questions about the InvestOhio program, eligibility and qualification requirements, the registration orapplication process, or any of its reporting requirements, please contact a member of the SALT team.