Equity Investment Credits and Their Effect on Economic Development

Economic development professionals are constantly evaluating projects to determine whether meaningful incentives may be available for a company’s relocation or expansion.  As a result, a particular focus is often placed on large corporate projects with the highest levels of job creation, capital investment, and opportunities for workforce training.  But what is being done to help small businesses, startups, and other entrepreneurial ventures that are also vital to a sustainable economy?  What policies best encourage job growth, investment, and workforce development for young companies finding their bearings in an uncertain economic landscape?

In Indiana, one such policy is the Venture Capital Investment tax credit, or VCI.  The VCI program allows Indiana taxpayers to claim 20 percent of capital investments made in qualified businesses as a credit against their Indiana income tax liability. Investors must be approved by the Indiana Economic Development Corporation (IEDC), meaning they have to satisfy a list of statutory criteria, including not holding a majority stake in the company prior to making the investment.  Qualified companies receiving the investment must also be certified, proving they are headquartered in Indiana, continue operations in the state, maintain average annual revenues less than $10 million over the last two years, and operate in one of the high-value industries outlined in the VCI statute.

The VCI credit program represents a great deal for entrepreneurs and small business owners, as it provides increased access to capital by incentivizing potential investors to act.  The 20 percent credit can be carried forward up to 5 years, reducing the investor’s overall risk.  But the program also has room for improvement, and Indiana’s next Governor and General Assembly should consider what other states have done to increase access to start-up capital for small businesses.

First, the credit is only useful to investors with Indiana tax liability.  If Indiana is to continue to market itself as an entrepreneurial, business-friendly state with an ideal regulatory environment, why should its equity investment incentive turn a cold shoulder to potential investment dollars that originate outside its borders?  Other states, including South Carolina and Arkansas, have adopted equity investment programs that allow credits to be transferred or sold, incentivizing investment from across the country rather than limiting it to within the state.

The Indiana Chamber of Commerce has recently explored this issue, surveying leaders in the tech industry this year to determine policy goals for the upcoming legislative session.  Increasing access to VCI by making the credits salable or transferable ranked 3rd on the list of policy actions to consider in the future.  By creating a marketplace for VCI credits, investors from outside the state can receive some value for credits that would otherwise be unused, increasing overall demand for the program.

Second, the total statewide allowance for all VCI credits in any calendar year is $12.5 million, and no investor may receive more than $1 million in credits during that period of time.  As a result, consultants who might normally be interested in these transactions have a capped upside, limiting the potential for facilitating a VCI marketplace to bring entrepreneurs and investors together.  While an increase in the credit cap may spark some added interest in driving future investment, budgetary constraints should also be respected.  After all, a state like Indiana has maintained its AAA credit rating through Hoosier pragmatism, not through unchecked spending or budgetary mischief seen elsewhere in the country.  However, if Indiana is to become the “Silicon Prairie” of the Midwest, substantial capital investment into startups and small businesses will certainly be required.

Thoughtful changes to equity investment programs are one way to ensure talented individuals have the capital they need to start or maintain business operations in a particular state. By looking to other states as models for increasing in-state and out-of-state investment, Indiana can double-down on its successes in tax policy, regulatory environment, and entrepreneurial spirit for the benefit of all Hoosiers.

Scott Neale, Client Advisor