Tax Credit Change Poised to Boost Supply of Venture Capital from Out of the State

Indiana startups might soon have an easier time attracting out-of-state investments thanks to a change lawmakers made this year to an instrumental tax incentive program.

The state has offered the venture capital investment tax credit since late 2003 as a way to make investing in startups a little less risky, but it really only benefited Indiana residents because it applied to an individual’s state tax liability. That meant investors who didn’t pay Indiana taxes were left out.

Senate Bill 563, authored by Republican Sen. Travis Holdman and signed by Gov. Eric Holcomb, changed that. Starting in 2020, investors will be allowed to transfer the tax credit, which means out-of-state investors can essentially sell the credit to someone in state who can take advantage of it.

Leaders in the tech community say that is a big win for their industry, because it will help motivate out-of-state individuals- who regularly ask about the tax credit – to invest in Indiana startups.

“It’s certainly not the only driver when making the decision about whether to invest in a company,” said entrepreneur Mike Simmons, who is now chairman and CEO of Sharpen Technologies. “But it certainly makes it a much easier decision.”

The change could also have a ripple effect for regular in-state investors. If startups’ pool of potential investors grows, local investors might hear fewer pitches.

“There are 15-20 people that probably get hit on pretty regular investment,” Simmons said. “The more we can broaden that out, it’s definitely better for the community.”

The VCI tax credit program allows someone who invests in early-stage Indiana company to claim a tax credit worth 20% of the investment. The credit is capped at $1 million.

An individual who invests $500,000 in an eligible startup, for example, can receive a $100,000 cut in the income tax he or she owes the state.

Eligible startups have to register with the Indiana Economic Development Corp. and set a venture capital fundraising goal. Investors then can receive the 20% credit until the company hits that goal, which is capped at $5 million.

In the programs first 15 years, 778 startups have been certified to use it, but only 30 startups have reached the $5 million cap.

Read the full article in the Indianapolis Business Journal.

 

Startup Team