As a multi-time founder and CEO, I have done my fair share of fundraising, from strategic partnerships and seed rounds to orchestrating multiple successful exits. One area of functional fundraising I wish I had learned about earlier in my career is partnering with the government in the form of tax credits.
What Are Credits and Incentives?
Credits and Incentives, or C&I, are government funds meant to incentivize employment creation, capital investment, sustainability, research, innovation and more. Here are four to explore.
While most founders have heard about the Employee Retention Credit and probably received a prospecting phone call or two, delving deeper into the world of Credits and Incentives (C&I) offers tremendous advantages for founders. Here are four ways founders can strategically align with government agencies and tap into non-dilutive capital streams.
ITC/PTC and Energy Retrofits
When President Biden released his omnibus IRA package, one of the talking points in the media was “the investment in renewable energy.” What that functionally means is a major set of tax credits. In this case, a large swath of renewable focused credits were reclassified as transferable credits.
Why is that important? Unlike a conventional offset credit, which can only be monetized when it matches up with a taxable liability, transferable credits can be sold to other organizations or individuals. This unlocks the liquid value of a tax credit. Famously, Tesla was a major beneficiary of selling transferable credits and used the liquidity it created to fund a huge part of its growth.
Now with so many tax credits becoming transferable, credits like the Investment Tax Credit and the Production Tax Credit become extraordinarily interesting for anyone paying energy costs. Founders can move forward with costly retrofit projects like solar upgrades or LED, generate an ITC even if they will not be turning a profit anytime soon, and then sell that credit in any number of transferable markets for cash.
Likewise, the newly resulting solar power can either be sold back to the grid or claimed as a Production Tax Credit which, you guessed it, can be sold on the open market.
While ITC/PTC and other transferable credits are not going to be as simple as, say, an Employee Retention Tax Credit or Work Opportunity Tax Credit, they are significant drivers of non-dilutive capital and can also help you align more practically with the critical renewable energy future.
State Amplifications of Federal Programs
The Work Opportunity Tax Credit and the Research & Development Credit are two of the largest federal programs, with a collective benefit to taxpayers nearing $20 billion annually.
Additionally, most founders are acquainted with these credits. Specifically, research and development holds a significant role in the financial stack, particularly within the tech sector. What is lesser known is that most states have companion programs to both the federal WOTC and R&D programs.
The California R&D Credit, for example, allows recipients to stack on another 15 percent return on qualified research and development which can stack on $500,000 (the federal R&D limit was doubled from $250,000 to $500,000 effective Jan. 1, 2023) federally allowable funds.
California is far from the only state with an R&D stack. Thirty-eight different states have stack-ons for R&D. Likewise, you may already be receiving a WOTC credit for hiring qualified individuals but that does not preclude you from looking at state programs like Georgia Jobs.
As a rule, if you are hiring people or building something new, you should pursue the big federal programs as well as your state’s specific stack-on program.
Employee Retention Tax Credit
Just as Babe Ruth transformed baseball and the Beatles revolutionized pop music, the Employee Retention Tax Credit has equally reshaped the playing field. This landmark program, initially introduced as a cornerstone of the original Covid-19 relief package and subsequently intertwined with the Paycheck Protection Program (PPP), has now firmly established itself as a pillar of the American business landscape. If you have a business and have not received ERTC, you should absolutely pursue it. No other credit available to SMB even comes close to its value as non-dilutive liquid capital.
What makes ERTC so special? Similar to the ITC/PTC programs discussed above, tax credits occasionally receive special classifications. In the case of the energy programs, that reclassification was into a transferable status. For ERTC, it goes even further into a status called refundable. Refundable is the rarest and most valuable of all classifications because it amounts to something closer to a grant than a classic tax credit — essentially, a refundable credit is a credit that does not require any liability and actually triggers what is called an “overpayment” from the U.S. Department of the Treasury.
Basically, the government sends you a check in the mail. While you do have to refile your taxes (and this is an area where we are seeing a huge number of ERTC recipients fail to comply, because if you received an ERTC, you must refile your taxes and you will likely have a small tax burden) you basically just got a check that you can spend as you’d like.
More Options
Cities, counties, states and countries want your business to be healthy and to be local. Governments depend on the taxes generated and their communities need the economic vivacity generated by your successful business.
So call them. Yes, they actually do have a phone number. Economic development is the department you want to call at the state and local levels. All you have to do is call them, describe your business and see if there are any other opportunities for tax credits, forgivable loans or stimulus available. You’ll be shocked at how often it actually works.
If you are considering moving or expanding your business, absolutely call various economic development departments. They exist so that jurisdictions can be competitive in luring the kind of innovative, high-paying job producing, awesome companies that can be the cornerstone of communities for generations to come.
By embracing these under-the-radar tax strategies, founders can secure non-dilutive capital and also propel their ventures toward unprecedented growth. As you navigate the intricate landscape of entrepreneurship, remember that financial innovation extends beyond conventional norms, creating opportunities that can fuel both your business and your community for years to come.
