Getting Tax Credits for your Company

If you want to kill a conversation and watch someone’s eyes glaze over, tell them you have a great idea for a white paper—on tax credits. Specifically, the Keystone Innovation Zone (KIZ) Tax Credit Program. Trust me, it works. The sense of impending doom and boredom is almost palpable.

But reframe the conversation as a means of highlighting a way for companies to save up to $100,000 per year in order to facilitate their growth, and you can hear a pin drop. This time, in a good way. Lesson learned.

Here’s the really cool thing: even though KIZ may not be the sexiest sounding topic, the benefits to entrepreneurs, startups and other smaller businesses can be game changing. Perhaps even a significant determining factor in whether a company lives to fight another year. So what exactly is this stuff, and how does it work?  

UNDERSTANDING KEYSTONE INNOVATION ZONES

Stemming from a statewide initiative of former Governor Edward G. Rendell, the core purpose of KIZs is to build knowledge-based economies by promoting and encouraging innovation and entrepreneurship in Pennsylvania. KIZs themselves are designated geographic districts designed to foster these entrepreneurial opportunities by aligning the combined resources of educational institutions and the private sector.

With a total pool of up to $25 million in tax credits available to qualified KIZ companies annually, the program strives to create the necessary support networks within these zones to cultivate a pipeline of innovators and dynamic new companies that will help craft the future of Pennsylvania’s economy. In short, the KIZ Tax Credit Program can be a pivotal kick start for young companies as they transition through the stages of growth. But, as with most things in life, there is a catch. Only certain types of companies qualify for the tax credit.

WHAT IS A QUALIFIED COMPANY?

In general, all applicants must be:

  • A for profit business entity
  • In operation for less than 8 years
  • Innovating in one of the targeted life sciences or technology sectors (commercializing new technologies, innovative products or processes, OR working within specific targeted life sciences or technology sectors)
  • Located within a Keystone Innovation Zone

Because this paper focuses on the benefits of the tax credit for Philly companies, it’s worth noting that Philadelphia has three distinct KIZ’s, each with their own focus. These are: BioLauch 611 + KIZ; University City KIZ; and the Navy Yard KIZ. In order to take advantage of the KIZ Tax Credits, a business must be located within the boundaries of a KIZ or on the opposite side of a KIZ boundary street.

BioLaunch 611+ KIZ

This KIZ is a BioStrategy Partners program that provides professional services to advance existing and newly forming KIZ companies to achieve their next level of development or commercialization. The focus in this KIZ is on life sciences, information technology and advanced manufacturing, specifically related to oncology, cardiovascular health, diabetes and aging.  

The territory is the largest of the 3 and  includes parts of the tri-county Bucks-Montgomery-Philadelphia region, south and east of Route 202 in Bucks and Montgomery Counties and north and west of Girard and Lancaster Avenues in Philadelphia County.

University City KIZ

Home to numerous tech companies, several major universities, non-profit research institutes, and research and teaching hospitals, this KIZ has an incredible concentration of resources for supporting life sciences and IT startups. It’s also a bit of a misnomer as the boundaries extend far east of University City and include a core part of Philadelphia’s Central Business District, which increases the potential office locations for companies that prefer to be in Center City but still want to take advantage of the tax credit.

The focus of the University City KIZ is on Life Sciences, IT and Nanotech.

Navy Yard KIZ

Located south of downtown Philly in our Navy Yard, this KIZ benefits from a unique partnership led by Penn State University, the U.S. Naval Surface Warfare Center (Carderock Division), Ben Franklin Technology Partners of Southeastern Pennsylvania, PIDC, Delaware Valley Industrial Resource Center, the City of Philadelphia, and several private industry partners.

The focus of the Navy Yard KIZ is on the following technology sectors: Power and Energy, Nanotechnology, Advanced Materials and Manufacturing, Communications and IT, Homeland Security, and LIfe Sciences.

SO HOW DOES IT WORK?

As with most things tax related, there is a bit of math involved. While a full discussion of all calculations goes beyond this paper (more information can be found at…), the basics are pretty straightforward.

To begin, there is a pool of up to $25 million in tax credits available to KIZ companies each year, and the credit can total up to $100,000 annually per KIZ company. The credit can be applied against the company’s Pennsylvania Personal Income Tax, Corporate Net Income Tax, or Capital Stock-Franchise Tax for the taxable year during which the credit is approved.

A KIZ company may claim a tax credit equal to 50% of the increases in its gross revenues in the immediately preceding taxable year attributable to KIZ eligible activities in the zone, over the KIZ company’s gross revenues in the second preceding taxable year attributable to its activities in the KIZ. A tax credit for a KIZ company cannot exceed $100,000 annually. Huh? Let’s illustrate with an example:

XYZ Co. operates entirely within a KIZ and all of its operations align with that particular KIZ’s industry focus. In year 1, XYZ Co.’s gross revenue resulting from activities within the KIZ are $50,000. In year 2, the business grows and gross revenues from activities within the KIZ are $80,000. In year 3, XYZ Co. can apply for a KIZ tax credit of $15,000 (50% of the $30,000 increase in gross revenue from year 1 to year 2).

While $15,000 may not be a momentous sum for large, established companies, that’s generally not the case for younger startup and growth companies. As a boot-strapped startup ourselves (albeit not one that qualifies for KIZ benefits), and as one that regularly advises clients that do qualify for KIZ benefits, we know first-hand how far these dollars can go. Nobody is better at stretching a dollar than startups and entrepreneurs; the paper bills seem to develop the elasticity of a well-chewed piece of gum.

But back to our example. Now suppose that in year 3, XYZ Co.’s gross revenues grow to $400,000 from activities within the KIZ. In year 4, the company would be eligible to apply for a maximum KIZ tax credit of $100,000. This is because their gross revenue increase from year 2 ($80,000) to year 3 ($400,000) is $320,000 and 50% of that increase ($160,000) exceeds the $100,000 maximum allowable tax credit. Still, $100,000 in tax credit on $400,000 in revenue is not chump change; it is fuel to continue innovation and growth.

NO TAX LIABILITY ANYWAY? THAT MAY NOT BE A PROBLEM

The program contains another innovative component: the credit is saleable for market rate returns, which have ranged from $.80 to $.90 on the dollar. This tradability can be a game-changer for young companies with little or no tax liability as the cash from selling a credit can be used to further fuel growth.