Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
Peter Berrie,
Faegre & Benson:
612.766.7080
pb*****@****re.com
www.faegre.com
NOT A DAY goes by without reading about some company receiving federal money because it is “too large to fail.” But what is the federal government doing for small businesses, which are the economic engine of this country? Companies are using federal tax credits to improve their bottom line, but are these tools too complicated for the average business owner?
One of President Obama’s first acts was signing the American Recovery and Reinvestment Act of 2009, commonly known as the economic stimulus package. This bill increased the amount of New Markets Tax Credits available by $3 billion and made it easier for businesses to use federal incentives for solar panels and other renewable energy systems.
How can small businesses take advantage of these incentives? It is likely that small-business owners will find three federal tax credits most useful: Renewable Energy Tax Credits, New Markets Tax Credits, and Historic Tax Credits.
“Going green” is increasingly more important as the public grows more concerned about climate change. Improving a building’s energy efficiency can also be cost-effective and reduce the uncertainty caused by fluctuating energy costs.
The federal Business Energy Investment Tax Credit makes some of these green investments even more attractive by effectively decreasing the amount of time for these investments to pay for themselves. This program creates dollar-for-dollar tax credits available to all businesses that invest in renewable energy building systems such as solar power systems (like photovoltaic solar panels or solar thermal systems), geothermal systems, fuel cells and small wind turbines.
Generally, the amount of the tax credit is 30 percent of the system’s cost. For example, if you spend $200,000 for solar roof panels, including installation, you would receive a tax credit of $60,000, effectively reducing your cost to $140,000.
In addition, the system can be depreciated on an accelerated basis over five years, and its basis will only be reduced by 50 percent of the tax credits. In the example above, the depreciable basis would be $170,000-pretty good considering the effective cost is $140,000 and the depreciation can be taken over five years!
The New Market Tax Credit is a relatively new investment tool-it was enacted in 2000 but wasn’t first used until 2004. Originally, there was $2 billion allocated annually for such credits. The economic stimulus package has increased this allocation to $5 billion for 2009 and added $1.5 billion for 2008 that still needs to be allocated. This presents a big opportunity for businesses to take advantage of this little-known subsidy.
The credit is designed to increase capital investments in low-income communities, which are census tracts with at least 20 percent poverty or where the median family income is less than 80 percent of the applicable area median income. Surprisingly, it has been estimated that about 45 to 50 percent of the country qualifies.
In addition, Congress has recently required that more credits be deployed in “non-metropolitan” areas. This is a technical classification that sometimes is not consistent with what you or I might think is a non-metro area, so do not assume that you are or are not located in a non-metropolitan area.
The tool gives taxpayers a tax credit for making qualified investments in “community development entities” (CDEs) that must then make loans or equity investments in qualified businesses located in “low-income communities.” The tax credit equals 39 percent of the investment.
Because of this program, CDEs in turn want to invest in, or make loans to, companies that make a positive impact in low-income communities. If you require capital to expand your business, renovate a company building, or fund an operating loan to retain a significant number of jobs, you can receive significant benefit from this program if you qualify.
Some CDE programs result in reducing interest rates on loans by 1 to 1.5 percent, but other programs result in outside investor equity equal to 15 to 20 percent of your funding needs, net of fees and expenses. And because of the substantial tax credit, these investors are usually willing to sell their equity interests back to you for a nominal price after the seven-year tax credit period.
The New Market Tax Credit can be used by businesses for almost any purpose, but the following uses are prohibited: rental residential real estate, country clubs, golf courses, massage parlors, hot tub facilities, suntan facilities, racetracks or other gambling facilities, and liquor stores. Farming businesses with assets in excess of $500,000 are also excluded. Banks also are unlikely to qualify for the end subsidy.
The first question as to whether you qualify for the program is the location of your business facilities or business activities. If you satisfy this threshold question, the next step is finding the right CDE to invest in your company.
Historic Tax Credits are available for substantial renovation of qualified buildings. They can be thought of as two separate programs-which I call the Historic Tax Credit and the Old Building Tax Credit. The Historic Tax Credit is available for “certified historic structures,” which are buildings listed in the National Register of Historic Places or located in a registered historic district and certified as being of historical significance. The so-called Old Building Tax Credit is available for buildings that were originally constructed and first placed in service before 1936-no governmental designation is required.
In either case, there is a one-time tax credit for the building owner based on a fixed percentage of building rehabilitation costs. The percentage is 20 percent of qualified rehabilitation costs for the Historic Tax Credit and 10 percent for the Old Building Tax Credit.
Tax credits can be a valuable tool in tough economic times. These descriptions above provide a general awareness of federal subsidies that are often overlooked by small businesses that do not have the staffing necessary to keep apprised of such incentives.
If you think you might be eligible, make a call to get a preliminary determination of whether you qualify and how much the subsidy may be worth. During the current recession, these programs can make the difference between surviving or thriving.
