Kentucky Drives Economic Development with Tax Credits

The Land of the Thoroughbred has been making great strides with its economic development efforts, and the nation is taking notice. In early March, the Cabinet for Economic Development (CED) announced that the state had placed first nationally in Atlanta-based magazine Site Selection’s annual Governor’s Cup rankings for new and expanded industry activity per capita in 2014. Projects qualified if they involved a capital investment of at least $1 million, created 50 or more jobs, or added at least 20,000 square feet of new floor space.

That year, Kentucky’s economic activity reached an all-time high; the state saw over $3.7 billion in new investment encompassing 350 new location and expansion projects anticipated to create nearly 15,000 jobs, which is more business investment than ever before. The CED attributed much of that economic growth to the expansion of companies already present; nearly 70 percent of the state’s announced new investment and new jobs came from the expansion of existing Kentucky businesses.

Economic development activity like this is linked to Kentucky’s precipitous drop in unemployment. The current 5.7 percent unemployment rate is the lowest in seven years, and down from 10.7 percent in 2008.

Angel Investment Fund Tax Credit

One of Kentucky’s tools for encouraging business growth and job creation is its Angel Investment Fund Tax Credit (Tax Credit). The Tax Credit allows people who provide capital for start-up companies to receive a tax credit of up to 50 percent of their investment in counties with high unemployment rates, or enhanced counties, and 40 percent in all other counties. Before last year, only groups of angel investors (with fund managers) could take advantage of the credits.

The Office of Entrepreneurship (OoE) within the Kentucky Cabinet for Economic Development administers the Tax Credit program. Earlier this month, the OoE trumpeted the astounding response from investors while warning those who wish to apply to do so fast because two-thirds of the 2015 funds to be allocated are almost gone. In just the first two months, 64 angel investors announced plans to invest $5.4 million in 17 Kentucky businesses, which makes them eligible for $2.1 million in angel investment tax credits after making their approved investments.

Besides the large tax credit, another reason for the high demand is that out-of-state investors are eligible to participate, even though they may not have any Kentucky tax liability. Such investors can sell their tax credit to someone within the state, thereby recovering some portion of the investment.

ThinkKentucky.com offers useful links to the fact sheet, applications, and other useful information, including the following guidelines:

• A qualified small business is a legal entity registered and in good standing with the Kentucky Secretary of State and has no more than 100 full-time employees;
• The business must be engaged in bioscience; environmental and energy technology; health and human development; information technology and communications; materials science and advanced manufacturing; or other new economy knowledge based activity;
• A qualified investor holds no more than 20 percent ownership in, and is not employed by, the qualified small business prior to making a qualified investment in that business;
• A qualified investment is a minimum cash investment of $10,000 made by a qualified investor in a qualified small business;
• Tax credits may be transferred to an individual taxpayer and can be carried forward for up to 15 years.

Kentucky has allocated $3 million each calendar year on the Tax Credit, and the maximum credit that any individual qualified investor is allowed to receive is $200,000 in aggregate in any calendar year.

Kentucky Small Business Tax Credit

Another tool that Kentucky has deployed to spur growth is the Kentucky Small Business Tax Credit (KSBTC).

Any small business that creates and maintains at least one qualifying job, and purchases $5,000 or more in qualifying equipment, may be eligible to receive a state income tax credit in an amount determined, in part, by the number of jobs created and the amount of equipment purchased.

The KSBTC fact sheet points out that the state has a limit of $3 million to award per fiscal year. Qualified applicants are eligible to receive a tax credit in an amount not to exceed the lesser of: 1) $3,500 per eligible position; or 2) the total dollar amount invested in qualifying equipment or technology. Applicants are also subject to a $25,000 maximum tax credit cap per applicant for each calendar year.

Companies that have 50 or fewer full-time employees at the time of the application are eligible. In addition, the fact sheet sets out requirements for employment, wage, and investment minimums. For instance, with respect to the qualifying jobs, they must be filled for 12 months, pay at least 150 percent of the federal minimum wage, and be subject to the individual income tax imposed by statute.

In addition, an applicant must spend $5,000 or more on qualifying equipment or technology, defined as “tangible property purchased by the applicant business for use in the business (not for resale or personal use), with a per-unit cost of$300 or more and expected useful life of more than one year.” Examples of qualifying equipment or technology include, but are not limited to: computers, equipment, furniture, fixtures, furnishings (excluding artwork), and vehicles titled in the legal name of the business. Real property, buildings, and consumable supplies do not qualify.

The Kentucky Investment Fund Act

A third growth device employed by Kentucky is the Kentucky Investment Fund Act (KIFA). KIFA offers a 40 percent tax credit to certain personal and corporate investors in approved investment funds. After the Kentucky Economic Development Finance Authority (KEDFA) allocates the credits to a fund, they are proportionately granted to the fund’s investors upon its completion of qualified investments.

The minimum fund size is $500,000. An eligible qualified investment is one in a Kentucky-based small business that is actively and principally engaged in a “qualified activity” within Kentucky that meets the following criteria at the time of investment:

• 50 percent of the company’s assets, operations, and employees are located in Kentucky;
• The company’s net worth is less than $5 million (or $10 million, if it is a knowledge-based business) or its net income in each of the prior two years is less than $3 million; and
• The company has no more than 100 employees.

A qualified activity includes any industrial, manufacturing, mining, mining reclamation for economic development, commercial, healthcare, agricultural enterprise, or agribusiness activity.

The total amount of tax credits available to any single investment may not exceed, in aggregate, $8 million for all investors and all taxable years.