First Rhode Island Startups Closing in on Tax Credit Under New Stimulus Program

1/16/08

If Massachusetts is the New England innovation economy’s Goliath (and we’d argue that it is), Rhode Island is David. And the state has a new weapon in hand as it goes up against its much larger neighbor: a targeted tax credit of up to $100,000. Rhode Island hopes the credit will encourage investment in its up-and-coming high-tech and life sciences companies and help counter any temptations for them to head across the border to what’s often viewed as more startup friendly Massachusetts (or anywhere else for that matter).

Will it work? Some answers might be coming soon. The six companies preliminarily approved for the Innovation Tax Credit Program last November will have their first opportunity to show proof of fulfilling the requirements later this month. Rhode Island will issue the first set of tax break certificates promptly after this review is complete, according to Melissa Withers, director of communications and market development at the Rhode Island Economic Development Corporation (RIEDC), whose organization oversees the program.

All of which means it’s showtime for the ambitious effort, which is targeted specifically at encouraging investment in companies in health and life sciences, information technology and digital media, financial services, marine trades and defense technology, technical and educational services, and consumer and industrial products. Initially proposed by the Rhode Island Science and Technology Advisory Council, the program was signed into law back in 2006. But given the required public hearing process and other steps needed to put the law into operation, the first few eligible companies are only now coming up for final approval.

The idea behind the program is to offer investors or companies up to a 50 percent credit on any seed, venture, or equity investment in a startup (or fairly young) company in the target areas—with a maximum credit of up to $100,000. To qualify, investments must be made in companies that produce traded goods or services and have had annual gross revenues of less than $1 million in the previous two calendar years. And the firms themselves must be pre-approved for the program, meaning that RIEDC has reviewed the companies to make sure they fall into the required fields and fit the revenue parameters. Firms are also reviewed on the strength of their business plan and how well qualified the applicant is to accomplish it, the perceived economic impact of their business, how well the business supports a culture of entrepreneurship, and their potential for advancing Rhode Island’s agenda of fostering an innovation economy, Withers says.

Presuming all goes well, the program provides a credit against tax liability on business corporation tax, franchise tax, or personal income tax: the company receiving the investment gets to stipulate (presumably in consultation with its investors) how the credit will be distributed. “The company could retain it for themselves, give it entirely or in part to the investor, or even give it to a subset of executive employees…or any combination thereof,” says Withers. Some investors, she notes, may not have a Rhode Island tax liability, or might just determine that the best way to support their investment is to use the credit to offset the company’s tax liability.

However the credit is to be used, being pre-approved is seen as attractive for startup companies as they seek investment, because it provides a keen incentive to potential investors to go ahead and take the plunge.

And so far, so good. A small wave of applications arrived last year as the program went into action, and … Next Page »

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