While there are a myriad of ways to reduce Ohio income taxes that are well known and widely leveraged, some methods seem to go largely unnoticed. One of those lesser-known and underutilized methods that every small business owner, or those interested in owning a small business, should be aware of is the InvestOhio program.
InvestOhio, launched by the State of Ohio several years ago, was created to encourage investment in Ohio-based eligible small businesses. Qualifying applicants to this program will receive non-refundable Ohio personal income tax credits equal to 10% of their investment in an eligible small business. Any unused credits can be carried forward up to seven years.
What is considered a small business?
To qualify for the credit, eligible small businesses in which the investments are made must be Ohio-based and either have a maximum of $50 million in assets OR a maximum of $10 million in annual sales. An eligible business must also have at least 50 Ohio-based employees OR employ more than half of its employees in Ohio. C-corporations, S-corporations, partnerships, LLC’s, and sole proprietorships may all be considered to be eligible small businesses under this program.
The small business is required to reinvest that infusion of cash into one of five categories of allowable expenses within six months of its receipt. You, as the investor, must retain your ownership interest for a two year holding period before the tax credit may be claimed. The small business must similarly retain the property that it purchased from the cash infusion for the entire two-year holding period.
Do you qualify as an InvestOhio investor?
Individuals (or pass through entities with individuals as owners) who invest cash in a qualifying Ohio small business are deemed a qualified investor. There are two qualification provisions:
- investments must be made in a qualifying Ohio small business
- the investment must be held for 2 years
Determining the amount of tax credit
InvestOhio provides a small business investment certificate (InvestOhio tax credit), which represents a 10 percent personal income tax credit for the investor, based on the amount invested. The tax credit is limited to $1 million per person.
How to receive your tax credit
There are several steps one must follow to be awarded a small business investment certificate (an InvestOhio tax credit).
- Both the investor and the small business must register for InvestOhio through the Ohio Business Gateway.
Following registration, each registrant will receive an InvestOhio User ID. The User ID is a unique number that prevents parties from having to share sensitive information with proposed business partners. This number will be required to complete Step 3, below.
- The parties on a given transaction will decide who is responsible for applying to the InvestOhio program.
Regardless of whether it is the investor or the small business, the party that applies must obtain the InvestOhio User ID of the other party on the transaction. They must also reach an agreement with that party about when the investment will take place and the amount of the investment.
- The party that is responsible for applying will do so at the Ohio Business Gateway.
The application will seek only the information described in Step 2, above. The timing of when an eligible investor or small business applies is critical, as credits are awarded on a first come, first served basis.
Additionally, an application must be filed in the same state biennium as the investment. Once a party has completed an application, he or she will be given an InvestOhio Transaction ID number. This number will determine the priority for that transaction. Once the Director has accepted enough transactions to fulfill all of the available tax credits, the Director will inform applicants of where their transaction sits in the line of unfulfilled transactions so that they can estimate how close their transaction is to potentially being awarded a tax credit.
- Regardless of whether a transaction has the necessary priority to be awarded an InvestOhio tax credit at the time of application, the investor must make the investment on or around the date described in the application.
Some transactions that were initially eligible may be disqualified for failure to follow the program rules. If a disqualification takes place, the Director will simply move on to the next InvestOhio Transaction ID that was not awarded a tax credit, so it is critical that those transactions that were not immediately eligible for a tax credit still complete the investment.
- Those transactions that have the necessary priority at the time of application will be notified by email of their eligibility. The investor must make the investment on or around the date described in the application and provide evidence of the investment to the Director within 30 days.
- The small business must then make allowed expenditures and provide evidence to the Director within 30 days of completing the expenditures or within seven months of the investment, whichever occurs first.
- Both the investor and the small business must retain ownership interest (investor) and property (small business) for the duration of the holding period (two years).Both parties must provide evidence of continued ownership to the Director upon the completion of the holding period.
- If the parties to the transaction have met the above steps, the investor may claim the tax credit.
As you can see, the InvestOhio program can be an additional or alternative way to help taxpayers reduce their tax obligation and should be considered, along with other credits, deductions, and financing options, when determining how best to raise the capital needed to grow a small business. Taxpayers should meet with their tax and business advisors to discuss how the InvestOhio credit could be of benefit.
For a list of frequently asked program questions, visit the InvestOhio site here, and then contact us. Our team has helped clients with InvestOhio and other programs that help reduce their income tax. Learn how we can help you. Contact me at firstname.lastname@example.org or any of the professionals at 216.831.0733. We are happy to help and ready to start the conversation.