If there’s one thing in life that’s for sure, it’s taxes. But if you groan and moan as April 15 approaches every year, Stephen Bradshaw, CPA has some good news. We spoke to the Senior Tax Manager at Bennett Thrasher about three Georgia startup tax credits that can benefit your company and save you (and your investors) a lot of dough.
If your startup is planning to hire, retrain staff on new software, or seek more funding next year, these Georgia tax credits are for you.
Angel Investor Tax Credit
It is a Georgia income-tax credit that the investor can use against their own taxes. It’s a 35 percent credit of the investment that the angel investor makes into a tech company.
How can you use it?
For example, let’s say a startup is doing software service. If I file a particular form with Georgia in order to be “qualified” or “registered” for this credit and then an angel investor invests, let’s say, $100,000 into my company, this Angel Investor Credit allows that angel investor to get a $35,000 Georgia tax credit that he or she can use against his own personal income tax.
Your startup needs to have been formed less than less than three years ago, it can’t have raised a million dollars yet from other investors or debt, and it can’t have had more than $500,000 in sales prior to the registration.
Why it’s important: From a technology company’s standpoint, there’s one super-key point that most technology companies actually miss out on and that is that they have to pre-register before the investors make their investment in the company. This is one of the most underutilized tax credits that Georgia has because most companies miss the deadline to register with the Georgia Department of Revenue prior to the investment. They will not allow any companies to retroactively register.
I would recommend that every startup pitch this to their angel investors. Whether or not the angel investor knows it, they should be aware of it (mainly for that free registration requirement). It’s going to speak to the sophistication of the startup company too. If they’re aware of things like this that will help out their investors, I think it should speak to an overall better picture of the company, painting a better investment potential for the investor.
Retraining Tax Credit
Another Georgia income-tax credit, this time for a tech company that trains its employees on new software or hardware. The company can receive up to 50 percent of the costs of the retraining as credit.
How can you use it?
Hire a qualified person to teach an internal training course. If it’s the founder of the company and he/she is certified in a specialized software, he can teach his employees to use the software and apply for the tax credit. The credit is generally equal to 50 percent of the cost that they spend. In the founder’s case, the cost would also include the hourly salaries of the participating employees. Remember to always document your costs for the credit. There is some paperwork you have to fill out and file in various places so working with a tax accountant is recommended.
What if your startup is at a loss?
If a company is in a loss, which I know a lot of start-ups are, they can’t actually use it. They can only use it against 50 percent of their Georgia income-tax liability.
If I own a software company and I’m generating some revenue but all of my expenses are way more than my revenues still, and I am at a loss, I’m not going to pay any federal or state income tax. Even if they went through the paperwork and hassle and got approved for, let’s say, $100 worth of this retraining tax credit, they’re not going to be able to use it this year. They’ll have to wait to use it until a future year, when they start turning a profit.
Job Tax Credit
This one can be a pretty sweet deal, especially for start-ups. If the company hires at least two people in a particular economically distressed zone (You can find out about opportunity zones here — ATDC, for example, is in one of them), they get a job tax credit per employee over the period of five years.
How can you use it?
You can use this tax credit to offset income tax from employees’ paychecks. Even if it’s a start-up company and they’re not turning a profit, they can still use this credit because, assuming they’ve got some employees, they’re going to have to withhold Georgia income tax from those employees’ paychecks.
The credit is up to $3,500 tax credit per employee, per year, for five years. You get that credit over the period of five years, so long as you maintain those jobs. There’s no cap on how many employees you hire.
The person has to be paid above the lowest county average wage in the state of Georgia which is somewhere around $24,000. They have to work more than 35 hours/week on average and they have to be offered health insurance, which I know that one’s actually a tough one for start-up companies. They don’t actually have to pay for health insurance, they just have to simply offer it to their employees. They have to be an actual employee, they can’t be an independent contractor.
Why is it important?
If you have a startup that hired six people, then that’s $21,000 tax credit per year. You get that for each of the five years, that’s $105,000 of tax credits that they get just for those six people over the 5-year period. Again, you don’t have to be turning a profit to use it.
Please consult your lawyer and/or accountant for advice before applying to any of these credits to see if they are good fit for your company.