North Carolina legislators support small businesses and work to create entrepreneur friendly policies to foster economic development in our state. Two such policies that have proven to be impactful to technology-driven startup companies over the years. These include the 1.) One North Carolina Small Business program (spearheaded by the NC Department of Commerce Office of Science, Technology, and Innovation) that appropriates dollars to match SBIR and STTR awards and 2.) the inactive Qualified Business Investor Tax Credit program (QBV) that provided a state tax credit to investors to incentivize investment in qualifying businesses.
The One NC program must be refunded by the state legislature on an annual basis. The QBV tax credit program sunset in 2013 and was not reauthorized due to sweeping tax reform in NC that resulted in the elimination of most tax credit programs in favor of a reduction in overall corporate tax rate (which did not benefit pre-revenue or companies with no profits). When funded, these programs worked together to contribute a “one-two-punch” of early-stage capital to the highest risk technology development firms.
You are likely familiar with the One NC program as we have discussed it in our recent newsletters and outreach. If you were not involved with the entrepreneurial financing world prior to 2013 you may not be familiar with the QBV Tax Credit program. Here are the highlights:
The QBV Tax Credit provided a 25% credit against personal income tax for individual investments in qualifying small businesses. Credits were capped at $50,000 per individual investor per year and a $7.5 million per year cap applied to all investments statewide. Investors could also receive the tax credit if they made their investments in the Qualified Business via a pass-through entity. The entity, such as an angel group, could receive a credit equal to 25% of the investment, with a maximum credit of $750,000 per year. To qualify for the credit, businesses that received investments must have had less than $5 million in revenues annually and be engaged primarily in manufacturing, processing, warehousing, wholesaling, or research and development.
The types of businesses that qualified are the drivers of home-grown economic prosperity in our state with above average employee wages. They are at risk due to the current economic climate which makes it even more difficult to raise equity capital. Over the past decade the trend has been for institutional investors including venture capital firms to invest in fewer but larger and later-stage deals. The data shows this trend has been amplified by COVID19 and the impact of the economic fallout. As a result, angel investors have been pressured to fill the early-stage funding gap. The role of these early-stage investors has never been more important and government incentives like the QBV Tax Credit would be an immediate way to incentivize investment into higher risk early-stage investment opportunities to help fill the gap.
Since the NC QBV tax credit sunset provision took effect in 2013, NC businesses have been at a competitive disadvantage versus several neighboring states that have “angel investor” tax credits. South Carolina, in particular, offers a transferrable credit that has attracted North Carolina angel investors and incentivizes them to invest in SC businesses. In total, there are 31 states with active tax credits for early-stage equity investment. Based on our research, the average cap is $9.38M per state. Four states with high caps include Massachusetts ($25M), New Jersey ($25M), Ohio ($50M) and Wisconsin ($30M).
Incentive programs like the QBV tax credit and One NC program can have a major impact on early-stage technology companies. These are challenging times in the early-stage funding landscape. The entrepreneurial community would welcome seeing both of these programs authorized and funded on an annual basis.