don't leave money on the table: top 8 business incentives for new orleans entrepreneurs

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Don’t Leave Money On the Table! Top 8 Business Incentives for New Orleans

Entrepreneurs

Julie DiColo, CPAManager

Doug Finegan, CPAPartner

Dean Martin Jr., CPASenior Manager

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Don’t Leave Money On the Table! Top 8 Business Incentives for New Orleans Entrepreneurs

Dean Martin, Jr., CPAdean@kl-cpa.com

Julie DiColo, CPAjulied@kl-cpa.com

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Top 8 Business Incentives• Domestic Production

Activities Deduction

• Historic Rehabilitation Tax Credit

• Louisiana Digital Media Incentive

• Research & Development Tax Credit

• Enterprise Zone /Quality Jobs Programs

• IRC Sec. 83(b) Election

• LA Capital Gains Exclusion

• Small Business Stock Exclusion

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Format• General Overview

• How does this look in the real world?

• Illustration

• Rules, Regulations, and Stipulations

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#1 Domestic Production Activities Deduction

“Deduct 9% of Your Profits Without Spending a Dime”

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Domestic Production Activities Deduction: NOLA In Bloom

Flora is the owner of NOLA In Bloom, an expanding flower farm. She grows and sells fresh cut flower bouquets and arrangements.

She was able to grow her business in 2015 to 480,000 in revenues with net income of 300,000.

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Domestic Production Activities Deduction: NOLA In Bloom

Tax Liability w/o DPAD Tax Liability with DPAD

Taxable Income 300,000 300,000Less: DPAD 0 (27,000)

300,000 273,000

Federal Income Tax 82,606 73,696State Income Tax 11,794 10,708Total Tax 94,400 84,404

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Domestic Production Activities Deduction• Incentive is available to taxpayers that do the

following in the United States:▫Manufacture goods (includes software & food

products)▫Grow or extract property▫Produce sound recordings and/or films▫Construct real property (includes subcontractors)▫Perform related engineering/architectural services

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#2 Historic Rehabilitation Credit

“Have the government help pay for your renovation/redevelopment”

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Historic Rehab Credits – Strategic Design ConsortiumJamie owns Strategic Design Consortium, a brand consulting & design firm.

He, along with additional investors, forms a real estate partnership to purchase & rehabilitate a building in Mid City.

Jamie will rent out the bottom floor of the building for his offices and additional rental revenue will be generated from apartments on the top floor.

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Historic Rehab Credits – Strategic Design Consortium

Investment Qualified CostsAcquisition Costs - Structure 140,000Acquisition Costs - Land 110,000Parking Lot/Landscaping 12,000Construction Costs 231,000 231,000Furniture & Equipment 20,000Architect Fees 12,000 12,000Total 525,000 243,000

X 45%109,350

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Rehabilitation Tax Credits•Combined federal and state incentive is up to

45% of the cost of renovation

▫Renovation costs only – does not include original acquisition costs, furniture, expansion, or site work

• Structure must be located in a historic district▫Good News – Historic Districts cover practically all

of New Orleans!

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•Federal Rehabilitation Tax Credit – 20%▫Nontransferable – Must be used to offset tax

liability on building owner’s tax return▫Can be carried back one year and forward twenty

•Louisiana Rehabilitation Tax Credit – 25%▫Transferable – Can be sold at a discount

(typically around 85% on the dollar)

Rehabilitation Tax Credits

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#3 Louisiana Digital Media Incentive

“Get paid for developing your app”

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Digital Media Incentive: Crescent Media Solutions, Inc.

Crescent Media Solutions, Inc. is developing Big Easy Parade Exchange, a cloud based application that allows users to buy and sell goods and services on parade routes.

The company rents office space for its three permanent employees and also hires a consultant to help with development of the mobile application.

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Payroll Expenses Title Gross Pay Qualified Expense

Marley Middleton Product Development 130,000 80% 104,000

Alexis Prejean QA Analyst 43,000 39% 16,770

Marcus Robinson Product Support 22,000 24% 5,280

195,000 126,050

Non-Payroll Expenditures Description Total Qualified Expense

IDC Realty Group Office Rent 36,000 55% 19,800

Apple Store Equipment 11,300 100% 11,300

Office Depot Supplies 1,500 100% 1,500

Jorge Ramirez Contractor 35,000 100% 35,000

83,800 67,600

Credit CalculationPayroll Credit 126,050 X 35% = 44,118

Other Expenditures Credit 67,600 X 25% = 16,900

Total Credit 61,018

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Digital Media Incentive e

▫Refundable tax credit of 25-35% of investment in qualified projects.

Applicants may also choose cash rebate of 85% of credit amount

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Digital Media Incentive

• Qualifying projects are interactive software products built for commercial export.

• Includes video games, training software, applications, web & cloud based platforms, etc.

• Does not include static websites, largely static retail websites, or any projects that are for internal use only

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• What costs qualify for the credit?

▫ Labor, equipment, and supplies directly allocable to production▫ Licenses/permits for development▫ Allocable rent for production site

Credit is 35% on payroll to Louisiana residents and 25% on all other qualified expenses

Digital Media Incentive

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#4 Research & Development Tax Credit

R&D Tax Credit: A&C Building Solutions

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Amy Architect and Carl Contractor form A&C Building Solutions, a company focused on designing and building functional workspaces & corporate campuses.

A&C Building Solutions: Federal R&D Credit Calculation

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2009 2010 2011 2012 2013 2014 2015Wages 75,000 85,000 125,000 225,000 325,000 325,000 325,000

Supplies 500 750 2,000 3,800 4,000 4,000 4,000

Contract Labor

0 0 3,500 5,000 3,000 3,000 3,000

QRE 75,500 85,750 130,500 233,800 332,000 332,000 332,000

Less: Base (48,625) (75,008) (116,050) (149,633)

185,175 256,992 215,950 182,367X 14% X 14% X 14% X 14%

Federal R&D Credits: 25,925 35,979 30,233 25,531

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Research and Development Tax Credits

• Qualifying taxpayers are typically involved in: Manufacturing Software Development Engineering Architecture Agriculture Food Processing/Manufacturing Biotechnology Construction

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Research and Development Tax Credits

Qualifying Research Expenditures#1) Improve function, performance, reliability, or quality#2) Rely on principles of science or engineering#3) Eliminate uncertainty #4) Element of a process of experimentation

▫Typically wages, contract labor, and supplies

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Research and Development Tax Credits

•Federal credit is 14-20% of qualified expenditures over base amount▫Start-ups may use credit against payroll

taxes

•State credit is 8-40% of qualified expenditures ▫Based on number of employees

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#5 Enterprise Zone & Quality Jobs

“Have the state reimburse you for assembling your team”

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Enterprise Zone: Henry’s Auto Repair Shop

In 2016, Henry decides to construct his own Auto Repair Shop and hire a few full-time assistants.

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Enterprise Zone: Henry’s Auto Repair ShopYear Event Credit Total Credit

2016

Facility Buildout $300,0004% Sales Tax = $12,000

New Full-Time Hires:

HenryHenry’s Assistant #1

$12,000

$2,500$2,500

$17,000

2017

New Full-Time Hires:

Henry’s Assistant #2Henry’s Office ManagerHenry’s Assistant #3

$2,500$2,500$2,500

$7,500

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Enterprise Zone: Henry’s Auto Repair Shop

Year Event Credit Total Credit

2018Assistant #1 Leaves

Hires Assistant #4

---

--- $02019 Hires Assistant #5 $2,500 $2,500TOTAL CREDITS $27,000

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• Tax credits of $2,500 per new job created • 1.5% to 4% reimbursement of your total investment

▫ Available only to certain industries▫ Limits on who you can hire to qualify – 50% new hires from:

Residency in Enterprise Zone Public Assistance Lacking Basic Skills Unemployable by Traditional Standards

▫ Timing of application is essential: file “Advance Notification” ASAP

Enterprise Zone Program

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• 6% cash rebate on 80% of gross payroll for new direct jobs

• 1.5% to 4% reimbursement of your total investment▫ 10 year period▫ Need 5 new jobs by end of 3rd fiscal year▫ Must be high-paying jobs with benefits▫ Timing of application is essential: file “Advance

Notification” ASAP

Quality Jobs Program

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• What is a “Quality Job” ? ▫ Full-time (30+ hr/week)

▫ Health Benefits

▫ Minimum wages of $14.50/hr

▫ Must hit total payroll threshold by end of third fiscal year: <50 employees, total payroll at least $250,000 >50 employees, total payroll at least $500,000

Quality Jobs Program

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• 3 Eligibility Scenarios: 1. Industry = Bioscience, Manufacturing, Software,

Environmental Technology, Food Technology, Advanced Materials or Oil & Gas Field Service

2. Business located in economically distressed region Lowest 25% Per Capita Parishes A census tract block group is below the state median per capita

income, based upon the latest federal decennial census.

Quality Jobs Program

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• 3 Eligibility Scenarios (con’t): 3. Must have at least 50% of annual sales out-of-state and/or to in-state customers or buyers if the product or service is resold by the purchaser to an out-of-state customer or buyer or to the federal government

Quality Jobs Program

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• Retail employers • State and local government enterprises• Real estate agents, operators and lessors• Automotive rental and leasing• Local solid waste disposal, local sewage systems and local water systems businesses• Nonprofit organizations, with some exceptions• Employers engaged in the gaming industry • Attorneys

Quality Jobs Program

Many industries do NOT qualify:

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#6 IRC Sec. 83(b) Election

“So you want to get paid in stock – what you need to know”

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83(b) Election: Billy’s Bait, Inc.

Jane Jones, top bait salesperson of 2015

100 shares of Billy’s Bait, Inc.

Vests in 3 years

Awarded 1/1/16

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83(b) Election: Billy’s Bait, Inc.Date FMV of Stock

January 1, 2016 (date awarded to Jane)

$5 per share

January 1, 2019 (date stock vests)

$40 per share

Jane decides to cash out on her shares on June 30, 2019 at FMV $50 per share.In 2018, Billy

Bait, Inc. is hugely successful and goes public!

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83(b) Election: Billy’s Bait, Inc.Jane DOES Elect 83(b) Jane DOES NOT Elect 83(b)

2016 Recognizes $500 of compensation (100 shares at $5/share)

Does not recognize any compensation

2019 Does not recognize any compensation

Recognizes $4,000 of compensation (100 shares at $40/share)

On June 30, 2019, Jane sells her shares for $5,000 (100 x $50/share)Recognizes $4,500 of capital gain at favorable capital gain rates

Recognizes $500 of capital gain at unfavorable short-term capital gain rates

Overall tax effect$500 – unfavorable rates$4,500 – favorable rates

$4,500 – unfavorable rates

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• Election to recognize the current fair market value as compensation upon receipt

• Good way to compensate employees without cash in the early stages

• Advantageous if you believe stock will appreciate• Creates a noncash deduction for the business

• Must be done within the first 30 days of receipt of stock

IRC 83(b) Election

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#7 Louisiana Capital Gains Exclusion

“Advantage of Operating a Business in Louisiana: How to pay zero state tax on the sale of your business”

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•Louisiana taxpayers are allowed a deduction for the net capital gains resulting from the sale or exchange of their business or interest in a business

•Created as a result of businesses relocating to Texas to avoid income tax

LA Capital Gain Exclusion

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#8 Small Business Stock Gain Exclusion

"End Game: How to pay zero federal tax on the sale of your business"

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Small Business Stock Gain Exclusion

▫100% Exclusion is available on the gain on disposition of Qualified Small Business Stock acquired after September 28, 2010.

▫Temporary provision made permanent with with passage of the PATH Act of 2015.

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•What is Qualified Small Business Stock?

▫Must be original issuance C-Corporation stock of an active business

▫Held for at least 5 years▫Corporation must have gross assets

of less than 50 million

Small Business Stock Gain Exclusion

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Conclusion