By: Aaron Gallagher
Entrepreneurs have many questions to consider when starting a new business. These questions range from the business’s establishment to tax liabilities. The Pennsylvania Department of Community & Economic Development (DCED) recognizes the burden that tax liability can place on a fledging entity and offers several tax credit programs to ease the cost of operation for entrepreneurs. In this inaugural post, we will discuss the Keystone Innovation Zone (“KIZ”) tax credit and how it helps budding entrepreneurs.
keystone Innovation Zones
In 2004, the DCED initiated the KIZ tax credit to address the lack of entrepreneurial activity in developing areas across the state. A KIZ is a designated region of the Commonwealth that involves partnerships between educational establishments and various other financial, governmental, and economic development organizations. KIZs were established in both rural and urban areas, and always near a college or university. The DCED hoped that creating KIZs would lead to innovation and economic development through the collaboration of the universities and the entrepreneurs based in those zones.[1]
At this point, you’re likely thinking, “Okay, that’s a cool story, I guess, but you said this post would be about tax credits. What does that have to do with this?” I’m glad you asked because to encourage entrepreneurs, the DCED offers a tax credit to entrepreneurs acting within the KIZs. Now you’re probably thinking, “Oh yeah! That’s what I wanted to know! How do I get that?” Well, don’t worry, we’ll cover that in our next section.
am i eligible for the kiz tax credit?
Businesses seeking to take advantage of the KIZ tax credit must satisfy certain eligibility requirements:
- The business must be for-profit and located within the geographic boundaries of the KIZ.
- The business must have been in operation for less than eight years.
- The business must comply with state laws and regulations as determined by the Department of Revenue.
- The business must meet any requirements placed on them by the DCED.
- The business must be operating within one of the KIZ’s targeted industries. Now, this requirement might seem confusing at first. However, it simply means that not all KIZs are the same. Each KIZ has certain industries that it seeks to focus on, and these industries may differ between KIZ zones.
For example, Philadelphia has three KIZs, each focused on a different industry. One is focused on Health, another on Information Technology, and the third on Energy.[2] So, before you decide what KIZ to set your company in, make sure to check and see if your industry is one of the targeted industries for that region. You can find out what a KIZ’s targeted industries are by contacting your local KIZ coordinator. Find your KIZ coordinator’s contact info here. [3]
how does the kiz tax credit work?
Businesses who qualify for the KIZ tax credit may claim a credit for up to 50% of the increase of revenue from KIZ-related activities in the immediately preceding taxable year over the following taxable year. What this means is that if your business within the KIZ made $40,000 in its first year and made $60,000 in the following year, then your entity would be able to claim a $10,000 tax credit, which is 50% of the $20,000 increase in revenue between the first and second year. However, it is worth noting that the amount the state credits through the KIZ tax credit will not exceed $15 million in total and $100,000 for a single entity.[4]
When calculating your revenue from year to year, the KIZ tax credit will include not only sales figures, but also other sources of income such as grants, licensing fees, and cash awards from business competitions. However, any income received that is not related to the business’s KIZ activities will not be included in the calculation of revenue for purposes of the tax credit.[5]
Additionally, businesses are not obligated to use the full tax credit in the year it is awarded. Recipients may utilize the tax credit for up to four taxable years following the year that it was awarded. Alternatively, recipients may also sell their rights to tax credits to other businesses. This tradability of the tax credit is especially helpful for businesses with low tax liabilities which may need additional income.[6]
Summary
To briefly recap, if you qualify for the KIZ tax credit, you are eligible to receive a credit up to 50% of the increase in revenue between taxable years for your entity. These credits can be applied to later years or even traded away for a small profit. If you, as an entrepreneur, think that you may qualify, or are interested in the opportunity, please follow this link to learn more about the KIZ tax credit and how you can apply. Applications are due annually by September 15th, with awards distributed on December 15th.
Sources:
(Further Information on KIZ tax credit) https://dced.pa.gov/programs/keystone-innovation-zone-tax-credit-program/
(Map of KIZ locations and coordinator contact information) https://dced.pa.gov/entity-assistance/kiz-coordinator-locations/
[1] https://dced.pa.gov/entity-assistance/kiz-coordinator-locations/
[2] https://entity.phila.gov/keystone-innovation-zone/
[3] https://dced.pa.gov/download/kiz-tax-credit-guidelines/?wpdmdl=76233
[4] Id.
[5] Id.
[6] Id.
Photo Sources:
https://dced.pa.gov/logo-use-guidelines/ (The DCED Department of Community and Economic Development Logo)
https://www.jari.com/financing-incentives/kiz-keystone-innovation-zone/ (Keystone Innovation Zone Banner).
https://dced.pa.gov/entity-assistance/kiz-coordinator-locations/ (Map of KIZ zones).
Aaron Gallagher, at the time of this post, is a second-year student at Penn State’s Dickinson Law. He currently holds the title of Events Coordinator in the Dickinson Law’s Business Law Society. He is interested in pursuing a career in business and tax law.
