State and Local Tax for a Tech Start-Up
Case Studies
State and Local Tax for a Tech Start-Up
A Comprehensive Source Advisors Case Study
How Tech Start-up Arable Labs Uses New Jersey Tax Incentives to Grow
About The Company
Wolf describes Arable as a data and analytics company focused on supply chain and risk management in agriculture, something, he says, no one has tackled before. Arable does this by monitoring conditions in its clients’ fields via a proprietary device and then analyzing the data it gathers via the specialized software it developed. Arable monitors and analyzes some 40 conditions, including weather, irrigation levels, and crop health.
Financed through government grants and venture funding, Arable has obtained patents for its technology and processes. It rapidly attracted small-to-enterprise-level clients across the U.S. and abroad. Like most savvy start-ups, Arable sought to push additional capital raises as far into the future as possible to increase its value before further diluting ownership.
The Connection
The New Jersey R&D tax credit and the Technology Business Tax Certificate Transfer Program, which enables qualified, unprofitable NJ-based technology or biotechnology companies with fewer than 225 U.S. employees to sell a percentage of net operating losses (NOL) and research and development tax credits to unrelated profitable New Jersey corporations.
Adam Wolf learned about these incentives when Source Advisors’ reached out to him via email. According to Wolf,
“I was intrigued, and we had an initial conversation.
They were smart and utterly clear about how it works, but I thought it was too good to be true. I checked with our tax accountant, and sure enough, this was real. For every start-up, cash is king. I know it’s more complicated than this, but to me, it amounts to free money on the table, and it’s obvious to take advantage of it.”
Wolf did some homework and was impressed with Source Advisor’s reputation in the industry and decades of experience in this narrow line of business. Arable launched a partnership with Source Advisors to establish its qualifications for the incentive programs and make the application.
The Work
Making a successful application for R&D tax credits at the federal and state levels and New Jersey NOL sales is a highly complex process. Source Advisors took Arable through the four-step qualifying process for federal R&D tax credits. This process also helped identify what payroll is related to qualifying research and development activities. Once qualified per the federal guidelines, Arable was also qualified for the New Jersey R&D payroll tax credit.
As the company had at least two years of operating losses, Source Advisors worked through the Technology Business Tax Certificate Transfer Program qualification list. To outline the basics, in addition to two years of operating losses, the company must provide documentation of:
- Protected & Proprietary Intellectual Property (PPIP) – refers to patents (issued or pending), copyrights or licenses. Arable held patents. Source Advisors let them know that copyrighting their software code would also qualify. Frequently software companies do not believe they have intellectual property until they are made aware of this fact.
- Up to 224 Full-Time W2 Employees in the U.S. – Depending upon the company’s age, a certain number of those employees must be in New Jersey, and all must receive healthcare benefits.
- Financial Statements – These must have all schedules and footnotes prepared according to U.S. GAAP by an independent CPA.
- Corporate Taxes – The company must file Corporate Business Tax returns in the State of New Jersey.
Arable’s application for the incentives was filed with the New Jersey Economic Development Authority (NJEDA). Its corporate business tax returns were filed in time for the deadline for June 30 of the application year – 2017.
To be certain that the application was complete, Source Advisors followed an internal practice of submitting a pre-application to the NJEDA for review and comment. Source Advisors also took the application through its own checklist process at least three times to be certain that the NOLs were accurately reflected.
The Results
The work, as outlined above, is a simplification of the full process. Source Advisors walked Arable through developing the documentation and addressing the nuances of the requirements. The result was that Arable was approved for nearly 100 percent of its NOL sales.
The sales of its NOLs and its federal and state R&D payroll tax credits yielded non-dilutive cashback to Arable equal to 26 percent of its business investment in New Jersey. The company is now in its third year of benefitting from these valuable programs.
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