The Kentucky Red Tape Reduction Initiative: Top 3 Benefits to Kentucky Investors, Entrepreneurs, Start-Ups, and Small Businesses

Governor Matt Bevin’s Kentucky Red Tape Reduction Initiative, formally announced on July 6, 2016, is further evidence that Kentucky is a great state for entrepreneurs, start-ups, small businesses, and investors. This is third article in this Biz&TaxHax series focused on key Kentucky-based programs, initiatives, credits, and incentives that benefit Kentucky small businesses, start-ups, entrepreneurs, and investors. Our prior posts in this series summarized the Top 5 Benefits of the Kentucky Small Business Tax Credit and the Top 5 Benefits of the Kentucky Angel Investment Tax Credit. In addition to those tax credit programs, Governor Bevin’s Red Tape Reduction Initiative is a strong pro-business step that Kentucky companies and business owners have desired for decades. This Kentucky Red Tape Reduction Initiative aims to provide the following key benefits to Kentucky investors, entrepreneurs, start-ups, and small businesses:

  1. Review, Identify, and Remove Burdensome Kentucky Business Regulations.

Governor Bevin began the Kentucky Red Tape Reduction Initiative by commissioning cabinet secretaries to begin a thorough review of Kentucky regulations currently in place, and has also asked Kentucky companies to weigh-in with their thoughts as to which regulations may be overly burdensome or unnecessary. Through the process, the state has determined that there are over 4,700 regulations currently on the books in Kentucky. In fact, Governor Bevin recently cited a report of findings in a study of the number and breadth of Kentucky administrative regulations, which shows that Kentucky administrative regulations increased by 250% between the years 1975 and 2015. This statistic is further proof of the problem that Governor Bevin is trying to remedy – that Kentucky has been one of the most highly regulated states in the U.S.

As a breath of fresh air for Kentucky small businesses, start-ups, entrepreneurs and investors, the Red Tape Reduction Initiative has already generated over 14,000 visits to the program’s website and over 500 suggestions from business owners to be evaluated. This is in addition to the review work that the Governor’s own staff members are conducting. By all outward appearances, it seems the Governor and his administration are committed to reducing the regulatory burden that has plagued Kentucky entrepreneurs, start-ups, and business owners for too long. This is a strong step in the right direction, and we’ll look forward to continuing updates that hopefully demonstrate progress in eliminating unnecessary and over-burdensome government regulation in Kentucky.

  1. Transform Government Regulators into Regulation Managers with an Attitude of Efficiency and Effectiveness.

The Governor’s above-noted call to current action for review, identification, and removal of unnecessary and over-burdensome Kentucky regulation was not his only directive. Governor Bevin is also encouraging regulators that are part of his Kentucky government administration to adopt a more pro-business attitude. Through this instruction, the administration hopes to create an environment of regulation managers who are focused more on the intent, efficiency, and effectiveness of Kentucky’s various regulatory frameworks and individual regulations as practically applied to the real here-and-now Kentucky businesses and issues they face. This is a key positive aspect of the Kentucky Red Tape Reduction Initiative. If Kentucky regulators maintain a pro-business attitude in the future, it will certainly help Kentucky entrepreneurs and start-ups get off the ground and small businesses expand, and should encourage investors to offer more capital, more frequently, to Kentucky companies.

  1. Encourage Job Creation and Investment.

A key stated purpose of the Kentucky Red Tape Reduction Initiative is to spark investment in existing Kentucky companies as well as new Kentucky business ventures, bringing additional jobs to the Commonwealth. Obviously, for entrepreneurs, start-ups, and small businesses seeking to grow, obtaining necessary capital is a key goal and access to capital can be a significant hurdle. Along with the Kentucky Small Business Tax Credit and Kentucky Angel Investment Tax Credit, the Red Tape Reduction Initiative provides additional incentive for: (i) Kentucky entrepreneurs, start-ups, and small businesses to expand their ventures and hire new employees in Kentucky; and (ii) investors to invest their capital in Kentucky entrepreneurs, start-ups, and small businesses. Not only should these initiatives and credits increase business growth and profits, but they should also lead to reduced costs to consumers, who often times pay increased rates for goods and services as a result of companies passing-through their internal costs of compliance with over-burdensome state regulations.

As always, for investors, entrepreneurs, start-ups, and small businesses dealing with Kentucky regulations, it is best to consult an experienced Kentucky business attorney. A Kentucky business lawyer can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your Kentucky regulatory compliance and planning needs.

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The Kentucky Angel Investment Tax Credit (KAITC): Top 5 Benefits to Kentucky Investors, Entrepreneurs, Start-Ups, and Small Businesses

As noted in Biz&TaxHax’s prior article, outlining the Top 5 Benefits of the Kentucky Small Business Tax Credit, Kentucky is a great state for entrepreneurs, start-ups, small businesses, and investors alike. The second of this series, this article highlights the top 5 benefits the Kentucky Angel Investment Tax Credit provides for Kentucky investors, entrepreneurs, start-ups, and small businesses. The Kentucky Angel Investment Tax Credit has wide-ranging application, offering the following key benefits to Kentucky investors, entrepreneurs, start-ups, and small businesses:

  1. The KAITC Incentivizes Investment in Kentucky Start-Ups and Small Businesses.

The stated purpose of the Kentucky Angel Investment Tax Credit is to encourage qualified individual investors to make capital investments in Kentucky small businesses, create additional jobs, and promote the development of new products and technologies in Kentucky. Obviously, for entrepreneurs, start-ups, and small businesses seeking to grow, obtaining necessary capital is a key goal and access to capital can be a significant hurdle. The KAITC provides additional incentive for investors, both in Kentucky and those in other states, to invest their capital in Kentucky entrepreneurs, start-ups, and small businesses.

  1. Broad Eligibility: The Requirements for a Qualifying Investor, Qualified Investment, Qualified Small Business, and Qualified Activity Encompass a Wide Base.

The KAITC is available to Qualified Investors making Qualified Investments in Qualified Small Businesses that are conducting Qualified Activities. That sounds like a lot of qualifiers. But, in reality, the definitions of the terms are not overly restrictive. Below is a summary of the relevant qualifiers:

Qualified Investor: (1) an individual, accredited investor according to Reg. D of the U.S. Securities and Exchange Commission, who (2) holds no more than 20% ownership in and is not employed by the Qualified Small Business prior to making a Qualified Investment in the business, (3) is not the parent, spouse, or child of someone who would fail to satisfy requirement # 2, (4) seeks a financial return on the Qualified Investment, and  (5) has become a Kentucky Economic Development Finance Authority (KEDFA) certified Qualified Investor.

Qualified Investment: (1) a minimum cash investment of $10,000 made by a Qualified Investor in a Qualified Small Business, (2) offered and executed in compliance with all applicable state and federal securities laws and regulations, (3) in exchange for equity interest in the Qualified Small Business, (4) having been pre-approved by the KEDFA as a Qualified Investment.

Qualified Small Business: (1) a legal entity registered and in good standing with the Kentucky Secretary of State and otherwise maintaining all state licenses and other permits required, (2) comprised of 100 or fewer full-time employees, (3) actively and primarily conducting (or planning to conduct upon receiving a Qualified Investment) a Qualified Activity within Kentucky, (4) maintaining more than 50% of its assets, operations, and employees within Kentucky, that (5) either (a) has a net worth of $10 million or less, or (b) has had $3 million or less in net income after federal income taxes for each of the two preceding fiscal years, which (6) has not received investments qualifying for more than $1 million in total angel investor tax credits, and (7) has been pre-certified as a Qualified Small Business by the KEDFA.

Qualified Activity: A knowledge-based activity related to the Office of Entrepreneurship focus areas that include, but are not limited to: Bioscience; Materials Science and Advanced Manufacturing; Environmental and Energy Technology; Information Technology and Communications; and Health and Human Development.

If you are a Kentucky entrepreneur, own a Kentucky start-up, or run a Kentucky small business, there is a good chance your company could become a Qualified Small Business eligible to receive a Qualified Investment from a Qualified Investor. An experienced Kentucky tax lawyer or Kentucky tax consultant can help you navigate the process of applying to become a Kentucky Qualified Small Business, opening your company up to a larger pool of capital sources. Additionally, if you are an investor wishing to invest in Kentucky small businesses, a Kentucky tax attorney or Kentucky tax consultant can help you apply to become a Qualified Investor and take advantage of the Kentucky Angel Investment Tax Credit.

  1. Generous Credit Rate and Up to $200,000 in Credit Each Year.

The Kentucky Angel Investment Tax Credit provides Qualified Investors a credit of up to 50% (in enhanced incentive counties) or up to 40% (all other counties) of their Qualified Investments. Depending on the amount of the Qualified Investment and the location of the Qualified Small Business, the KAITC can provide up to $200,000 of tax benefit per calendar year.

  1. Carryforward of Unused Credits.

A credit approved under the KAITC program is first applied against any tax due on the return for the calendar year for which the credit was granted. But, if the credit is not fully utilized in the award year, the Qualified Investor may carry forward the remaining amount of credit to offset against tax due for up to the next 15 years. This is important, as often times entrepreneurs, start-ups, and small businesses may not have significant taxable income and tax liability in initial years. This 15 year carry forward enables a Qualified Investor in a Kentucky Qualified Small Business to recognize the benefit of the Kentucky Angel Investment Tax Credit in later years when their investment may be generating more taxable income and thus the investor may have more tax liability.

Biz&TaxHax Tip: The KAITC is a non-refundable credit, meaning that a taxpayer cannot obtain a cash refund for the difference between the credit and the taxpayer’s tax liability for a particular year. Rather, as noted above, the taxpayer may carry forward any unused portion of the credit for offsetting future tax liability, for up to 15 years.

The KAITC is transferrable for out-of-state investors, meaning investors who are located outside Kentucky, who may not have Kentucky tax liability, can still reap the benefit of this tax credit. To do so, a nonresident/out-of-state Qualified Investor may sell its Kentucky Angel Investment Tax Credit to a Kentucky taxpayer and that Kentucky taxpayer may use the credit to offset Kentucky tax liability.

Biz&TaxHax Tip: A nonresident Qualified Investor who wishes to transfer the KAITC to a Kentucky taxpayer must follow certain procedures outlined by the Kentucky Department of Revenue. So, it is best to consult an experienced Kentucky tax lawyer or Kentucky tax consultant to ensure proper transfer of the Kentucky Angel Investment Tax Credit.

As always, for investors, entrepreneurs, start-ups, and small businesses considering eligibility for the Kentucky Angel Investment Tax Credit and related planning, as well as Kentucky tax reporting and payment obligations, it is best to consult an experienced Kentucky tax attorney or Kentucky tax consultant. A Kentucky tax lawyer or Kentucky tax consultant can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your Kentucky tax compliance and planning needs.