For the second year in a row, the Maine Seed Capital Tax Credit has been depleted on the first business day of the year.

On Jan. 2, 2020, Maine companies submitted 145 applications to the Finance Authority of Maine (FAME), which administers the tax credit program, representing approximately $14.5 million in investments, according to Bill Norbert at FAME.

However, because FAME implemented some rules changes, this year did not witness startup founders and their representatives camping out overnight outside the FAME offices in hopes of getting their applications in first.

The Maine Seed Capital Tax Credit offers investors in eligible early-stage Maine companies a chance to recoup a portion of their investment up to $500,000 (the percentage has traditionally been 50%, but that has changed as will be explained below) over the course of at least four years in the form of credits that reduce their Maine tax liability (or, in the case of out-of-state VC funds without Maine tax liability, in the form of cash). The credit is currently capped at $5 million, though there are efforts underway in Augusta to increase it.

In past years, FAME doled out the tax credits as the applications came in until all $5 million was spoken for. However, the credit has become very popular in the last few years, which created the situation where companies were sending representatives to line up outside the FAME office the night before the first business day of the year in hopes of getting their investors the credits before they ran out.

To avoid that situation this year, FAME changed its policy for how it accepted applications. It decided to accept all applications received on day one and pro-rate them rather than awarding all the credits to the first applications it received. What this means is that since more than $10 million in investments was submitted to claim the credits (50% of $10 million would reach the $5 million cap) investors will no longer receive credits worth 50% of their investment.

If all the applications that FAME received on Jan. 2, 2020, are found eligible, the $5 million in credits would be spread amongst them all on a pro-rated basis. What this means is that investors will receive credits worth approximately 34.5% of their investment rather than 50%, according to Norbert at FAME.

If you’ve been wondering how so many companies can be ready on Jan. 2 to claim tax credits for investments that are required to be made in the 2020 calendar year, it’s because companies raised money in 2019 with this situation in mind. Because all the credits for 2019 were claimed on the first day of the year, companies needed to structure their deals so that they could offer investors the chance to claim 2020’s credits. They did this by selling short-term bridge notes that converted to equity on Jan. 2, 2020, thereby creating an investment in the 2020 calendar year that’s eligible for the tax credit.

Tax credit details

The Maine Seed Capital Tax Credit program allows investors—both individuals and venture capital funds—to recoup a portion of their investment (up to $500,000) in an eligible, early-stage Maine company in the form of tax credits, which can be used over at least a four-year period to reduce state income tax liability. To be eligible, the company must have sales of less than $5 million in the prior 12 months, and it must either be a manufacturer, derive at least 60% of its sales from outside the state, develop or apply advanced technologies, be a visual media production company, or a value-added natural resource enterprise. Investors must also own less than 50% of the business to receive the tax credits. The aggregate investment limit per business is $5 million for which tax credits may be received.

The program was originally created in the late 1980s, but it took roughly 25 years for it to meet its lifetime cap of $30 million, which it did in 2013. The Legislature revived it in 2014, changing it from a lifetime cap to an annual cap. That annual cap equaled only $635,000 in 2014, but ramped up to $4 million in 2015 and to $5 million in 2016 and each year after.

Gov. Janet Mills’ recently released 10-year economic development plan proposes increasing the annual cap from $5 million to $15 million.

The Legislature also tweaked the program so the tax credits could be enticing to out-of-state venture capital funds, which don’t have any tax liability in Maine. The program now provides out-of-state VC firms (and only out-of-state VC firms) with what are known as “refundable” tax credits, meaning they could be redeemed for cash if no tax liability exists.

 

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