Maryland Tax Credit Aims to Spur Investment in Early Stage Biotech Companies
March 1, 2017 - By: SC&H Group
The following blog post from SC&H Group’s Tax Services team discusses the Maryland Biotechnology Investment Incentive Tax Credit, providing biotech companies and investors with the requirements, steps, and deadlines to take advantage of this key growth opportunity.
Securing capital is key to future success—especially for Maryland’s seed and early stage biotech companies.
To help spur the growth of these companies, Maryland has enacted the Biotechnology Investment Incentive Tax Credit (BIITC). The Maryland Department of Commerce (Commerce) administers applications for the credit and provides information on their website, which will be updated once the 2017 BIITC program is released later this spring.
Under the BIITC, investors can receive a refundable income tax credit equal to 50 percent of an eligible investment in a Qualified Maryland Biotechnology Company (QMBC). A refundable credit means that if an investor is entitled to the credit but has no Maryland tax liability, the investor would get a check from the State upon filing a Maryland income tax return. Essentially, the investor would get cash back for making the investment!
To claim the credit, QMBCs and investors must take the following three steps.
Step One: Satisfy Eligibility Requirements
Eligible QMBCs must be headquartered and operationally based in Maryland, as well as certified by the Secretary of Commerce. Further, they must have no more than 10 years as an active business, fewer than 50 employees, and at least one full-time, non-executive employee performing biotech research in Maryland.
To qualify as an investor, eligible individual or corporate investors must invest at least $25,000 in a QMBC and submit applications to be certified by Commerce.
Investors are limited to a $250,000 credit for each QMBC each fiscal year. However, enhanced credit amounts of up to 75 percent of the qualified investment (up to $500,000) are available when the QMBC is in Montgomery, Allegany, Dorchester, Somerset, or Garrett counties.
Step Two: Complete Applicable Forms
Eligible companies must apply for certification by completing and submitting Form B. In particular, companies must attach several documents with their responses to question 11:
- Organizational documents, with a certificate of good standing from the State Department of Assessments and Taxation within the last 30 days
- List of intellectual property, licenses, and patents
- Documentation of laboratory and experimentation activity
- Formal business plan, including information such as R&D expenses and a balance sheet showing equity
Note that question 11 attachments do not have to be submitted for each prospective QMBC investor if a current Form B is on file with Commerce and is less than 31 days old.
Investors must complete one of several application forms, depending on their structure:
Corporate investors and pass-through entities must provide verification of good standing and organizational documents. In addition, all investors should be prepared to disclose information regarding criminal offenses, delinquent taxes, and litigation for securities fraud.
Step Three: Submit Applications in a Timely Manner
Applications are first come, first serve. For instance, during the 2016 funding allocation, only the first 215 applicants were funded. Funding for FY 2016 was $12 million, and it is expected to remain the same for FY 2017.
Therefore, QMBCs and investors should complete and submit their forms as soon as possible, per the following guidelines:
- QMBCs. By June 1, the QMBC must deliver completed applications to Commerce’s World Trade Center office in Baltimore, upon which Commerce will issue a user name and application number to the QMBC. Then, on July 1, the QMBC must electronically submit their application on the credit website using their user name and application number.
- Investors. Between 30 and 60 days prior to making a qualifying investment, investors must submit their completed application to Commerce.
Within 30 days of receiving the investor application, Commerce will issue an Initial Tax Credit Certification that either rejects or approves the credit (along with verification of the amount approved). If the credit is approved, the investor then has 30 days to invest in the QMBC.
Once the investment is complete, the investor has 10 days to provide written notice and supporting documentation to Commerce. Based on the investment amount, Commerce will issue a final tax credit certificate, with which the investor can receive credit against their Maryland income tax liability.
Factoring in Convertible Debt
If the conversion of the debt to equity takes place within 30 days of the initial tax credit certification, convertible debt will qualify if the debt had been created within one year prior to the date of the investor’s BIITC application.
Since the program’s intent is to bring in new money, the renewal of debt that has been outstanding for more than one year is ineligible for the conversion qualification. Equity ownership may be converted to common or preferred stock of a corporation or partnership capital of a partnership or LLC.
Ultimately, both QMBCs and investors can benefit from the BIITC, provided they complete the required steps in the necessary manner. By working with an experienced tax professional, they can accurately submit all necessary forms on time, resolve relevant tax issues, and prepare for future success.
Want to find out if and how you can benefit from the BIITC? Contact SC&H Group’s Tax Services team here.