In the state of Hawaii, tax breaks make tech investments nearly risk-free?

http://www.enterprisehonolulu.com/html/display.cfm?sid=225

by shawndrost • 19 years ago

15 10 19 years ago

shawndrost5• 19 years ago

AFAICT, private investments in software (or other tech) startups up to $2 million are basically repaid by the state. (Over 5 years, front-loaded, through refundable state income tax credits. Credits against taxes owed, not deductions from taxable income. And refundable, meaning if credits exceed debts, the state will cut a check to the taxpayer.)

So it works likes this: Investors give you money. The state gives it back to them. Any amount you do not piss away is profit for them. Am I missing something? Why haven't I heard of this before?

Side note: Any other n.ycers in Hawaii? If so, anyone going to the Hawaii Venture Capital Association lunch this Thursday?

shiro3• 19 years ago

I'm in HI. I'm not going to HVCA lunch, though.

Did you try Act221 benefits? A few years back it seemed that everybody in this business trying to get that. At that time my business was pretty small and I didn't bother.

shawndrost5• 19 years ago

No, I haven't; I just moved back a week ago. I'm interested in creating a startup, but if I can't get some angel money to live on in the next several weeks, I'll need to get a day job.

Do you know of any non-obvious downsides to Act 221?

Also, can a business owner receive 221 benefits for investing in their own company? That seems ripe for abuse: you could invest $x in your company, raise your salary by $x for one year, and receive the tax credit from the state.

shawndrost5• 19 years ago

I've been speaking with many people that have taken advantage of 221, and I've learned that it's not refundable -- sorry for spreading bad information. However, I can say that there is no catch -- it's just as great an incentive as it looks. In fact, one company I spoke with is working on solar power development, and due to other, stacking credits, their investors are guaranteed a significant profit even on a complete loss of capital. Fascinating and scary.

zach• 19 years ago

Well hey, now all they need is a YC clone. Or spinoff, like CSI -- who wouldn't want to apply to YC: Hawaii?

shawndrost5• 19 years ago

Given that this law has been in place since 2001, I'm more than puzzled by the fact that the startup world hasn't been shaken by it: I feel I have to be missing something. After all, I understand that startup hubs like the bay area offer irreproducible benefits, but I can't believe that these incentives haven't made Hawaii the center of activity for at least some subset of startups -- capital-intensive seed-level startups, say. And that's not even considering the other perks of Hawaii ;)

shiro3• 19 years ago

Well, I guess isolation is much higher barrier after all. Many says it is difficult to find people---for senior staff you are more likely to relocate them from mainland, but people are reluctant either if they have family, or if they think it isn't as easy to find other jobs here as other tech hubs in case if your startup tanks (plus the living cost is high here). For junior staff the only source is UH and some community colleges; there are talented people, but the pool is inherently small.

However, I do know some local startup benefitted by Act 221, hiring local people and doing good. It's just that the law itself isn't a silver bullet.

shawndrost5• 19 years ago

Two things I discovered recently:

-The fact that the tax credit is given over five years obviously means that it's not actually worth 100% of your money. Furthermore, you can't claim your state payments as a deduction for your federal taxes. An Act 221 business told me that it amounts to more like a 50% credit, all that considered. -If you are working on an independent programming project and you pay Hawaii state taxes, I've been told that you can incorporate, invest in your company, pay yourself that amount of money, then claim a 221 credit for your payment. You get 35% of your investment as a credit the first year, so a good amount to invest would be about triple your expected state tax liability.

In the state of Hawaii, tax breaks make tech investments nearly risk-free?

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