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October 25, 2016

Missouri Small Business Incubator Tax Credit Can Help Startups Grow

St. Louis is known for many things, but as we’ve been discussing recently, many entrepreneurs are finding St. Louis is also the City of Startups. There are multiple programs in place to help startups gain traction and launch their company, including the Small Business Incubator Tax Credit program. This credit uses private funds to establish a “protective business environment” (incubator) in which multiple small businesses can collectively operate, fostering growth and development during the startup period. It’s this program and others like it that have given St. Louis its new name.

Understanding Incubator Programs

An incubator is both a program that participants can use to assist in the growth of their startup businesses and a building that can be divided into smaller units of space to be leased by those small businesses. Participants of incubator programs are sole proprietorships, business partnerships, or corporations operating a business for profit.

Sponsors of the incubator must make certain business development services available to the small business tenants, including financial consulting assistance, management and marketing assistance, business education, and physical services such as personal computers, a copy machine, fax machine, conference rooms, wet labs, etc. By sharing the space and business services, costs are reduced for individual startups, allowing them to use their profits in other ways. The incubator is meant to be a temporary home for new businesses. After a set amount of time, companies will move out to make room for another startup.

Who Can Sponsor an Incubator?

Certain organizations typically fill the role of a local sponsor of an incubator program, including:

  • Missouri municipalities, counties, special tax districts, and regional planning commissions
  • universities, community colleges, state colleges, and area vocational schools
  • Not-for-profit organizations

The sponsor must enter into a written agreement with the DED stating that they will establish, operate, and administer a small business incubator program or provide funds to another organization that operates an incubator program. Applicants are evaluated based on their ability to carry out the incubator program provisions, the location of the incubator and economic impact on the community (with the goal to spread incubators throughout the state), and conformance with any local economic development plans.

Incubator Tax Credit

Any Missouri individual or business taxpayer who makes a contribution to an approved incubator sponsor, aside from those that benefit directly from General Revenue such as public universities, may be eligible for a tax credit equal to 50% of the contribution. Tax credits can be applied to:

  • Income tax, excluding withholding tax
  • Corporate franchise tax
  • Bank tax
  • Insurance premium tax
  • Other financial institution tax

The sponsor must submit the appropriate paperwork within 12 months of donation, and upon approval by the DED tax credits will be issued for the year in which the contribution was made. Any unused credit can be carried forward up to five years and applied to future tax liability. In addition, the credits are sellable and transferable but for no less than 75% of the value and not to exceed 100% of the credit. Sales of credits are considered taxable income. The maximum amount of tax credits that can be authorized under this program in a calendar year is $500,000, and applications are accepted on a first-come basis.

The Missouri Small Business Incubator Tax Credit offers a significant advantage to startup companies with a sizeable tax benefit for many Missouri taxpayers. If you have questions about the incubator program, including the multiple reporting requirements, or want to discuss your eligibility as a program participant, sponsor, or contributor, contact the Anders Startup Group.

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