Tax Credits for Start-ups and Growing Companies 4202

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

Tradable tax credits for research and development (R&D) are a key element of state tax policies that favor start-up and growing companies in the medical technology industry. States set a maximum amount for such credits in a given tax year. (For example, Pennsylvania sets this limit at $30 million.) During the year, companies register their R&D costs or incremental costs, which can be used to offset an equivalent amount in state tax burden.

Having R&D tax credits as a tradable option allows start-up and prerevenue growth companies to sell these credits to larger companies that are in a position to monetize them. Often, such tradable programs lead to some discounting of the face value of the credit by the purchaser. A 10–15% discount would be considered common.

Similarly, net operating loss (NOL) carry-forward policies allow prerevenue companies to deduct the losses they incur during their formative years against their initial revenue. Several states cap NOLs at between $2 million and $5 million per tax year. However, NOL programs that are most favorable to the medical technology industry have no caps and are tradable to revenue-positive companies for purposes of monetization on an annual basis.

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