Let me share with you examples of how the fund can benefit your clients.
What is the IPF?
The IPF was created in 2006 to support the work of the South Carolina Research Authority, which is a public, nonprofit corporation established by the state. SCRA and its affiliate, SC Launch Inc., are focused on fueling South Carolina’s innovation economy by accelerating technology-enabled growth in research, academia, entrepreneurship and industry through grants and investments in technology start-ups and related efforts.
The IPF is a critical source of funding for SCRA and SCL, the efforts of which have been instrumental in significant job creation and positive economic impact throughout South Carolina. In the past two years, an average of 2,700 jobs annually have been created by early stage companies supported by the IPF, and the average wage of these jobs was nearly 75% higher than the state average. The average annual positive impact of SCRA and SCL on the state’s economy has been over $688 million.
How the IPF Works
Every year, the IPF is open for individuals and organizations to make contributions, which provide a dollar-for-dollar state tax credit to the contributor. The fund has an annual cap, which current legislation has set at $6 million. We are working with the South Carolina legislature on increasing that cap, given the benefits the IPF has produced across the state.
The maximum annual contribution from an individual or organization is $250,000, and the IPF state tax credit can be carried forward for up to 10 years from the year in which the IPF contribution is made. The process is simple: A contributor completes a brief online questionnaire, which represents a pledge on the part of the contributor. We then work with contributors on fulfilling that pledge with a single payment, semi-annual payments or quarterly payment plan.
Changes Affecting the IPF in 2019
The Tax Cuts and Jobs Act capped the annual state and local tax personal deduction at $10,000. States with high tax rates passed legislation to recharacterize state taxes as “contributions” to circumvent this cap. As a result, the IRS proposed a regulatory change in August 2018 that would in effect eliminate the federal deduction of charitable contributions that served to offset state taxes. This clearly included funds such as the IPF, although the IPF had been in existence since 2006 and therefore was not created to sidestep the new tax law. While this proposed change has not been finalized, it has had a chilling effect on individuals’ 2019 tax strategies. The IPF can still make sense for individuals and organizations in ways discussed below.
How the IPF Can Benefit Your Clients
As CPAs, we are always looking to add value for our clients and organizations. What follows are examples of how the IPF can help in your efforts:
Scenario: A client’s estimated state tax liability is $60,000.
o The individual can write a check to the state’s general fund for $60,000; -OR-,
o The individual can contribute $50,000 to the IPF and write a check to the state’s general fund for $10,000 (to capture the maximum SALT deduction)
Tax impact: Neutral.
Benefit of contributing to the IPF: You are directing your funds to an effort that is having a significant impact on the state economy.
Scenario: The client’s estimated state tax liability is $350,000.
o Write a check to the state’s general fund for $350,000; –OR-,
o Contribute $250,000 to the IPF and write a check to the state’s general fund for $100,000
The IPF has contribution tiers that provide marketing, business development and related services based upon the amount contributed, and thus could qualify as a deductible business expense at the company-level for federal income tax purposes.
At the marginal federal corporate tax rate of 21%, the client could receive federal tax benefits of 21 cents for each dollar contributed.
Tax impact: Neutral. The client would receive the same federal tax benefit were they to pay the full $350,000 to the general fund as compared with a qualifying business expense deduction.
Benefit of contributing to the IPF: Marketing and business development opportunities, and the ability to direct your funds to support the innovation economy.
(Note: All references to LLCs in this section are only to LLCs that are characterized as S-corporations or partnerships for federal income tax purposes.)
Scenario: LLC Members’/Shareholders’/Partners’ estimated state tax liability is $150,000.
o Members write checks as individuals totaling $150,000 to cover their state tax liability. These payments are subject to the SALT limit of $10,000 per taxpayer; –OR–,
o Have the LLC/Partnership/S Corp contribute $150,000 to the IPF; state tax credit passes through to members.
This level of contribution could qualify as a deductible business expense at the company-level for federal income tax purposes.
The client could receive federal tax benefits based upon their marginal rate.
Tax impact: Positive; the members would not receive the same potential federal tax benefits were they to pay the full $150,000 to the general fund instead of the IPF
Benefit of contributing to the IPF: Marketing and business development opportunities, and the ability to direct your funds in a way that has had a measurable impact on the South Carolina economy
The Industry Partnership Fund continues to provide critical funding to South Carolina’s innovation economy while allowing individuals and organizations to participate in a meaningful way. The proposed IRS change makes contributions neutral from a tax standpoint in the personal federal income tax context, as noted above. However, the additional potential tax benefits available to certain kinds of business organizations and the ability to direct resources to a fund that is having such a significant impact on the state’s economy makes the IPF a potential value-added opportunity worthy of sharing with your clients.
About the author: John Sircy is the Director of Finance and Administration at the South Carolina Research Authority. He has served as a senior financial executive in banking, industry and higher education.