Tax Incentives for Incubator Companies
In 2013, New York State created the Innovation Hot Spot program to fund operations in business incubators and extend tax incentives to qualified ventures in participating incubators.
WIN serves as the Innovation Hot Spot in the WNY economic development region, and can certify companies for eligibility. To be certified, companies must be:
- Enrolled and in good standing with a WIN incubator
- In their first five years of operations (or seven years for life sciences ventures)
In the formative stages of development (defined as one of the following):
- Still in the testing/development phase of of the product being produced
- Has raised less than $1M equity capital
- Has not yet earned profits from sales
Once qualified, a company enters into a five year window of exemption from state corporate income tax and state sales tax on purchases. In that period, partners in the company are also eligible to deduct their income from the incubator company.
This window lasts for five years, regardless of company age when entering the program, provided the company remains in good standing as a resident or graduate of its incubator.
Is this START-UP NY?
No. START-UP NY is a related but different program for companies able to predict and quantify future job growth.
It requires a company to secure the sponsorship of a participating college or university that attests to (a) an academic connection or ‘alignment’ between the company and the university; (b) having reviewed the company’s plans, including its commitment to create a certain number of jobs over a five year period; and (c) that the company will occupy physical space that the university has put on its START-UP NY Campus Plan as a designated tax-free area. When these conditions are met, the company can get a 10 year exemption from state corporate income and sales taxes and new employees are exempt from state income tax on income earned from the company. START-UP NY was designed as a tax program that incubator companies can ‘graduate’ into.
Here are the differences in a nutshell:
- The IHS program lasts for five years, whereas START-UP NY is ten.
- IHS does not include START-UP NY's personal income tax exemption for new employees (just for partners).
- START-UP NY requires an application and a campus to sponsor the company; the Hot Spot only requires that the company is an incubator client.
- START-UP NY requires the company to move into specific space that is designated as a ‘tax free area’ in the participating university’s campus plan. IHS benefits are available regardless of physical location, as long as they are an incubator client.
Does this preclude a company from participating in START-UP NY down the road?
No. Companies leveraging IHS incentives are neither precluded from, nor promised acceptance into, START-UP NY. You would still apply into the program as you otherwise would. Please keep in mind that these programs can be used consecutively, but not concurrently.
Are you my attorney or tax advisor?
No! You should consult your own advisors to understand exactly how these programs might impact your own tax situation.
Official NYS documentation on this program:
- Innovation Hot Spot Technical Memorandum
- Form CT-223
- Form IT-223
- Form AU-11
- START-UP NY / IHS Comparison
To be certified for participation by WIN: Please review the READ ME FIRST file and contact your incubator director for next steps.