All large corporations begin small, with a vision and strategy. The Small Business Investment Company (SBIC) program provides loans to private equity funds licensed by the U.S. Small Business Administration (SBA) to help finance promising young companies across the country. Funds are able to borrow up to $150 million in low interest loans from the government to invest in the market. Once small businesses like Apple Computer, Buffalo Wild Wings and Costco have all benefitted from SBIC financing over the years.
In Ohio, the program has been especially impactful. According to the Small Business Investor Alliance (SBIA), SBIC-leveraged funds have invested approximately $500 million in over 100 Ohio companies during the past eight years alone. These small businesses operate in critical industries like manufacturing, technology and healthcare. Despite the potential benefit of SBIC financing, however, Ohio has not historically been an ideal tax climate for SBIC-leveraged funds because of the Financial Institutions Tax, or FIT.
The FIT is a tax levied on the apportioned equity capital or net worth of banks, bank holding companies, trust companies, nonbank small dollar lenders, certain savings and loans companies, and other similar institutions previously subject to the Ohio Corporate Franchise Tax. Insurance companies, credit unions and dealers in intangibles are financial services providers generally exempt from the FIT, which became effective January 1, 2014, upon the passage of HB 510.
The rate used to calculate FIT liability varies with the size of the taxpayer. A rate of 0.8% is applied to the first $200 million in taxable capital, 0.4% for capital in excess of $200 million but less than $1.3 billion, and 0.25% for capital in excess of $1.3 billion. For SBIC-leveraged funds, the FIT represents a potentially significant cash outflow and expense.
Interestingly, the applicability of the FIT to SBIC-leveraged funds appears to have been an oversight lost amidst the significant revisions to Ohio’s tax code included in HB 510, especially the introduction of the Ohio Commercial Activity Tax. Once the Ohio General Assembly recognized the issue, a proposed change to the definition of “financial institution,” excluding SBIC-leveraged funds, was introduced by state Rep. Derek Merrin in HB 592. Language in that bill was incorporated into another piece of legislation in late 2016 and ultimately passed, becoming effective retroactively in 2017. Any SBIC Fund adversely impacted by the issue could seek a refund from the state. The SBIA and other industry proponents heralded the legislative change.
The recently passed Tax Cuts and Jobs Act has overshadowed other new laws and regulatory changes at the federal and state level, but at Schneider Downs we continue to monitor the entire tax landscape to provide you with insight on lesser-known yet important issues like the FIT. As always, if you have any questions about statutory or administrative changes and how they impact you, please don’t hesitate to reach out to your tax professional at Schneider Downs.