
In the state of Hawaii, tax breaks make tech investments nearly risk-free? - shawndrost
http://www.enterprisehonolulu.com/html/display.cfm?sid=225
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shawndrost
AFAICT, private investments in software (or other tech) startups up to $2
million are basically repaid by the state. (Over 5 years, front-loaded,
through refundable state income tax credits. Credits against taxes owed, not
deductions from taxable income. And refundable, meaning if credits exceed
debts, the state will cut a check to the taxpayer.)

So it works likes this: Investors give you money. The state gives it back to
them. Any amount you do not piss away is profit for them. Am I missing
something? Why haven't I heard of this before?

Side note: Any other n.ycers in Hawaii? If so, anyone going to the Hawaii
Venture Capital Association lunch this Thursday?

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shiro
I'm in HI. I'm not going to HVCA lunch, though.

Did you try Act221 benefits? A few years back it seemed that everybody in this
business trying to get that. At that time my business was pretty small and I
didn't bother.

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shawndrost
No, I haven't; I just moved back a week ago. I'm interested in creating a
startup, but if I can't get some angel money to live on in the next several
weeks, I'll need to get a day job.

Do you know of any non-obvious downsides to Act 221?

Also, can a business owner receive 221 benefits for investing in their own
company? That seems ripe for abuse: you could invest $x in your company, raise
your salary by $x for one year, and receive the tax credit from the state.

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shiro
I didn't dig deep enough, but some of my friends did. If you're curious, I can
ask them or introduce you to them. Drop me a line at shiro at acm dot org. I'm
mostly in the video game / CG imaging industry. There are some interesting
startup in this field here.

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shawndrost
Two things I discovered recently:

-The fact that the tax credit is given over five years obviously means that it's not actually worth 100% of your money. Furthermore, you can't claim your state payments as a deduction for your federal taxes. An Act 221 business told me that it amounts to more like a 50% credit, all that considered. -If you are working on an independent programming project and you pay Hawaii state taxes, I've been told that you can incorporate, invest in your company, pay yourself that amount of money, then claim a 221 credit for your payment. You get 35% of your investment as a credit the first year, so a good amount to invest would be about triple your expected state tax liability.

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zach
Well hey, now all they need is a YC clone. Or spinoff, like CSI -- who
wouldn't want to apply to YC: Hawaii?

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shawndrost
Given that this law has been in place since 2001, I'm more than puzzled by the
fact that the startup world hasn't been shaken by it: I feel I have to be
missing something. After all, I understand that startup hubs like the bay area
offer irreproducible benefits, but I can't believe that these incentives
haven't made Hawaii the center of activity for at least some subset of
startups -- capital-intensive seed-level startups, say. And that's not even
considering the other perks of Hawaii ;)

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shiro
Well, I guess isolation is much higher barrier after all. Many says it is
difficult to find people---for senior staff you are more likely to relocate
them from mainland, but people are reluctant either if they have family, or if
they think it isn't as easy to find other jobs here as other tech hubs in case
if your startup tanks (plus the living cost is high here). For junior staff
the only source is UH and some community colleges; there are talented people,
but the pool is inherently small.

However, I do know some local startup benefitted by Act 221, hiring local
people and doing good. It's just that the law itself isn't a silver bullet.

