Funding was under threat from tax law, so SC tech innovation group turned to business partners | Business

The arm of state government that invests in early-stage technology businesses had to change its approach to fielding contributions this year, but its leaders say the result is a strengthened fund-raising model.

A portion of the federal tax reform passed in late 2017 affected the South Carolina Research Authority, which is financed primarily by a fund that, in years past, was replenished mostly with money from individual donors. The overhaul changed that.

Up until 2018, individual contributors could claim a generous tax credit. John Sircy, SCRA’s chief financial officer, said the “Industry Partnership Fund” historically has hit its limit within minutes of opening each January. It has hit its former cap of $6 million every year.

Now, contributors can’t deduct their donations on their federal tax returns. Charitable giving by individuals in 2018 dropped for the first time since 2013, Forbes reported, though only marginally. 

“That took a major benefit away,” Sircy said.

U.S. Sen. Lindsey Graham even wrote to the secretary of the Department of the Treasury on Oct. 1 to say the regulation has caused the SCRA “unintended harm” and has had “devastating impact.” 

“Unlike ‘charities’ that were recently created in other states for purposes of avoiding the cap, the SCRA was created to help South Carolina’s economy and job growth,” the Republican lawmaker wrote. 

Graham had advocated for an exemption that would have preserved the tax deductions for state-based groups like the SCRA. 

The change only applied to donations made after the end of last August. For 2018, SCRA pulled in the donations it was expecting, Sircy said. But the organization’s leadership knew they would need to take a different approach in 2019. 

Bob Quinn, the organization’s executive director, said the SCRA made the best of the situation and turned to South Carolina businesses, which are not affected by the tax law in the same way, to contribute.

“What started as a challenge became an opportunity,” Quinn said. 

The SCRA uses its money to pump seed funding into early-stage tech businesses. Quinn said the authority is pumping resources into South Carolina’s tech industry in its adolescent stages, in a region where capital can be tough to come by. 

The annual “State of Startups in the Southeast” report from BIP Capital credits SCRA with 136 investments since 2014, or roughly a third that were made in the state during that time period. 

SCRA hands out easily the most government-backed investments in the Southeast, according to the report. Its private SC Launch offshoot, which runs an entrepreneurial program tailored at mentoring startup businesses, usually makes investments between $100,000 and $200,000 each.

Engage Talent, which announced it was recently acquired, was an SC Launch participant.

Those investments are risky,  given they are typically among the first checks the startup will see, according to Sircy.

“Other than friends and family, we’re the next ones in,” he said. 

The more money the SCRA has, Quinn said, the more it can invest in the state’s tech industry. Right now, it grants between $2 and $3 million annually.

SCRA also owns a number of facilities across the state totaling 1.3 million square feet, and earns money from rental income. Advanced Technology International, for instance, leases much of the space in SCRA’s Summerville headquarters. The authority also pledged to be a tenant in the new WestEdge development near Lockwood Drive, where it has subleased its 20,000 square feet of office space to a local diagnostics company, Vikor Scientific. 

Still, the Industry Partnership Fund is the largest single income source. Though it is technically an arm of the state government, the SCRA received only about $600,000 from the government in the 2018 fiscal year.

With a new law passed this year by the state Legislature, the fund can accept up to $7 million. As of last week, the fund and its tax credits were only about half spoken for, Quinn said, though the year is not yet over.

The SCRA had been pushing for an increase to the ceiling for several years. Bills were introduced in 2016 and 2017 by state Sen. Hugh Leatherman, R-Florence, who at the time was on the authority’s executive committee.

The bill stalled both years. Lawmakers have wanted to guard the state’s tax dollars. But this year, a law was passed allowing the fund to bring in $9 million total annually, up from $6 million. The 33 percent increase will be phased in over a few years; the fund got a $1 million boost for this year.

The new law also drastically decreased the maximum each individual or business could give, to $250,000 from $2 million, in a volume-drive approach designed to entice more smaller donors to jump in.

Quinn said he is confident the money will be put to good use. He said not a single state-backed group in the country “has the breadth of capabilities and services that we do.”