What New York-Based Tech Companies Should Know About QETC Filings

The state of New York offers some serious tax perks for tech startups operating within its borders. Specifically, if you can get certified as a qualified emerging tech company (QETC), you and your investors can claim some meaningful credits to lower your tax liability. Plus, your company will qualify for a lower corporate tax rate on your New York State taxes. 

So, does your startup count as a QETC? And, if so, what kind of upside could it create for you? Let’s dig in. 

Eligibility to be a QETC

To start, you need to meet two requirements to be a qualified emerging technology company. You need to:

• Be located in New York State
• Have annual product sales of $10 million or less

Note that you don’t have to be incorporated in New York to get certified as a QETC. If you set up your corporation in Delaware, for example, but you have a New York location, you can still qualify. 

Once you meet the two basic criteria, you also need to fall into one of two QETC categories:

• Category 1: You create or develop products or services classified as emerging technologies under Section 3102-e of the Public Authorities Law. That section will give you a much more detailed idea of what the state counts here, but to give you a feel, emerging technologies include:
  • Material or processing technologies to make things like superconductors and advanced polymers
  • Computer-aided design and manufacturing technologies
  • Technologies to make microprocessors, optical fibers, and solar cells
  • Information and communication technologies
  • Biotechnologies
  • Remanufacturing technologies (i.e., processes that divert something from becoming waste by restoring it to its original performance standard)
• Category 2: Your ratio of R&D funds to net sales equals or exceeds the average ratio laid out by the National Science Foundation (NSF). New York State hasn’t announced that ratio for 2024, but for the 2023 calendar year, it was 4.0%, down from 4.1% in 2022.  

If your company has a location in New York State, has annual sales of $10 million or less, and can fit into one of those two categories, you can get classified as a QETC. And that could mean some notable tax savings. 

The Tax Credits You Can Get

Specifically, QETC certification makes you and your investors eligible for two key tax credits: 

Capital Base Tax Credit – Saving your company from paying Franchise Taxes

The franchise tax in New York is computed based on calculating the higher of the following three taxes:

1. Business Income Tax Base
2. Capital Base Tax
3. Fixed Dollar Minimum Tax

The Business income tax base calculation equals federal taxable income, modified for items of income and deduction that New York treats differently to the Federal rules, minus investment income and other exempt income, that is apportioned to New York State. By certifying as a QETC, your business income tax rate is 0.04875 versus 0.0725, which is a considerable saving. At the earliest stages, most tech companies usually run into net operating losses, meaning their business income tax base calculation is likely 0. 

The business capital base is the total business capital apportioned to New York State after deducting short and long-term liabilities attributable to assets. By certifying as a QETC, your business would have a tax rate of 0 versus 0.001875. This capital base tax would apply even if your company has net operating losses. We find that companies that are sitting on a large cash stockpile and have most of their operations in New York are most impacted by this tax. This includes companies that may have recently raised a Series A or B round. The tax on capital is limited to $5,000,000 for general business taxpayers.

The Fixed Dollar minimum tax for general business taxpayers is based on the table below: 

Table courtesy of tax.ny.gov

Fixed Dollar minimum taxes for qualified emerging technology companies and New York Manufacturers are lower – See image below: 

Table courtesy of tax.ny.gov

Employment Credit

You can claim this credit in three consecutive years, starting once you’ve had full-time employees for three years. That’s because New York State uses the employment data from the past three years to calculate your base-year employment. 

The tax credit gives you $1,000 for each full-time New York State employee you have over your base-year employment.

Let’s say you founded your company in 2019 and hired your first employee in 2020. You had one employee in 2020, grew to three employees in 2021, and had five full-time staff in 2022. If you start claiming the employment credit in 2023, your base-year employment number would be 3 (1 employee in 2020 + 3 in 2021 + 5 in 2022 = 9 / 3 years). Say you have a team of eight in 2023. Those five employees over your base number of three would give you a $5,000 tax credit (5 * $1,000). If you start taking the credit in 2023, you could take it in 2024 and 2025, too. It expires after three consecutive years of usage. 

Capital Tax Credit for Investors

This credit goes to individuals or businesses that make a qualified investment in a QETC. The amount of the credit hinges on how long the investment will be in play. The investing individual or business needs to certify to the Commissioner of Taxation and Finance that the qualified investment won’t be sold, traded, transferred, or disposed of within a certain time period:

• If you certify for four years, you can get a credit for 10% of the investment.
• If you certify for nine years, you can get a credit for 20% of the investment.

Informing investors about this tax advantage might help entice them to get on board with your startup. 

Unfortunately, if you’re investing your own money in your company, this can’t help you lower your personal tax bill. The state tax code explicitly excludes QETC owners with 10% interest or more from claiming this capital tax credit. 

How to Become a QETC and File for These Credits

To start, you’ll need to get certified by the New York State Department of Taxation and Finance as a qualified emerging technology company. You can find Form DTF-620, the application to get certified, here. You might also want to use the state’s instruction guide for that form. 

You need to file your application within 30 days of the beginning date of the certification period. That means that if you want to be a QETC for the 2025 tax year, you must get that application filed no later than November 30th, 2024. 

Once approved as a QETC, you still have paperwork to file to claim the tax credits we explored above. 

Filing for the Employment Credit

You’ll use Form DTF-621 to apply for this tax credit. New York State has issued an instructional packet to help you fill out the four-page form. Using your DTF-620 (the QETC certification application) should make life a little easier since a lot of the information is the same across those two forms. 

Filing for the Capital Tax Credit

You’ll use Form DTF-622 — and potentially its instruction guide — here. Be advised that if you say you’re going to hold the investment for four or nine years and don’t make it to that mark, you’ll owe back some money. The good news: you won’t necessarily owe the entire credit back. The state adjusts the recapture amount based on the time the investment was held.

Clearly, getting certified as a QETC in New York State can offer some major tax advantages, from a lower corporate tax rate to these potentially significant credits. If you want help figuring out if your company is eligible to become a certified qualified emerging technology company or you’re looking for guidance in filing any of the paperwork we’ve discussed here, contact our team. 

Here are some helpful links:

For more information, contact:

NYS Department of Taxation and Finance 

W.A. Harriman Campus 

Albany, NY 12227 

Phone: (518) 485-2889 Website: http://www.tax.ny.gov