College Incubators, Seed Funds OK, IRS Says

Does increasing a university or community college’s involvement in tech-based economic development – through technology incubators or early-stage capital programs – detract from the nonprofit, educational purpose of the institution? Fortunately, for many state and regional TBED strategies, the Internal Revenue Service (IRS) says no.

The IRS recently released a ruling affirming the nonprofit status of a college foundation planning to unveil a new high-tech incubator and pre-seed capital fund. The potential benefit of this investment to the college protects the organization’s 501(c)(3) status, and the deductibility of its outside contributions, the ruling states.

The foundation, unnamed in the IRS release, plans to build a business and research incubator near the campus providing office space and specialized resources for technology start-ups. Its associated capital fund will support qualified businesses through early-stage product development and technology assessments in exchange for a small equity interest. While the incubator will be operated in partnership with the local chamber of commerce and county government, both college-based initiatives will be financed through philanthropic donations.

The IRS agreed with the foundation’s argument that the plan could create new employment and educational opportunities for students in the economically depressed region. Campus-based incubation will encourage cooperation between client companies, faculty and students. The new pre-seed capital fund will contribute to the college’s educational program by encouraging local "innovation and entrepreneurial behavior", resulting in new jobs and college partnerships.

Return on investments made by the fund will be used to perpetuate the pre-seed fund rather than be distributed to those individuals making the original donations to establish the fund, the IRS ruling states. Because of the educational purpose and nonprofit motivation for creating the fund, donations to capitalize the preseed fund may be considered deductible charitable contributions.

Released in early April, the ruling applies only to this specific case; however, it is an encouraging sign for other college and university incubation programs. Universities and foundations can preserve their nonprofit status and invest in entrepreneurial support programs if these programs serve a necessary role in the educational mission of the institution.

Read the IRS ruling at: http://www.irs.gov/pub/irs-wd/0614030.pdf.

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