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State Credits and Incentives


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Decosimo's Sarah Denton presented this PowerPoint at the 2012 Decosimo Tax Seminar held on Oct. 30, 2012 in Chattanooga, Tennessee.

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State Credits and Incentives

  1. 1. A Global Reach with a Local Perspective www.decosimo.comState Credits and IncentivesSARAH DENTON, CPA | TAX SUPERVISOR
  2. 2. Why Credits and Incentives? States are trying to influence taxpayer behavior  Increase capital investment in the state  Increase number of jobs for citizens of the state  Environmental and social concerns Competition between states for new businesses  Jobs for residents  New sources of tax revenue  Local examples: Amazon and Volkswagen
  3. 3. Why is this important to me? Over 3,000 federal, state and local credits and incentives Industry groups estimate only 10% of businesses are taking full advantage of credits and incentives available  Complexity  Cost outweighs benefit  Difficult to keep up with changes to programs
  4. 4. Constitutionality of Credits and Incentives Commerce Clause  State authority is limited and taxes that discriminate against interstate commerce are unconstitutional  Complete Auto Transit, Inc. v. Brady, 430 U.S. 247, 279 (1977) – 4 prong test  Substantial nexus  Fair apportionment  No discrimination  Related to services provided by state  Incentives and credits by definition:  Promote activities and investments within the taxing state  Are integral components of a state’s taxing system
  5. 5. Supreme Court Decisions Bacchus Imports, Ltd. v. Dias, 468 US 263 (1984)  Exemption from Hawaii excise tax for wholesale liquor sales of two locally produced alcoholic beverages New Energy Co. v. Limbach, 486 US 269 (1988)  Tax credit against motor fuel tax for each gallon of ethanol sold as a component of gasohol but only if ethanol was produced in Ohio or state with similar tax benefits Taxpayers pay higher taxes if not selling instate products – violates discrimination doctrine
  6. 6. Supreme Court Decisions Cuno v. Diamler-Chrysler, Inc. 154 F. Supp.2nd 1196 (2004)  Ohio industrial machinery credit  Sixth Circuit said this violated Commerce clause because of its impact on economic activity outside the state  Taxpayer could reduce tax liability by locating machinery and equipment in Ohio but not elsewhere  Supreme court reversed decision saying taxpayers lacked standing to challenge the credit
  7. 7. TENNESSEE CREDITS Main classes of credits and incentives available  Investment and Economic Development  Job Creation and Hiring  Environmental  Housing and Family  Exempt Entities
  8. 8. TENNESSEE CREDITS Headquarters Tax Credits  Qualified Headquarters Facility:  Located in a “Central Business District” or “Economic Recovery Zone” with approval from the Commissioner of Revenue  $50 million new construction, expansion or remodel, or  $10 million investment and100 new full-time jobs at 150% average occupational wage  Sales Tax Credit on tangible personal property (6.5% or 7%)  Headquarters Relocation Expenses  NOL credit conversion  Super Jobs Credit for Qualified Headquarters
  9. 9. TENNESSEE CREDITS Headquarters Facility Relocation Credit  Fully refundable tax credit  Prior approval required  Determined by the number of existing positions relocated to TN:  100-249 jobs: $10,000 per relocated position  250-499 jobs: $20,000 per relocated position  500-749 jobs: $30,000 per relocated position  750+ jobs: $40,000 per relocated position  If a capital investment in excess of $1billion is made, a $100,000 credit per job is available to businesses that create 500+ new full-time jobs
  10. 10. TENNESSEE CREDITS Conversion of NOL to credit  Applies retroactively to tax years ending on or after 12/31/03  Franchise tax credit equal to the excise tax rate multiplied by certain NOLs  Must have headquarters established in TN  Credit only available if taxpayer is unable to use the loss or loss carryover to offset net income during the current tax year for excise tax purposes
  11. 11. TENNESSEE CREDITS Data Center Tax Credit  Qualified Data center – building or buildings housing high technology computer systems and related equipment  Minimum $250 million investment  25 new jobs – at 150% of the state’s average occupational wage  Investment must be made during a 3 year period  Can be extended to 7 years  Qualified computer purchases and repairs qualify for a minimum 5% Industrial Machinery Tax Credit  Computer and repair purchases are exempt from sales and use taxes  Reduced sales taxes on electricity
  12. 12. TENNESSEE CREDITS Sales and Use Tax Credit for Qualified Facility to Support an Emerging Industry  Minimum $100 million investment  50 new full-time jobs  150% of TN’s average occupational wage  Credit is 6.5% of the 7% state sales and use tax paid to TN on the sale or use of the qualified TPP  High-skill, high-wage jobs in high-technology areas, emerging occupations, or clean energy technology
  13. 13. TENNESSEE CREDITS Industrial Machinery Credit  Purchase, installation and repair of industrial machinery  Same as definition for sales tax exemption (Sec. 67-6-102)  Includes computer equipment (Sec. 39-14-601)  Lessees of new equipment also qualify  Can offset up to 50% of combined F&E tax  100% for headquarters or warehouse distribution center relocation  Can be carried forward up to 15 years  Until used for those investing $1 billion in TN  Recapture provision for machinery sold or removed from TN
  14. 14. TENNESSEE CREDITS  % of credit depends on investment made during the investment period  <$100,000,000 = 1%  $100,000,000+ = 3%  $250,000,000+ = 5%  $500,000,000+ = 7%  $1,000,000,000+ = 10%
  15. 15. TENNESSEE CREDITS Standard Job Tax Credit  $4,500 F&E credit (up to 50%) per net new job  $500,000 investment  Must create at least 25 new full-time jobs  Business plan must be filed with Commissioner of Revenue prior to taking the credit  Credit applied in tax year when capital investment and job creation requirements occur  Jobs must be filled before 1/1/16  Unused credit can be carried forward for 15 yrs  Waiver available for minimum job requirement if $500k investment and jobs are high-skill, high-wage technology jobs
  16. 16. TENNESSEE CREDITS  Weyerhaeuser Co. vs. Chumley, Tennessee Court of Appeals, September 7, 2007  No credit for 615 former employees hired one day after being terminated by previous owner
  17. 17. TENNESSEE CREDITS Enhanced Job Tax Credit  For businesses in TN counties considered “Tier 2” or “Tier 3” Enhancement Counties  Levels of substantial economic distress  Based on unemployment, per capital income, and poverty levels  Credit of $4,500 for each qualified job created  Business must make a $500,000 capital investment in a 12 month period  Must create a minimum of 25 net new full-time jobs in a period  Tier 2 period = 3 years  Tier 3 period = 5 years  Can offset up to 100% F&E Tax each year  Cannot be carried forward
  18. 18. TENNESSEE CREDITS Super Jobs Tax Credit  $5,000 additional credit for each new job  Standard credit increased to $5,000, 50% and 15 yr carry- forward  Can offset up to 100% F&E Tax for 3 to 20 years  To qualify, a business must either be  $100 million investment and100 jobs, or  100% average occupational wage  $10 million headquarters investment and100 new headquarters jobs  150% average occupational wage  2011 Average Occupational Wage = $37,360  No carry-forward provision
  19. 19. TENNESSEE CREDITS Hiring Disabled Persons Credit  F&E credit for hiring disabled persons receiving state services directly related to their disabilities  $5,000 for each qualifying net new full-time job  $2,000 for each qualifying net new part-time job  File plan with Tax Commissioner before last day of the fiscal year employment begins
  20. 20. TENNESSEE CREDITS Green Energy Tax Credit  Green energy supply chain manufacturers  $250 million investment for facility the produces product necessary for production of green energy  Credit is amount “by which the charge for electricity sold to the manufacturer exceeds the charge that would have been made for electricity delivered if maximum rate had been applied” Carbon Energy Credit  Credit for any carbon charges incurred by green energy supply chain manufacturer
  21. 21. TENNESSEE CREDITS Brownsfield Property Tax Credit  Credit against F&E tax  50% or 75% of purchase price of property depending on level of investment  Property must be purchased for qualified development project  Capped at $10 million per year
  22. 22. TENNESSEE CREDITS Rural Opportunity Fund Credit  10% credit for Financial Institution contributions to:  Tennessee Rural Opportunity Fund  Tennessee Small Business Opportunity Fund  Allowed each year for 10 years from year contribution is made  No carry-forward  Loaning funds to TN ROI qualifies as contribution  Recapture first year following 10 year period for any amount received as repayment
  23. 23. TENNESSEE CREDITS Volkswagen  Incentive package valued at more than $577 million  Super Jobs Credit - $200 million  Industrial Machinery Credit  Other local credits and incentives  $81 million land gift  $50 million in road and railroad upgrades  Exempt from property tax (except for school portion - $4.7M per year) for 30 years
  24. 24. TENNESSEE CREDITS Amazon  Not required to collect sales tax until Jan. 1, 2014  Super Jobs Credit  Sales Tax Exemption on all equipment for distribution center  Land for site donated  Money for training and site work  No property tax except storm water and schools portion for 11 years
  25. 25. TENNESSEE EXEMPTIONS 2008 changes to exempt organizations filings  Exempt entities must file an annual exemption form  Failure to file form results in loss of exempt status  FONCE must file annual disclosure of activity form
  26. 26. TENNESSEE EXEMPTIONS Family Owned Noncorporate Entities (FONCE)  LLC, LP or LLP  If at least 66.67% of gross receipts come from passive investment income, the taxpayer is exempt from TN F&E taxes  Determined on a year-to-year basis  Must have at least 95% family ownership  Grantor trusts and pass-through entities do not qualify as family members  Estate or trust of deceased family member qualifies
  27. 27. TENNESSEE EXEMPTIONS Venture Capital Fund  LLC, LP, LLP or business trust  Purpose of investment company should be to trade in securities on it’s own behalf and not as a broker  More than 50% of securities are non-publicly traded  More than 50% of capital is from investments not affiliated with the fund
  28. 28. TENNESSEE EXEMPTIONS Diversified Investing Funds  LLC, LP, LLP or business trust  Purpose of investment company should be to trade in securities on it’s own behalf and not as a broker  90% of assets are securities, bank deposits and office space and equipment  90% of gross receipts are interest, dividends and gain on sale of securities
  29. 29. TENNESSEE EXEMPTIONS Obligated Member Entity  LLC, LP and LLP whose members have given up limited liability protection  Documentation must be filed with Secretary of State before the 1st day of taxable year for which return is filed  New members must file documents within 60 days of admission
  30. 30. TENNESSEE EXEMPTIONS Real Estate Mortgage Investment Conduits (REMIC) Financial Asset Securitization Investment Trusts  Excise tax exemption  Fixed pool of mortgages with regular and residual interest held by investors  The sole purpose must be the asset-backed securitization of debt obligations  Can be a mortgage, home equity loan, trade receivables, credit card receivables, or automobile loans
  31. 31. GEORGIA CREDITS Main classes of credits and incentives available  Investment and Economic Development  Job Creation and Hiring  Work Training and Basic Skills  Environmental  Historic Property  Housing  Family and Health
  32. 32. GEORGIA CREDITS Investment Credits  New Manufacturing Facilities Property Credit  Incentive for manufacturers operating in state for at least 3 years  $800 million investment in new facility  Full-time employees exceed 1,800 – do not have to be new jobs in Georgia  Prior approval by state required  6% of cost credit against tax – max $50 million  Excess can offset withholding tax  15 year carry-forward
  33. 33. GEORGIA CREDITS Manufacturing and telecommunication facility investment credit  Existing taxpayer operating in Georgia for 3 years  $50,000 investment per project/location  Real or personal property acquired to construct or expand a facility in Georgia  Prior approval by Commissioner required  Credit based on type of investment property and level of development in county located (Tier 1 - 4)  Not eligible for Optional Investment Credit or Job Tax Credit when taking this credit  Can offset up to 50% of tax with 10 year carry-forward
  34. 34. GEORGIA CREDITS Manufacturing and telecommunication facility optional investment credit  Available to those qualifying for Investment credit who meet the following thresholds  Tier 1 $5M 10% credit  Tier 2 $10M 8% credit  Tier 3 or 4 $20M 6% credit  Credit is the lesser of:  90% of excess tax of applicable year over the base year average  Excess of the aggregate amount of credit allowed over sum of amounts already used in years following base year
  35. 35. GEORGIA CREDITS Research fund tax credit (Seed Capital Fund)  Investment in a research fund that provides financing to start-up based on intellectual property from research done at Georgia universities  Credit = 25% of investment but cannot exceed tax liability  10 year carry-forward  No credit once research fund reaches $30 million  Recapture provision if fund liquidates before cash is received from taxpayer  Certification of research fund required before credit can be taken
  36. 36. GEORGIA CREDITS Economic Development Credits  Port Activity jobs and investment credit  Businesses who have increased shipments out of Georgia ports by 10% over second preceding 12 month period  If 2009 exports exceed 2008 by 10% then credit in 2010  Must be at least 75 net tons, 5 containers or 10 TEUs  Credit  Additional job tax credit of $1,250 per job or,  Investment tax credit of 5% or,  Optional tax credit of 10%  If 400 jobs created, investment of $20M and port activity increased by 20% can take both job and investment credit
  37. 37. GEORGIA CREDITS Job Creation/Hiring Credits  Quality Jobs Credit  Create 50 quality new jobs  New quality job  Located in Georgia  Regular work week of 30 hrs or more  Not a job already located in Georgia  Pays at or above 110% of average wage in county located  Must be claimed within 1 year  Can offset 100% of Georgia tax
  38. 38. GEORGIA CREDITS  Qualified Business Expansion  Existing Georgia business for at least 5 years  500 new jobs due to expansion  Credit up to 5 years for each year 500 new jobs created  Application to Commissioner required  Credit is against monthly or quarterly withholding tax  Available only if total credit exceeds 50% of business’ tax liability
  39. 39. GEORGIA CREDITS  Less developed Census Tracts  Credit for new full-time jobs for five years in less developed areas  Less developed area – ranks areas comprised of 10 or more contiguous census tracts  Highest unemployment rate for most recent 36 mo. period  Lowest per capita income for most recent 36 mo. period, and  Highest percentage of residents whose income is below poverty level  Average wage must be above average wage of county with the lowest wage  Health insurance must be provided
  40. 40. GEORGIA CREDITS  $3,500 credit for each new full-time employee for five years  Cannot exceed 100% of income tax liability  10 year carry-forward of unused credits
  41. 41. GEORGIA CREDITS Worker Training/Basic Skills credits  Basic skills education credit  Eligible employer programs that enhance reading, writing or math skills to the 12th grade level  Credit is the lesser of 1/3 cost per full-time equivalent student or $150 per student  Cannot exceed tax liability for the year  Approved Employee Retraining Credit  Must be approved by the Technical College System of Georgia  50% of training or $500 per full-time employee  Must be claimed within one year of date original return was filed or due
  42. 42. GEORGIA CREDITS Environmental Credits  Low-emission vehicle credits  Credit is the lesser of 10% of the cost or $2,500  Credit also available for conversion of a standard vehicle to low-emission  Low emission vehicle is powered by an alternative fuel (hybrids are not included)  Low speed vehicles do not qualify – no golf carts  Certification by the Environmental Protection Division of the Department of Natural Resources required to be filed with return
  43. 43. GEORGIA CREDITS  Zero Emission Vehicle Credits  Credit is 20% of cost or conversion of standard vehicle or $5,000  Zero emission vehicle has no tailpipe and evaporative emissions  Electric vehicles qualify as long as there is no on-board combustion device  Low speed vehicles do not qualify  Electric Vehicle Charger Credit  10% of cost or $2,500 for a business purchasing an electric vehicle charger
  44. 44. GEORGIA CREDITS  Clean energy property credit  Construction, purchase or lease of clean energy property placed in service from 7/1/08 thru 12/31/14  Clean energy property is:  Solar equipment that uses solar radiation as an alternative to traditional energy sources  Energy Star geothermal heat pumps  Lighting retrofit projects  Energy efficient buildings  Wind Equipment  Biomass Equipment
  45. 45. GEORGIA CREDITS  Credits for 2012, 2013 and 2014 must be taken in four equal installments over four years beginning with the year of installation  Credit amount is lesser of 35% of cost or  $500,000 per installation of solar, wind and biomass property  $100,000 per installation of solar energy for domestic water heating  $100,000 for Energy Star geothermal heat pump systems  .60 per square foot – maximum $100,000 for lighting refit  Sum of property installed in building construction at $1.80 per square foot not to exceed $100,000
  46. 46. GEORGIA CREDITS Historic Property Credits  Historic property rehabilitation credit  25% of rehabilitation expenses for structures listed in the Georgia Register of Historic Places Housing credits  Low-income housing credit  Credit equal to the federal low-income housing credit but not to exceed income tax liability
  47. 47. GEORGIA CREDITS Family Credits  Employer’s child care property credit  100% of cost claimed at 10% over 10 years but not more than 50% of tax liability in any year  Employer provided child care credit  75% of cost of operations less amounts paid by employees not to exceed 50% of tax liability in any year
  48. 48. GEORGIA CREDITS Health Credits  Qualified health insurance Credit  $250 per employee enrolled in a qualified health care plan for 12 consecutive months  50 employees or less  Qualified health insurance expense is a high deductible health care plan as defined by IRC Sec. 233  Credit can’t exceed tax liability  Carry-forward allowed to next tax year
  49. 49. GEORGIA CREDITS Other Credits  Qualified Transportation Credit  Business enterprise vehicle credit  Film tax credit  Donation of conservation land credit  Telework expense credit  Qualified education expenses
  50. 50. ALABAMA CREDITS Main classes of credits and incentives available  Investment and Economic Development  Job Creation and Hiring  Work Training and Basic Skills  Environmental  Exempt Entities
  51. 51. ALABAMA CREDITS Investment Credits  New Markets Development Credit  Effective 8/1/12 against corporate income tax credit  50% of investment  Capital or equity investments in, or loans to, certain qualified active low-income community businesses  $10 million limit to any one qualified community business  $20 million cumulative credit per tax year  Carry-forward of unused credit allowed
  52. 52. ALABAMA CREDITS  Capital Costs Credit  Credit is 5% of capital costs for qualifying project  Requirements include:  $2 million investment for industrial, warehousing or research  $2 million headquarters facility  $500,000 investment in favored area  After 2011 - $100 million alternative energy production  $2 million data processing center  $8 per hour or $10 per hour average total compensation including benefits  In most cases 50 new full-time jobs must be created
  53. 53. ALABAMA CREDITS Enterprise Zone Credits  Increased Hiring Credit  Decreasing % of taxes due over a 5-year period from zone operations  Year 1: 80%, Year 2: 60%, Year 3: 40%, Years 4 and 5: 20%  30% of new permanent employees were formerly unemployed for at least 90 days prior to employment  No reduction in jobs in other part of the state allowed  Endorsement from local authority required
  54. 54. ALABAMA CREDITS Enterprise Zone Credits (continued)  New Skills Training Credit  Credit for the expense of training new employees in new skills  Up to $1,000 per new employee  Cannot total more than $2,500 per new permanent employee  New Jobs Credit  Must hire at least 5 new permanent employees  10% credit on first $10,000 invested  5% on the next $90,000  2% on remaining investments
  55. 55. ALABAMA CREDITS New Jobs Credits  Small Business New Jobs Credit  Credit against corporate, personal, and financial institutional excise taxes  $1,000 for each new job  For tax year in which the new employee has completed 12 months of consecutive employment  Small businesses (50 or fewer employees) paying more than $10 per hour get a credit per new job  Employer must have a net increase in the total number of full time employees in AL on the last date of each tax year during which the employees are hired for which the employer claims the credit, over the number employed in AL as of the last day of the tax year immediately preceding the first employment year.
  56. 56. ALABAMA CREDITS New Jobs Credits (cont.)  New Jobs for Veterans Credit  $1,000 for each new full-time deployed unemployed veteran  In addition to the new jobs credit  Start-up Business Expenses for Veterans Credit  Against expenses associated with a start-up business of a recently deployed unemployed veteran  Must be located in AL and have new profit of at least $3,000 for the year in which the credit is taken  Veteran must hold at least 50% ownership interest in the business  Up to $2,000 for expenses associated with one start-up business
  57. 57. ALABAMA CREDITS Worker Training/Basic Skills Credits  Employer Education Credit  For state-approved basic skills education programs that enhance employees’ basic skills through the 12th grade functional level  Employees with a high school diploma or GED or that are assessed at or above 12th grade level are not eligible  Must be at least 16 years old and not enrolled in school  20% of the actual costs of education for an approved program provided or sponsored by an employer  Cannot exceed employer’s tax liability  An employer that receives or requires reimbursement or any form of remuneration for any cost of education is not eligible to claim the credit
  58. 58. ALABAMA CREDITS Economic Development Credits  Port Authority Property Investment Credit  For qualifying projects that use AL State Prot Authority property for certain industrial, warehousing, or research activity  A qualifying project is defined as a project sponsored or undertaken by one or more investing companies that have a capital cost of not less than $8 million and that predominantly conduct industrial, warehousing, or research activity  5% of the capital costs of the project in each of the 20 years starting the year in which the project is placed in service  Cannot exceed tax due for the taxable year or the capital costs
  59. 59. ALABAMA CREDITS Economic Development Credits (cont.)  Tariff Credit  An investing company must undertake a project that has a capital cost of at least $100 million and employ at least 100 new full-time employees meeting the base wage requirement  Equal to the amount the investing company paid in tariffs not to exceed $20 million or 25% of the project capital costs, whichever is less  Against income tax and state financial institutions Excise tax liability  Up to 3 years  Credit is limited to $50,000,000  Cannot be reduced or affected by the application of any other capital credits earned by the company
  60. 60. ALABAMA CREDITS Environmental Credits  Irrigation Conversion Credit  20% of the accrued cost of the qualified irrigation equipment and the cost of constructing the qualified reservoir  Cannot exceed $10,000 in any tax year  Cannot exceed the taxpayer’s AL income tax liability computed without regard to the credit  Taken in the year in which the qualified object is placed in service  Limited to only one purchase and installation per tax year
  61. 61. ALABAMA CREDITS Other Credits  Neighborhood Infrastructure Authority Project  Income tax credit  10% of the amount of assessment paid, not to exceed $1,000 in any year, for a period not exceeding 10 successive tax years  Increased Coal Production Credit  Producers of coal mined in AL receive this credit for the increased production of coal over its production of coal during its “base year”  “Base year” is the calendar year 1994 or a 12 month consecutive period subsequent to 1994 if the corporation did not produce coal in 1994  $1 per ton of increased production of coal over the base year production
  62. 62. ALABAMA EXEMPTIONS Insurance Companies  Insurance companies that pay a state tax on their premium income are exempt from the Alabama corporate income tax  Premium taxes are imposed on all domestic and foreign insurance companies authorized to do business in the state  A corporate income tax exemption also is give to farmers and other mutual hail, cyclone, or fire insurance companies whose income is solely collected from members for the sole purpose of meeting expenses  A company qualifies as an insurance company if more than half of its business during the tax year is the issuing of insurance or annuity contracts
  63. 63. ALABAMA EXEMPTIONS Banks – Financial Corporations  Financial institutions are exempt form the general corporate income tax if they are subject to the financial institution excise tax  Federal land banks and national farm loan associations and building and loan associations whose business is substantially confined to making loans to members are exempt from corporate income tax
  64. 64. Future of Credits and Incentives Transferable credits have opened a sort of credits market in some states  Unused credits can be sold for less than value  Film industry  Historic Preservation  R&D  Land Conservation and Energy Tax Credits
  65. 65. Future of Credits and Incentives Should Federal Government level the playing field by putting a moratorium on credit and incentives programs?  Fairness  Benefit to the states