State and Local Tax Credits and Incentives
Many companies assume that if they have a CPA or Big 4 Firm completing their tax return that they are obtaining all of the tax credits and incentives that they are entitled to. This is far from the truth. To understand why this is true we will provide you with a background on what types of credits are available and how the mechanics of many of these credits work. To begin with most tax credits and incentives fall into two categories: statutory and negotiated.
Statutory State Tax Credits and Incentives
Statutory State tax incentives are available to all companies that qualify based on the language in the law or statute. For example, most states offer a tax credit for research and development (R&D) performed within their state. If a company performs such activities they can obtain the credit on their tax return. Unfortunately, state income tax returns do not offer full transparency into all of the statutory credits available. Many states bundle numerous credits under a line on the tax return called General Business Credits. Also, many credits such as state R&D tax credits require a study or minimum documentation that must be gathered to support the credit. Certain CPAs will rely on third-party consultants to assist with such requirements.
Some statutory tax incentives require state approval. For example, the Massachusetts Manufacturing Corporation classification allows companies to receive numerous credits and incentives such as 1) single sales factor apportionment for income tax purposes, 2) sales and use tax exemptions, 3) investment tax credits, and 4) local property tax exemptions. The requirements are statutory. However, a relatively complicated application is due by January 31st and annual recertifications are required.
Negotiated State Tax Credits and Incentives
Every state has some form of negotiated state tax credits and incentives in order to attract business to their states. In order to obtain these credits and incentives companies need to plan in advance with multiple stakeholders (within and outside the company) to successfully win such a package. Recently Amazon was awarded over $500M in state and local tax credits and incentives in order to locate their second corporate headquarters in New York City. These projects take many months of planning but can be highly lucrative. Here is a typical project plan:
- Month 1 – 3 working with internal stakeholders to establish a strategy and select a group of possible locations
- Month 4 – 6 work with each state and locality to understand what is available and apply for each package with each state
- Month 6 – 8 receiving approval from each location (generally requires state designated board approval) and evaluate the offers ultimately coming to a final decision
Transferrable Tax Credits
Both statutory and negotiated credits can be transferrable to other taxpayers. For example, in Pennsylvania, several credits including the Keystone and R&D Credits can be transferred to other taxpayers if they cannot be utilized. This process generally requires approval by the state as the buyer or transferee generally requires assurances from the state that the credits are accurate that there will be no recourse to the company that has purchased the credits. Currently, over 15 states have transferrable tax credits programs. Some of the most popular and successful programs involved film tax credits. PMBA state tax credit and incentive team works with companies across the United States in buying and selling transferrable tax credits.
If you are a BUYER of tax credits please click on the link below to request a free copy of our current inventory of transferrable tax credits.
State R&D Tax Programs
Most states offer a tax credit for research and development performed within their state. If a company performs such activities they can obtain the credit on their tax return. Visit our State R&D Webpages to see which states have programs and how to apply.
States Offering R&D Credit:
States Without R&D Credit
Angel Investor Tax Credit Program
All investors that invest in a qualifying NJ emerging technology business may benefit from a tax credit. For more information on the program visit the NJ EDA Website.
Selling Your NOL’s
If your company hasn’t considered the R&D credit in the past because you have net operating losses (NOL’s) and could not utilize the credit contact us today to find out which states allow you to sell your credits and losses for up to 95 cents on the dollar. Also, qualified start-up companies can now take a credit on their payroll taxes for their R&D credit, allowing your company to utilize the R&D credit immediately, even if your company does not have taxable income.