For the Record - Newsletter from Andersen

 
 

 

A Survey of Significant Business Credits and Incentives Developments in 2017

Federal tax reform presents major changes to income taxation in the United States.

While much attention has focused on this legislation, the federal government and various states enacted significant new laws in 2017 related to credits and incentives. This article pulls these opportunities out of the shadow of tax reform to cast light on major developments in the credits an incentives area.

Federal Income Tax Credits

Federal tax reform left major tax business credits intact. In particular, the legislation made no changes to the Work Opportunity Tax Credit or the Research and Development Tax Credit. In addition, prior to tax reform, Congress enacted tax relief measures for businesses affected by Hurricanes Harvey, Irma and Maria. One of these measures, the Disaster Tax Relief and Airport and Airway Extension Act of 2017, provides a new Employee Retention Tax Credit of 40% in qualified wages per employee, with a wage cap of $6,000. The maximum credit per employee is $2,400 for wages paid by a disaster-affected employer to each employee whose principal place of employment was in a hurricane disaster zone. On February 9th, 2018 the Bipartisan Budget Act of 2018, H.R. 1892 expanded the Employee Retention Credit to include taxpayers impacted by California wildfires.

Contributions to Capital

While not a change to incentives themselves, the new tax law changed the federal income tax treatment of certain state and local tax incentives as contributions to capital, as defined in Sec. 118. Under the new law, credits and incentives offered to a corporation by a governmental unit or by a civic group for the purpose of inducing the corporation to locate its business in a particular community, or for the purpose of enabling the corporation to expand its operating facilities, must be included in taxable gross income. Previously such incentives were potentially excludable.

State Credits and Incentives

More than half of the states enacted changes to tax credits and incentives focused in particular on film production, environmental clean-up and job creation. Job creation incentives had a significant number of changes including the establishment of new programs and reauthorization or modifications to others. Some of these new incentives focus on particular industries. For example, Maryland enacted the More Jobs for Marylanders Act of 2017, establishing incentives for new or expanding manufacturers in Maryland. These incentives offered manufacturers new to Maryland with a 10-year refundable tax credit of 5.75% of the wage per new position, state property tax exemption, sales tax refunds and waiver of all State Department of Assessment and Taxation fees. Existing manufacturers creating five to ten new jobs in specific counties will qualify for the 10-year income tax credit as well. While the incentives available vary depending on a variety of factors including location and number of new jobs created, the common goal is job creation through tax benefits.

Other job-related programs focus on redevelopment of undesirable locations. Michigan is now offering increased incentives for developers to claim the Business Tax Brownfield Credit. The new amendment to the Michigan Business Tax Act provides qualified developers that redevelop brownfield sites into mixed-use projects up to one billion dollars in tax incentives. Certain states resurrected more broad-based job incentives. Illinois for example reinstated the Illinois Economic Development for a Growing Economy (EDGE) Tax Credit through June 30, 2022. The EDGE Tax Credit is a negotiated state income tax incentive to encourage companies to locate or expand operations in Illinois. The credit can be worth as much as 50% of the incremental income tax withheld attributable to new employees plus 10% of new employee training costs.

Other states brought focus to certain segments of the workforce. Massachusetts created the New Veteran’s Hire Tax Credit, which allows a $2,000 credit for each veteran hired, eligible to businesses with fewer than 100 employees. A second $2,000 credit for the next year will be available if the veteran remains employed for a second year. 

Beyond job credits, many states continued to court the entertainment industry. Georgia is the first state to offer a tax credit to companies that provide post-production services. The tax credit can be worth as much as 35% of qualified, pre-approved spending by a post-production company. Louisiana amended its administrative code to create a reservation and allocation system for its film credits. Rhode Island extended its production credit program through July 1, 2024, while eliminating video game production as a qualified activity. It should be noted that not every state liberalized incentive programs. Connecticut for example made permanent its moratorium on issuing Film and Digital Media Production Tax Credits, leaving only an exception for motion pictures that film for at least 255 days in Connecticut at facilities that receive at least $25 million in private investment.

Conclusion

The federal government was not alone enacting major legislation in 2017. State legislatures continued to use credits and incentives to entice job creation and capital investment. While we digest the major changes that come with tax reform, taxpayers should not overlook new opportunities for incentives.