1. A Global Reach with a Local Perspective
www.decosimo.com
State Credits and Incentives
SARAH DENTON, CPA | TAX SUPERVISOR
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. 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. 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. 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. 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. TENNESSEE CREDITS
Main classes of credits and incentives available
Investment and Economic Development
Job Creation and Hiring
Environmental
Housing and Family
Exempt Entities
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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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