Transferable state tax credits and incentives—an important element of tax planning
Credits & Incentives talk with Deloitte
“Credits & Incentives talk with Deloitte,” is a monthly column by Kevin Potter of Deloitte Tax LLP, featured in the Journal of Multistate Taxation and Incentives, a Thomson Reuters publication. The March/April edition co-authored with Marcus Panasewicz and Crystal Nicholas provides an overview of transferable state tax credits and incentives.
In today's economic environment, credits and incentives are a valuable element of a company's tax planning approach. Typically, credits are statutory tax-based offsets that are used by federal, state and local governments to incentivize and encourage business activity that benefits the jurisdiction. For example, a statutory-based credit may provide that a manufacturing company purchasing at least $500,000 in machinery and equipment during a tax year in that state is eligible to claim a three percent tax credit on its state income tax return. A number of states are also utilizing discretionary credits that require taxpayers to apply and seek approval prior to engaging in the qualifying activities.
Incentives, typically discretionary in nature and requiring negotiation with a state or local government agency, are tax and/or financial offsets that jurisdictions use to entice business activity and investment, particularly when a company is considering multiple jurisdictions for its capital or labor investment. Activities for which discretionary incentives may be available include job creation, skills-based training, investments in green technology and investments in capital equipment.
A taxing jurisdiction generally determines the number of incentives to offer based on a variety of factors including the type of investment, the potential impact to the jurisdiction, and the needs of the area where the investment is projected to occur. For example, a jurisdiction may offer a taxpayer hiring 250 employees at an average wage of $20 per hour an employment grant worth $4,000 per new employee, provided the company also pays at least 65 percent of the health insurance premiums for those new hires.