Interested in Claiming State Tax Credits and Incentives?
Sarah S. Kim, J.D., LL.M.
01.10.22 | SALT Chat
State governments offer tax credits and incentives to attract new businesses and retain business operations within their jurisdictions. States sometimes create their own versions of federal credits (e.g., Research and Development credit). In many cases, however, states create credits and incentives programs to promote certain industries (e.g., New York Film tax credit), encourage certain business owners (e.g., New York Restaurant Return-To-Work tax credit), or to induce certain behaviors within the states (e.g., New Jersey Clean Energy Program) as well as to help job creation and economic development.
A tax credit, by its nature, helps reduce the amount of tax a taxpayer may owe. A credit may simply be claimed on a tax return by attaching a required credit form, provided that the statutory requirements for claiming the credit are met. Certain credits and incentives, however, must be awarded by the state authority administering the credit and incentive programs through an application and approval process. In cases where the guidelines for the program are flexible, the financial benefits of the program are determined at the discretion of the state authority through negotiation.
State tax incentives could be awarded in the form of a grant other than a credit. Grants are appropriated by state budget, and unlike credits, may provide the immediate financial assistance that businesses need in everyday operations.
Depending on the program, any unused credit may be refunded or carried forward for a prescribed time. In case there are no carryover provisions for a credit, any unused credits may be forfeited. In addition, previously claimed credit amounts may be subject to recapture if the taxpayer fails to meet the requirements to continue claiming the credit.
Here is an example of a state credit program:
The California Competes Tax Credit Program. California created this program in 2013 to encourage businesses to create or retain jobs in California. To earn the credit, eligible taxpayers must first apply for the program and enter into an agreement with the Governor’s Office of Business and Economic Development. The agreement then must be approved by the California Competes Tax Credit Committee. Taxpayers who meet the terms of the agreement earn the allocated credit for that taxable year for the five-year term. The credit is non-refundable, but can be carried over for up to 6 years and is subject to recapture if the taxpayer fails to fulfill the terms of the agreement. For the fiscal year 2021-2022, in addition to the credit program, California created the California Competes Grant Program. The grant program works in a similar manner to the credit program. So it provides taxpayers an option to choose between either program depending on their financial needs and operational goals. Note, while California has allocated over $394 million for the credit, it appropriated $120 million in grants. Both the credit and grant programs are open for applications through January 24, 2022.
Identifying the right credit and incentive opportunities for businesses is challenging. If you are interested in credits and incentives programs that are available for your business, you can reach me at 646.346.6467 | email@example.com or contact your Berdon tax advisor.
Sarah S. Kim is a Senior Tax Manager in Berdon LLP’S State and Local Tax Group with nearly 10 years of professional experience. Sarah advises Fortune 500 and middle market businesses across an array of industries. She has experience with various types of taxes, including corporate income and franchise tax, sales and use tax, personal income tax, unincorporated business tax, commercial rent tax, and real estate transfer tax.