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Transferable Tax Credits
By: James H.
Renzas
Transferable Tax
Credits
Providing Assistance Where Assistance is
Needed
By James H. Renzas
The Credit Crunch of 2008 has hit
the world of economic development hard. Companies that were
considering expansion of existing facilities or new facilities
have rushed to the sidelines due to uncertainty in the capital
markets, general economic malaise and investor concern. A
recent study conducted by DCI on behalf of the Greater Houston
Partnership shows that 38 percent of site consultants expect
to see a decrease in the demand for their services as a result
of recent changes in the world-wide economic climate. Over
two-thirds of all site consultants have seen projects either
terminated or placed on hold in the last six months.
Yet, studies show that there continues to be
strong demand for new locations in the energy, medical,
biotechnology and services sectors. Recent estimates of
energy-related projects indicate that over $15 billion per
year is expected to be spent each year over the next decade on
alternative energy projects in the United States alone. In
addition, an aging population and changing financial
conditions bodes well for the med-tech and services sectors of
the economy.
The Drive for Growth
Industries
Many states have shifted
their economic development attraction programs towards these
industries. Massachusetts, for example has recently launched
aggressive attraction programs in both the life sciences as
well as the alternative energy industries. Grants, tax
credits, tax abatements, R&D credits and other programs
are typically targeted towards these emerging industry
companies as a method to attract high-paying technology jobs
in critical industry segments.
California, for
example, offers a generous Research and Development tax credit
which provides companies 15 percent of the excess of current
year research expenditures for qualified research conducted in
the state of California. The State has rightly promoted itself
as the center for biotechnology and has touted the industry’s
impact on the State and its research institutions. Yet, few
life sciences companies show a profit in the 15-year
life-cycle typically required for the creation of a new
biotechnology product. Most companies in this segment are
research intensive organizations that aim to get the product
through a rigorous FDA approval process and then capitalize
upon the value- added research by selling or licensing the
technology to a much larger organization.
As
generous as it is, California’s Research and Development tax
credit does not provide the needed stimulant to the biotech
industry because these credits cannot be monetized. This is
because the California Research and Development credits are
non-transferable.
Other states have
recognized this problem and have implemented tax credits which
can be monetized through the sale of the credits to companies
with current tax liability in the state.
In
1999, a New Jersey state law went into effect allowing
emerging technology and biotechnology companies to transfer,
"sell," their unused New Jersey Net Operating Loss carry
forwards (NOL’s) and New Jersey Research and Development Tax
Credits (R&D Credits) for cash. Profitable companies,
paying New Jersey corporate tax, can "buy" these credits at a
discount thereby reducing their state tax obligation.
Administered by the State Economic Development Authority and
passed by the Senate and General Assembly of the state of New
Jersey ( P. L. 1997, c334, Senate No. 1709-Final Version
Chapter 140), the intent of this law is not only to stimulate
economic growth within the state, but also to aggressively
expand the State’s emerging technology and biotechnology
industries.
The response to the program has
been quite favorable. According to an Ernst and Young study
conducted on behalf of BioNJ, the number of life sciences
companies located in New Jersey has increased for the third
year in a row to 238, with over 6,155 employees. R&D
expenditures at public life sciences companies have increased
to $1.2 billion in 2007 versus just $737 million in 2005. The
aggregate market cap of publicly traded life sciences
companies in the state had increased to $29.7 billion versus
$16.9 billion in 2005.
In response to questions
that look at why companies locate and remain in New Jersey, 61
percent of the 2008 respondents indicated that the New Jersey
state government provides and supports the industry, a
statistic that has increased every year since 2003. A key
component of this support is the Tax Credit Transfer program
that allows companies that are not making a profit to sell Net
Operating Losses (NOL’s) and Research and Development Tax
Credits.
What are Transferable Tax
Credits?
Transferable tax credits allow the
company which generates the state tax credits to sell these
credits on the market to companies that have state tax
liability. Transferability allows an entity that has more tax
credits than tax liability to sell what it cannot use.
Transferability also allows entities that receive multiyear
credits for capital projects to sell the credits and obtain
the financing they need.
Transferable tax
credits differ from refundable tax credits in that the state
will not provide a cash refund of unused tax credits where the
company has insufficient tax liability to take advantage of
the program. Many states have enacted both transferable and
refundable tax credits as a way of providing stimulus to
industries where job creation and investment are important to
the state’s economic development program.
Transferable Tax Credits Drive Oregon Renewable
Industry
The State of Oregon offers the
Business Energy Tax Credit to those who invest in energy
conservation, recycling, renewable energy resources and
less-polluting transportation fuels. A transferable tax credit
of 50 percent is available for companies in the following
industries:
- High Efficiency Combined Heat
and Power
- Renewable Energy Resource
Generation
- Renewable Energy Resource
Equipment Manufacturing Facilities
Through 2007, there were more than
14,000 Energy Tax Credits issued in Oregon.
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Located at 23365 NE
Halsey Street in the city of Wood Village, just east of
Portland, Oregon, XsunX is establishing its initial 25
mega-watt TFPV solar module manufacturing
facility.
| Trade, business or rental property owners who pay
taxes for a business site in Oregon are eligible for the tax
credit. The business, its partners or its shareholders may use
the credit. The applicant must own or be the contract buyer of
the project (the project owner). The business must use the
equipment for the project or lease it for use at another site
in Oregon. A project owner also can be an Oregon non-profit
organization, tribe or public entity that partners with an
Oregon business or resident who has an Oregon tax liability.
This can be done using the Pass-through
Option.
The Pass-through Option allows a project
owner to transfer their Business Energy Tax Credit project
eligibility to a pass-through partner for a lump-sum cash
payment. A project owner may be a public entity or non-profit
organization with no tax liability or a business with tax
liability that chooses to use the Pass-through Option.
According to an Economic Impact Study prepared by
ECONorthwest in May 2007, the annual benefits of the Business
and Residential Energy Tax Credit programs in Oregon far
exceeded the costs of administering the program. Of the $73.8
million committed in 2006, for example, the net impact on the
Oregon economy included:
- Increased output in Oregon’s
economy of $142.7 million
- 1,240 new jobs in Oregon
- $18.6 million in new Oregon
wages
- An increase of $10 million in
state and local government tax revenues
- A decrease in commercial and
residential energy costs of $48 million.
Solar
manufacturers are increasingly considering Oregon as a
location for manufacturing and production as a result of these
programs. Solaicx, a manufacturer of mono-crystalline silicon
ingots and wafers used in the solar industry, announced in
June 2008 that it will establish its first high-volume
manufacturing facility in Portland, Oregon. In March, 2008,
SolarWorld Group, based in Germany, said it will convert an
existing semiconductor plant in Hillsboro, Oregon to a
solar-wafer and cell manufacturing facility. When fully
operational, it will be the nation’s largest solar production
facility.
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Solaicx will make
products for the solar
Industry in a high volume
plant in Portland, Oregon
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SpectraWatt, an Intel spin-off, will make solar
cells in Hillsboro, with an initial employment of 135, with
potential for expansion. XsunX, is completing its factory in
Wood Village, Oregon. The company has plans to expand up to
100 MW in solar panel production capacity. Average wages in
the solar manufacturing industry in Oregon is in the $60,000
per year range.
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Refundable Tax Credits Becoming More
Popular
Refundable tax credits differ from
transferable tax credits, in that refundable, or non-wastable
tax credits can be applied to state taxes to reduce the tax
owed to below zero, resulting in a moderate negative income
tax. Because transferable tax credits can only be sold where
there is a buyer who needs tax credits, situations can arise
where there is insufficient tax liability to fully utilize
available transferable tax credits. Refundable tax credits,
however, avoid this problem because they allow the recipient
of the tax credits to actually receive a cash rebate of
unutilized tax credits, once all tax liability has been fully
utilized. Companies in fast growing industries and those in
emerging fields with heavy development spending can more
easily utilize refundable tax credits because it does not
require a willing buyer to take advantage of the credits. In
addition, the tax credits are available at a 1:1 basis with
cash versus 70 to 85 percent for transferable tax credits.
Among the states offering refundable tax
credits are Michigan with its MEGA tax credit program; Indiana
with its EDGE program and numerous state film production tax
credits; Ohio’s Job Creation Tax Credit; Nebraska’s Advantage
Program; New York’s Economic Development Zone; Utah’s Economic
Development Zone tax credit; Maryland’s One Maryland Tax
Credit, and many other programs.
These programs
are among the most desirable as companies never have to worry
about whether or not these credits can be monetized.
Tracking and Compliance is
Key
The common thread between both
transferable and refundable tax credits is the need for
rigorous compliance to ensure that the programs are being used
as specified by the tax code. In addition, many companies do
not correctly calculate the value of these credits or provide
timely reports as required by law. Recently, for example, we
had a client who had successfully applied and pre-certified
for a New York Empire Zone project which entitled the company
to up to $3,000 per new hire in refundable tax credits. Due to
management changes, however, the company failed to provide
compliance reports to the state as required by law, and the
Empire Zone project was de-certified. The dollar loss
associated with the failure to file timely reports has been
estimated to be in the millions of dollars.
In
addition, many companies do not effectively communicate with
state and local officials regarding the status of their
projects. Many programs require verification of job creation
or investment. In an uncertain market, companies may not
always be successful in creating the number of jobs that they
have projected during the incentives negotiation process.
Regular communications between state and local officials can
help stem the loss of all or a portion of investment or job
creation tax credits. Alternatively, if the company creates
far more jobs or investment that was originally contemplated,
this regular communication program can help you qualify for
more credits.
Whenever you or your company are
considering establishing new or expanded facilities, a survey
of all available tax credits should be conducted as a normal
part of doing business. Companies like Bedford can handle this
on a contract basis or this can be done by internal staff
resources. Once your company has successfully applied for tax
credits, it is important that you have a system in place to
monitor and maintain these tax credits to ensure full
utilization. |
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