State Tax Credits

Excelsior Program Announced in New York State

Under the Excelsior Jobs Program enacted in Mid-2010 (and effective for 2011 through 2015), New York has enacted four refundable tax credits geared at creating jobs in New York. This program also incorporates the Investment Tax Credit (ITC) which has been available for a number of years, plus Excelsior adds benefits such as a new R&D tax credit described below.

New York Investment Tax Credit – Overview

Adding Equipment in New York?

New York state offers an additional incentive for businesses in the form of an Investment Tax Credit (ITC) which is a business tax credit on purchases of buildings, machinery or equipment used to produce goods by manufacturing, processing assembling and other activities. The definition of ‘manufacturing’ and ‘processing’ also includes developing computer software as well as producing theatrical or television content as long as the master copy is retained in New York and meets all of the other criteria. The Investment Tax Credit is calculated based on a percentage of the investment credit base, which is the cost of qualified property on the date the property was acquired. The standard rate of the credit is 5% on first $350,000,000 of investment credit base and 4% on the investment credit base that is in excess of $350,000,000. These benefits may increase up to 10% of the investment credit base if the business is located in an Empire Zone.

Under the Excelsior Program, the ITC is now Refundable with the refundable credit equal to 2% of the cost of qualified investments. In addition, the yearly cap is $2 million in credits under Excelsior, but additional credits in excess of the cap may be carried forward indefinitely.

What are the Criteria for the Investment Tax Credit?

Qualified property for the ITC is tangible property, including buildings and structural components of buildings, that is:

  1. Depreciable pursuant to IRC § 167;
  2. Acquired by purchase (which includes self-constructed assets);
  3. Principally used by the taxpayer in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture or commercial fishing;
  4. Has a situs in New York; and
  5. Has a useful life of four years or more.

The investment credit base is the cost or other basis for federal income tax purposes of the qualified property as of the date it is placed in service, less any amount of non-qualified, non-recourse financing with respect to such property to the extent such financing would be excludible from the credit base pursuant to section 46(c)(8) of the Internal Revenue Code. The New York ITC is largely based on the federal regular investment credit under former IRC Section 46 and related Sections 47 and 48 prior to its repeal by the Tax Reform Act of 1986. Thus, New York follows federal definitions and precedent where any terms are not defined for purposes of determining whether property qualifies for the ITC under NY Section 212.12.

Principal Use Test

One of the key criteria and exam points is demonstrating that the equipment placed in service was principally used in the manufacturing process, which includes processing, assembly and other aspects of production to complete the product. The principal use test is met by showing that the equipment was used a majority of the time (over 50%) in qualified production activities. This is a factual determination and should be demonstrated in your documentation to substantiate the ITC, such as memos explaining the qualifying equipment and how that equipment is used in producing goods. Many assets could be mixed use which requires demonstrating to the auditors that the greater than 50% test is met with respect to that piece of equipment. Interviews with employees involved in the production process are a good starting point, as well as other records such as facility layouts/diagrams/workflow charts showing how that component fits into the production process.

Hiring New Employees in New York?

The new Excelsior Program also adds the Excelsior Jobs Tax Credit, a refundable tax credit worth up to $5,000 per employee added in New York.

Conducting R&D in New York?

New R&D Tax Credit Enacted in New York

The R&D tax credit is one of the Excelsior Program’s refundable tax credits where qualifying businesses are eligible to claim a refundable New York State tax credit equal to 10% of the federal R&D credit for the portion attributable to R&D conducted in the State of New York. Warner Robinson has many years of experience working with our clients on the Federal R&D tax credit, plus numerous state R&D tax credit projects and audits at the state level; we can assist your company with the support needed to claim and sustain Excelsior tax credits.

Is your Company Eligible to Claim ITC and/or R&D Tax Credits in New York?

To find out more about the New York Investment Tax Credit and the other new Excelsior credits, including the R&D tax credit, contact Warner Robinson today. We have been involved with assisting companies in claiming and sustaining the ITC in New York for several years, including working with New York auditors in helping clients navigate through the exam process, and have been assisting clients with Federal and state R&D tax credits since the 1990s.

Texas R&D Tax Credit – Reinstated

Taxable entities engaged in qualified research activities under the criteria of Internal Revenue Code Section 41, the basis for the federal R&D credit, may claim a credit equal to 5% of qualified expenses such as wages, supplies and contractor costs over a base amount

Taxable entities may claim the franchise tax credit as long as they are engaged in qualified research activities in Texas. The criteria for qualification follow the guidelines of Internal Revenue Code Section 41, the basis for the federal R&D credit. The franchise tax credit is equal to 5% of qualified research expenses in Texas (QRET) such as wages, supplies and contractor costs over a base amount. The base amount, in turn, is calculated using the QRET incurred by that entity over the previous three tax periods.

If the entity incurs QRET while contracted with a public or private institute of higher education, the credit percentage increases to 6.25%. Regardless of whether or not the research is undertaken with an institute of higher education, the credit may also be taken at a reduced percentage even if the entity did not have QRET in all three years preceding the period the credit is claimed.

Colorado R&D Increase Tax Credit

Colorado offers a 3% credit based on the increase of research and experimental expenditures in an enterprise zone.  The increase is determined based on the average expenditures for the prior two years in the same enterprise zone.  Activities in different enterprise zones must be calculated separately, and the expenditures must meet the definition of research and experimental activities in IRC §174.   Research expenses include wages, except fringe benefits, supplies, and payments for the right to use computers.  Contract research may also be included, and it is not subject to the 65% limitation found in the federal version of the credit.  However, the following expenses do not qualify: land or improvements to land, management surveys, depreciable equipment, research funded by a government entity, and costs incurred to adopt a product to a particular customer’s needs.  Once the credit is calculated, the taxpayer must divide the credit equally over four years.  If the company’s tax liability for a given year is less than the credit amount, the credit can be carried forward for an unlimited number of years.

Georgia Research and Development Tax Credit

To be eligible for the Georgia R&D Tax Credit, a Company must first be eligible for the Federal Research and Experimentation (R&E) Tax Credit. The tax credit is applied by first calculating a base amount. An average research ratio is calculated based on Georgia Qualified Research Expenses (QREs) to Georgia Taxable Net Income occurring during the three most recent tax years. That ratio is multiplied by Georgia Taxable Net Income for the current year to arrive at the base amount.  If the current tax year’s research expenses exceed the base amount, the excess is eligible for a 10% State tax credit. The tax credit is claimed on the Georgia Tax Return through the Research Tax Credit Form IT-RD. A copy of the Federal Form 6765 must be attached.

California Research Credit (R&D Credit)

California offers one of the best tax credits of any state for R&D activities conducted in California. The R&D credit is a 15% credit of qualified research expenditures or QREs over the base amount. Qualified research expenses generally include wages, supplies, and contract research costs. Wages – Qualified wages are for qualified services that directly relate to the research activities and are paid or incurred by the taxpayer. Qualified services include direct supervision, direct support, or direct performance of qualified research. General or administrative wages generally do not qualify. These rules generally follow the Federal research credit for what constitutes a qualified research expenditures, except for the criteria that the QRE must be incurred in California.  Supplies are defined the same as under the federal rules; tangible property that is consumed directly by the research activity or that is utilized in the development of a prototype. The supplies must be used in the conduct of qualified research. Supplies do not include land, improvements to land, or property subject to the allowance for depreciation. Utilities (phone and electricity), small tools, and allocations of total shipping cost do not qualify as supply expenses. Contract research expenses in California qualify as R&D if paid to consultants to perform qualified research. The vendor must perform the research within California. If the research is conducted within and without California, only the expenditures incurred within California qualify. Only 65 percent of the California expense qualifies for the credit.

Contact us today to find out how we can help your business find and sustain important State Tax Credits.