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Volume XII, Number 26


January 26, 2022

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November 2015 Tax Credits and Incentives Update

HMB Tip of the Month:  While some roadblocks may slow down the incentive negotiation process, such as the temporary ban in Illinois on certain incentive programs, taxpayers need to remain diligent and patient when navigating these roadblocks.  Taxpayers who are otherwise eligible for these incentive programs, may need to put its expansion or other plans on hold and be willing to compromise with the state's economic development authorities in order to take advantage of these programs. 

Interesting Updates

All- The practice of states offering tax incentives to companies has expanded since the end of the last century according to the Council for Community & Economic Research's November 13 report entitled "State of State Business Incentives." The report stated that in 1999, there were 940 state incentive programs targeted to businesses. By 2015, the number had more than doubled to 1,934 programs.

In between those years, the report noted, was the Great Recession, which it flagged as part of the reason for the surge in the number of incentive programs.  The report said the combination of the Great Recession in 2007-2009 and the 2010 state elections produced nearly 100 new incentive programs in 2011 alone. Besides recessions, changes in administration -- there were 27 new governors after the 2010 elections -- are most likely to produce a wave of new incentive programs, the report said. By contrast, from the beginning of 2012 until the current period in 2015, only 123 new programs began.

Illinois- On November 10, 2015, Governor Rauner announced that he is restarting the Illinois EDGE credit and the Film Tax Credit.  The next day he announced changes to state business tax-credit programs after he suspended them earlier this year.  First, he said that changes include eliminating agreements that favor companies with money to attract deals. In addition, the change also eliminates credits for job retention in favor of granting them only for new job creation.  Moreover, the plan also restricts the way jobs are counted, prohibits multiples credits for the same facility, and would market the state's benefits, not just offer incentives.  Finally, the state will not offer any new tax credits until there's a budget agreement.

Recent Announcements of Credit/Incentives Applications and Packages

Illinois- On November 24, 2015, the Illinois Department of Commerce announced it reached tax-break deals with three companies following Governor Rauner's recent decision two weeks earlier to reinstate corporate tax incentives.  The deals through the EDGE tax-credit program, though, will not provide tax incentives until Rauner and Illinois lawmakers agree on the overdue state budget.

Under the deals announced in November, Fabrik Industries Inc. of McHenry would add 25 new jobs and invest $5 million. The company now employs 264 people.  Bell Flavors & Fragrances Inc. of Northbrook would add 25 jobs to its 179-employee workforce and invest $10 million.  Finally, Taurus Die Casting would add 37 jobs and invest $6.4 million at the Rockford facility where it now employs 268 people.  The department did not provide the size of the tax breaks the companies would receive. 

Michigan- Fiat Chrysler Automobiles LLC ("FCA") agreed to renegotiate a tax credit agreement with Michigan, a move designed to provide the state with greater budget certainty and limit its obligations under the now-discontinued Michigan Economic Growth Authority (MEGA) tax credit program.  The new agreement, announced November 24, calls for FCA to invest $1 billion in the state through 2029 and caps the value of the credits the company can claim each year.

Under the old agreement, the company could have cashed in the credits at any time, leaving the state unable to predict when or how much it would have to pay. The term of the agreement was also shortened by two years.

Governor Rick Snyder called the agreement "an essential step in helping us better manage our state budget, while finding common ground that will ensure the company will continue to invest and create jobs in our state for years to come."

New Jersey- The New Jersey Economic Development Authority on November 13 approved $93 million in tax credits for a massive mixed-used development in the heart of Jersey City, along with a generous incentive package for a new medical school.  The awards could bring One Journal Square, a planned one-million-foot high-rise, closer to fruition if WeWork Cos. Inc. selects the locale as the place to house its planned incubator space for startup companies.

WeWork, which develops leasable office space, was awarded up to $59 million in tax credits from the EDA's Grow NJ program over the next decade to support its 75,000-square-foot project.

New Mexico- In November, Governor Susana Martinez announced that New Mexico's film industry injected nearly $290 million into the economy last year -- the largest economic impact in state history.

Twenty-five major productions were in principal photography in New Mexico during FY 2015, with project budget sizes increasing 72 percent from FY 14, and the number of TV series increasing by 66 percent from FY 13. Additionally, the data shows that the industry continues to support more jobs, with nearly 280,000 worker days in FY 15.

In 2013, Governor Martinez strengthened New Mexico's film incentive program through signing a bipartisan job creation and tax reform package designed to diversify the economy and make the state more competitive. Among other things, this legislation increased the incentive rate for television and other qualifying productions.

Legislative, Regulative and Gubernatorial Update

Baltimore, Maryland- The Baltimore City Council's tax committee on November 24 approved legislation (Bill 15-0565) that would create a new tax credit to lure supermarkets offering a full range of fresh meat, dairy products, fruits and vegetables to impoverished areas of the city without such stores.  Under the measure, qualifying supermarkets would receive an 80 percent tax credit against the taxes applied to building materials.

The Taxation, Finance and Economic Development Committee unanimously approved the bill after revising it slightly to ensure that the legislation conforms with the enabling state law. Baltimore Mayor Stephanie Rawlings-Blake strongly supports the bill and pushed for the Maryland General Assembly to pass the enabling legislation in its 2015 session.

The bill now goes to the full City Council, where it must be approved twice. The first vote will be at the next council meeting, December 7. If it passes, it will get its second vote at the last session of the year, December 10.

California- A previously underused California tax incentive program for renewable technology businesses has suddenly reached its $100 million annual cap, just as the program authority is preparing to expand the types of businesses that can apply for the tax break.

The California Alternative Energy and Advanced Transportation Financing Authority has received applications for $222 million in sales and use tax exclusions this year and may seek an increase to the annual cap on the incentive program, according to an authority staff report presented at the authority's November 17 meeting.

Under the program, businesses working on renewable technologies, such as solar power and electric cars, can apply for a sales tax exclusion for equipment purchases. The incentive program is one of several administered by the authority to encourage businesses to develop and adopt low-pollution and energy-efficient technologies.

District of Columbia- District of Columbia Bill B21-0353 would provide a performance-based abatement of real property taxes of up to $6 million annually on real property leased by the Advisory Board Company for 10 years if the company meets the annual hiring target during that time period, including a net increase of 1,000 District residents employed through 2029.  The bill is under review of Council of the District of Columbia. 

Florida- On November 23, Governor Scott unveiled his proposed $79.3 billion "Florida First" budget, headlined by a goal of $1 billion in tax cuts and a $250 million investment in a new Florida Enterprise Fund he says is needed to become the nation's top job producer.

Scott's reductions would come primarily by eliminating income taxes for manufacturing and retail businesses, which he says would help grow the economy by saving those businesses $770 million.  He also proposes permanently extending a sales tax exemption on manufacturing machinery and equipment valued at $76.9 million.  Nonbusiness tax cuts would come from a one-year extension on a sales tax exemption for college textbooks worth $46 million and back-to-school and disaster-preparedness sales tax holidays estimated to be save taxpayers $72.8 million.

Georgia- Effective January 1, 2016, Ga. Comp. R. & Regs. § 560-7-8-.45, the Film Tax Credit, has been extended past the prior sunset date of January 1, 2016, and the credit will now be available until taxable years beginning on or after January 1, 2019. The aggregate amount of credits available for taxable years beginning January 1, 2016 and ending before January 1, 2019 for qualified interactive entertainment production companies and their affiliates which qualify must not exceed $12.5 million for each taxable year.

Additionally, the personal service company definition has been expanded from Code Sec. 269A(b) to also encompass sole proprietorships or individuals paid as independent contractors meeting the principal activity, meeting the ownership requirements of Code Sec. 269A(b). The maximum credit allowed for any qualified interactive entertainment production companies and its affiliates which are qualified must not exceed $1.5 million for each taxable year beginning on or after January 1, 2016 and before January 1, 2019.

A provision is also added for taxable years beginning on or after January 1, 2013 and before January 1, 2016 and claiming the credit on the day the aggregate credit amount is reached, as the credit will then be allocated pro rata on a first-come, first-served basis. Beginning on January 1, 2016 and before January 1, 2019, all qualified interactive entertainment production companies must be preapproved to claim the credit. The credit may still be transferred, but pre-approval in and of itself does not qualify as earning the credit. Reporting will be required for taxable years beginning on or after January 1, 2016 and before January 1, 2019 to transmit to the Department of Revenue the monthly average number of full-time employees subject to Georgia income tax withholding for the taxable year.

New Jersey- New Jersey Governor Chris Christie on November 9 vetoed most of a legislative package aimed at stabilizing Atlantic City's faltering gaming economy, applauding the Legislature's attention to the struggling tourist destination while ultimately shooting down the proposed revitalization methods.

The governor rejected four of the five bills in a package that passed both houses of the Legislature and has sat on his desk since June. The legislation was intended to help the city bounce back from a financial crisis that has forced some of its biggest casinos into bankruptcy with measures including a plan allowing casinos to make payments in lieu of property taxes for 15 years.

For the conditionally vetoed measures, the governor offered amendments that he said keep intact the legislation's underlying goals while providing adjustments that ensure they provide more than temporary support. The bills will return to the Legislature with the recommendations.

Review of Programs

Indiana- The Indiana Office of Fiscal and Management Analysis has released their annual report in November 2015 analyzing the impact of the state's various tax credits.  The report notes the positive impact of low- income assistance and college savings credits while highlighting the ineffectiveness of several housing and property rehabilitation credits and tax increment financing. 

Case Law

Federal- On November 13, an Arkansas coal company mired in legal problems challenged an IRS decision scrapping $14 million in tax credits for refined coal production, telling U.S. Tax Court in a petition that the agency failed to provide enough evidence for why they should be disallowed.

Ecotec Coal LLC said in its petition that the IRS' August adjustment disallowing the credits, which also nixed over $1 million in deductions for administrative expenses, was "arbitrary and capricious" considering that the company had "true and correctly accounted for" the amounts claimed on the 2011 tax forms.

In the adjustment, the IRS simply said that the company had failed to "substantiate entitlement" to tax credits provided by the 2004 American Jobs Creation Act for refined coal and that the deductions were not "adequately substantiated." According to the petition, Ecotec had claimed deductions for a host of costs, including those for rent, taxes, legal fees, marketing fees and its biggest ticket item: $223,000 in travel expenses.  The case is Ecotec Coal LLC, case number is 28181-15, in U.S. Tax Court.

© Horwood Marcus & Berk Chartered 2022. All Rights Reserved.National Law Review, Volume V, Number 338

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