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Innovation through Tax Credits

By Kamal Parag Email By Kamal Parag
June 2014
Innovation through Tax Credits

How to tap into the incentive programs offered by Georgia.

What is the best way to grow your business? Most would answer—with a new idea, methodology, or expansion. The key behind any answer is innovation. Innovation, the application of better solutions, not only helps your company earn more revenue, but can be further applied through federal and state government tax credits and state incentives to return money to your business.

The federal government and the state of Georgia reward companies that are innovative. An innovative business usually creates and maintains jobs. The Georgia job tax credit applies up to $4,000 per new job created each year for five years. This income tax credit, applied to certain industries, can be used to offset payroll withholding tax. Furthermore, a quickly expanding business creating 50 or more jobs within a 12-month period and paying wages at least 110 percent of the county average may be eligible for the quality jobs tax credit. This can also offset withholding tax with a credit of up to $5,000 per job, per year, for seven years. Either job tax credit may be carried forward for up to 10 years for any unused portion.

Businesses that retrain existing employees may also be eligible for the retraining tax credit in Georgia. With this credit, up to 50 percent of the direct cost of qualified retraining, $500 per full-time emp- loyee per training, can be applied towards a tax credit. Any unused credit may be carried forward for up to ten years. Although no more than $1,250 per employee can be claimed per year, this credit offsets investment in employees by allowing the business to afford more training, more often.

Growing a business often requires large capital investments. Georgia recognizes this and rewards exising businesses making substantial investments of $50,000 or more. Through the investment tax credit, manufacturing and telecommunications support businesses that have been in Georgia for three or more years can receive an income tax credit between 1 and 8 percent, depending on the county’s economic status. This credit may also be carried forward up to ten years, but businesses can claim either the investment tax credit or the job tax credit, not both.

Alternatively, businesses may increase their research and development expenditure (“R&D”) in order to grow. Any business that improves a product through R&D spending is qualified for the research and development tax credit for the increased portion. The credit is a dollar for dollar reduction of taxes owed and can offset up to 50 percent of Georgia taxes. Any unused portion can be applied against Georgia state payroll withholding and also carried forward ten years.

Even if increased R&D is not a future business plan, energy is something that is always consumed. Recently, the House eliminated sales and use tax on energy used directly or indirectly in manufacturing or processing in a manufacturing plant. The elimination will be a 100 percent exemption by 2016. How- ever, local governments retain the right to impose an excise tax equal to the amount that would have been collected.

The final two areas in which Georgia rewards innovative businesses are through incentives that are commonly overlooked. A company participating in international sales has an opportunity to avoid C-corporation taxation on export profits and can create an additional expense through the creation of a tax-exempt Domestic International Sales Corporation (DISC).

Another incentive exists when a company has free cash flow and can form a captive insurance company (“captive”). A captive not only provides the operating company the benefit of additional coverage, but also creates an immediate tax benefit due to the premium being treated as a tax-deductible expense. The captive is not taxed on the receipt of premium income and its net investment income can be tax-averted by investing in non-taxable assets, such as municipal bonds.

Innovation is the application of better solutions and should be applied not only to the growth of a business but also through tax credits and incentives. The state of Georgia rewards innovative businesses. How will you grow your business?


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Kamal Parag, CPA, is a partner at Habif, Arogeti & Wynne, LLP. He specializes in the technology and manufacturing & distribution industries. Many of his clients are international entities. Business Insights is hosted by the Law Firm of Kumar, Prabhu, Patel & Banerjee, LLC.

Disclaimer: This article is for general information purposes only, and does not constitute legal, tax, or other professional advice.



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