Utilizing Lesser Known Tax Incentives
The United States has one of the highest official corporate tax rates in the world at a staggering 35 percent, not including state taxes. However, smart businesspeople and their advisors know how to take advantage of the numerous tax credits and incentive programs that exist. As a result, large corporations often pay as little as 10 to 20 percent.
Knowing how to utilize these tax credits is important for small businesses as well, especially as a company expands and succeeds. For example, many businesses have migrated to Georgia because of the state’s “Single Gross Factor Receipt” apportionment formula (meaning that a company’s gross sales are the only relevant factor in determining the company’s income that will be subject to taxation). Georgia is the only state in the Southeast that uses this apportionment formula. There are scores of tax incentives that states offer businesses. We discuss three specific tax credits here.
For businesses that choose to own real property, there is a historical tax credit applied to the rehabilitation of a certified structure or historic home. On the federal level, this tax credit is called the Federal Rehabilitation Investment Tax Credit (RITC), which provides a federal income tax credit equal to 20 percent of the rehabilitation expenses. This credit is available solely for income producing properties.
Some states, including Georgia, offer a State Preferential Property Tax Assessment for rehabilitated historic properties. This tax credit freezes the property tax assessment for over eight years and is available to personal residences, as well as income-producing properties, but does require that the owner increase fair market value by at least 50 percent.
Lastly, there is the State Income Tax Credit for rehabilitated historic properties that grants a state income tax credit of up to 25 percent of rehabilitation expenses. This credit is capped at $100,000 for personal properties and $300,000 for income-producing properties.
Conservation easements are a similar tax credit related to the preservation of real property. A conservation tax credit provides financial incentive for landowners to help protect natural resources. Landowners who donate land or easements to a government entity or an approved nonprofit organization may apply for a credit against their state income taxes. The Department of Natural Resources must certify that such donated property is suitable for conservation purposes. Once approved, the tax credit is equal to 25 percent of the fair market value of the donation, up to $250,000 for individuals and $500,000 for business donors. Any unused portions may be carried forward for ten years.
Recently, states have been capitalizing on the booming film industry as more production companies shy away from the high costs of production in California. In 2010, Georgia vitalized the film industry here by providing tax incentives to production companies which have at least $500,000 of qualified expenditures in the state. This credit can be applied to 100 percent of the production company’s tax liability, and any excess may be used to offset the company’s withholding taxes. Other states in the Southeast, such as North Carolina and Louisiana, have similar programs.
Although there has been much criticism about film and production tax credits, there is a benefit to local businesses that many aren’t aware of. The entertainment production companies can get a 30 percent tax credit for their spending, but typically their state tax liability is far lower than the credit is worth. That’s where a local business can reap the benefits—legislation in many states allows film companies to share the credit with a third party. For example, a film company that spends $100 million would be eligible for a $30 million state tax credit. But its tax liability might only be $6 million. To avoid losing out on the remaining $24 million, the company gives away or sells 10 to 15 percent of that $24 million, so it can utilize the remainder of the credit. Thus, the third party company could get a tax credit for somewhere between $2.4 million and $3.6 million. Also important to note is that the film tax credit can be utilized by companies involved in developing videos or digital media, including gaming software. (For more information on each state’s tax credit regarding film and production, please visit http://www.mpaa.org/policy/state-by-state)
As the Southeast continues to become an important hub for corporations both large and small, it is important for businesses to remain current on all the applicable tax credits available and take advantage of any favorable legislation in their state.
[Business Insights is hosted by the Law Firm of Kumar, Prabhu, Patel & Banerjee, LLC. Sonjui L. Kumar is a corporate, transactional attorney and a founding partner of KPPB Law. She primarily focuses on serving as general counsel to privately held companies assisting them with all legal matters, including corporate governance, contracts, shareholder matters, mergers, and acquisitions. Mehrnush Saadat is a 2nd year law student at Georgia State University and is a law clerk at KPPB.
Disclaimer: This article is for general information purposes only, and does not constitute legal, tax, or other professional advice.]
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