09.02.15 |
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Negotiating the Complex World of Transferable Tax Incentives

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There are many tax credits and incentives available to businesses today. To date, there are 46 states that offer some form of tax credit.[1] These incentives can be effective tools to help businesses increase their bottom line by offsetting overhead and operating costs.

Some tax incentives are relatively straightforward, easy to understand and clear on their eligibility requirements, while others are more obscure and require somewhat vague qualifications. Maximizing the use of all available incentives in today’s business environment can add to a company’s profitability.

Transferable tax credits are among the more complicated incentives of the business world. “Transferable” means that they can be bought and sold, often at a discount, between taxpayers. On average, sellers will receive 85 to 90 cents on the dollar when selling their tax credit and in some cases less.[2]

These types of incentives are designed to stimulate economic activity and help companies lower their effective tax rate and reduce tax liability.

What types of tax incentives are transferable?

Most states offer transferable tax incentives in one form or another. Some of the most common options include:

Why sell a tax incentive?

A tax break is a good thing, right? So why would businesses want to sell a tax credit instead of using it for the company’s benefit? The short answer is that the business either doesn’t need it or can’t use it. For example, a film production company shooting a movie in a particular state may only be operating in the state for a few weeks or months.[7] In such a short amount of time, the company will likely not have generated a very large tax liability within that state, and the excess tax incentive may not be refundable.

Therefore, it is often more profitable for that particular film company to sell its tax incentive to another taxpayer with a larger tax liability in the state. Because the buyer will purchase the incentive at less than full value, they can then make use of the incentive to help reduce or eliminate their estimated tax payments at a lower cost. The seller, on the other hand, generates a larger gain through the sale. Thus, the transaction ends up being a win-win for both parties.

Why so complicated?

Navigating the marketplace for the transfer of tax incentives can be complex and time-consuming. Many companies work with experienced incentive brokers who can help maximize the profit on the incentive transfer. These brokers often play a crucial role in bringing buyers and sellers to the table.

Are transferable tax incentives right for your business?

How do you know whether or not transferable tax incentives could benefit your business? It depends primarily on the size of your company’s tax liability. In order for the transfer to be profitable for an incentive buyer, it must be purchased at less than full value.

As a result, a company’s tax liability would typically need to be significant in order for it to be worth the requisite time, effort and expense.  Larger corporations are much more likely to benefit from a tax incentive transfer than a small or medium-sized business.  It is advisable to seek advice from an experienced third-party provider to determine whether or not your company could potentially benefit from pursuing a transferable tax incentive transaction.

Learn more about how ADP can help you reduce your company’s state tax liabilities by assisting you in finding state tax incentives available to sell or purchase at a discount.

Learn More About ADP SmartCompliance® Tax Credits

The information provided in this blog post is for informational purposes only and not for the purpose of providing accounting, legal, or tax advice.  The information and services ADP provides should not be deemed a substitute for the advice of any such professional.  Such information is by nature subject to revision and may not be the most current information available.

[1] Journal of Multistate Taxation and Incentives (Thomason Reuters/Tax & Accounting), March/April 2015, page 1, http://www.hmblaw.com/media/97814/the_transferability_and_monetization_of_state_tax_credits__jmt_march-april_2015_.pdf

[2] Journal of Multistate Taxation and Incentives (Thomason Reuters/Tax & Accounting), March/April 2015,  page 8, http://www.hmblaw.com/media/97814/the_transferability_and_monetization_of_state_tax_credits__jmt_march-april_2015_.pdf

[3] State Film Production and Incentives, March 28, 2014, http://www.ncsl.org/research/fiscal-policy/state-film-production-incentives-and-programs.aspx

[4] Brownfields Tax Incentives, http://www.mass.gov/eea/agencies/massdep/cleanup/programs/brownfields-tax-incentives.html

[5] Low Income Housing Tax Credit, http://www.mass.gov/hed/housing/affordable-rent/low-income-housing-tax-credit-lihtc.html

[6] Grow NJ Assistance Program, http://www.njeda.com/financing_incentives/programs/grow_nj

[7] The Pew Charitable Trusts, http://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2012/12/14/tax-breaks-for-sale-transferable-tax-credits-explained


2 comments on “Negotiating the Complex World of Transferable Tax Incentives”

  1. Nanette says:

    Thanks for sharing the Transferable Tax Incentives 100! I would like to make this into a PDF for my next GA film meeting at the new Pine Woods Film Studio.

    1. Jonathan Reese says:

      Fine. Please reference ADPcomplianceInsights as the source.

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