Massachusetts enacts economic development and job growth law
TAX ALERT |
On Aug. 13, 2014, Massachusetts Governor Deval Patrick signed into law an economic development bill (H. 4377) that contains various provisions designed to stimulate economic development and job growth throughout Massachusetts. Among other things, the bill provides for a modernization of the research and development tax credit and new tax credits and incentives for job creation. The bill also provides for the transferability of historic rehabilitation tax credits and creates investment tax credits for individuals who are primarily engaged in agriculture, farming or commercial fishing.
In greater detail, the bill provides:
Modernization of the research and development tax credit
Effective Jan. 1, 2015, the bill creates a new Alternative Simplified Credit (ASC) calculation for the state’s research and development tax credit and repeals the current calculation. Using the ASC calculation, taxpayers are allowed a credit equal to the sum of (1) 10 percent of the excess, if any, of their qualified research expenses for the tax year over the base amount, and (2) 15 percent of the basic research payments determined under subsection (e)(1)(A) of section 41 of the Internal Revenue Code. The “base amount” is calculated by multiplying (1) the average annual gross receipts of the taxpayer for the four tax years preceding the credit year, and (2) the taxpayer’s “fixed-base ratio.” The fixed base ratio is a fraction, the numerator of which is the taxpayer’s average aggregate qualified research expenses for the third and fourth tax years preceding the credit year, and the denominator of which is the taxpayer’s annual average gross receipts for those years. The fixed-base ratio cannot exceed 16 percent. In contrast, under the repealed method, taxpayers were allowed a credit for research and development expenditures to the extent that such expenses incrementally exceeded a base amount calculated for a set period in the 1980s.
As an alternative to the ASC method, for calendar years 2015, 2016 and 2017, taxpayers may elect to take a research and development tax credit equal to 5 percent of their qualified research expenses for the tax year that exceed 50 percent of their average qualified research expenses for the three tax years preceding the tax year for which the credit is being determined. Similarly, for calendar years 2018, 2019 and 2020, taxpayers may elect to take a credit equal to 7.5 percent of their average qualified research expenses for the three tax years prior to the tax year for which the credit is being determined. Beginning in calendar year 2021, the amount of the taxpayer’s credit will be equal to 10 percent of such expenses. If a taxpayer making such an election did not have qualified research expenses in any one of the three tax years preceding the tax year for which the credit is being determined, the amount of the credit will equal 5 percent of the taxpayer's qualified research expenses for the tax year for which the credit is being determined.
Under either method, the research and development credit is limited to 100 percent of a corporation’s first $25,000 of corporate excise tax, plus 75 percent of the corporation's excise in excess of $25,000, as determined before the allowance of any credits.
Job creation incentives
The bill provides individual and corporate taxpayers with a credit of up to $1,000 per job created pursuant to a certified job creation project. A “job creation project” is generally defined as a project or investment by a controlling business that (1) is located within the commonwealth; (2) generates substantial sales from outside of the commonwealth; (3) does not involve a significant investment in the construction or expansion of an existing facility or otherwise result in an increase in the value of the real property where new jobs will be located; and (4) generates a net increase of at least 100 permanent full-time employees within two years after project certification. Such jobs must be maintained for at least five years after project certification.
Taxpayers may be eligible for a credit of up to $5,000 per job created in a gateway municipality or within a city or town whose average seasonally adjusted unemployment rate, as reported by the executive office of labor and workforce development, is higher than the average seasonally adjusted unemployment rate of the commonwealth. A “gateway municipality” is defined as a municipality with a population greater than 35,000 and less than 250,000, a median household income below the commonwealth’s average, and a rate of educational attainment of a bachelor’s degree or above that is below the commonwealth’s average.
The bill indicates that credits generated for certified job creation projects may only be used in the year subsequent to the year in which the jobs at issue are created. However, to the extent they cannot be used, such credits are refundable to taxpayers in the tax year subsequent to the tax year in which the required jobs are added.
The bill also modifies existing law by redefining the term “enhanced expansion project” for those businesses that qualify for an investment credit under the Economic Development Investment Program. Most notably, the revised definition requires that the facility at issue generate a net increase of at least 100 full-time employees within two years after project certification. The bill also adds definitions for “special tax assessment” and “tax increment financing (TIF) agreement,” allowing municipalities greater flexibility to enter into special property tax arrangements.
Historic tax credit transfer
Pursuant to current Massachusetts law, a taxpayer that acquires a qualified historic structure during the 12-year period beginning Jan. 1, 2006, and ending Dec. 31, 2017, is eligible for a credit of up to 20 percent of the qualified rehabilitation expenditures made by the taxpayer with respect to a qualified historic structure. The bill provides that a taxpayer that acquires a qualified historic structure may receive any tax credits for qualified rehabilitation expenditures previously awarded to the transferor of the qualified historic structure if (1) the rehabilitation was not placed into service by the transferor, (2) no credit has been claimed by anyone other than the acquiring taxpayer, and (3) the taxpayer completes the rehabilitation and obtains certification.
Agriculture and fishing tax credit for individuals
Effective Jan. 1, 2015, individuals primarily engaged in agriculture, farming and commercial fishing may be eligible to claim an investment tax credit. Current law only provides a credit against the corporate excise tax for corporations primarily engaged in such activities. To be eligible for the credit, individuals must be engaged in either (1) agriculture or farming, as defined by statute, in specified zones, or (2) commercial fishing. A taxpayer will be deemed to be primarily engaged in commercial fishing only if it possesses a state or federal fishing permit and lands a minimum of 5,000 pounds of fish per year.
The bill provides tax credits of up to 3 percent of the cost or other basis, for federal income tax purposes, of qualifying property acquired, constructed, reconstructed or erected during the tax year. For leased property, the amount of the credit equals 3 percent of the lessor's adjusted basis in qualifying property for federal income tax purposes at the beginning of the lease term multiplied by a fraction, the numerator of which is the number of days of the tax year during which the lessee leases the qualifying property and the denominator of which is the number of days in the useful life of the property.
Eligible taxpayers may carry over such credits to any one or more of the three succeeding tax years after the tax year during which the credits are generated.
Other notable developments
The bill provides that a limited partnership that is not a “business corporation” but that would otherwise qualify as a “research and development corporation” may claim the sales and use tax exemptions that are available to research and development corporations under Chapters 64H and 64I of the General Laws. This provision applies only to limited partnerships that are owned entirely by corporations.
H. 4377 establishes a wide variety of statutory benefits for investments in economic development and job growth throughout Massachusetts. Businesses and individuals should review the changes made to existing programs, as well as new programs created by the bill, and consider the impact of these programs when making qualifying investments in Massachusetts.