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Manufacturing Incentives Unveiled

During the 2009 special session, Governor Steve Beshear signed into law a sweeping economic incentives package which amends existing provisions and creates various new tax breaks for manufacturers and other businesses and individuals in Kentucky.  The new legislation includes key initiatives related to a reinvestment credit for manufacturers and a new plan for economic development credits and assessments. 

Notably, after significant lobbying by the Kentucky Association of Manufacturers and various other groups, the new incentive package substantially modifies the Kentucky Reinvestment Act to assist existing manufacturers making capital investments in Kentucky facilities for job retention as well as creation.  The legislation also overhauls several of Kentucky’s existing economic incentive programs, replacing tax credits and wage assessments available under the current Kentucky Economic Development Act (KREDA), the Kentucky Economic Opportunity Zone Act (KEOZ), the Kentucky Jobs Development Act (KJDA) and the Kentucky Industrial Development Act (KIDA).

Manufacturing Reinvestment Credit

Companies that reinvest in existing Kentucky manufacturing facilities and that meet certain job retention criteria may claim a nonrefundable tax credit against income tax and limited liability entity tax (LLET) liability.  To be eligible, companies must reinvest at least $2.5 million in the existing facility and maintain at the facility at least 85% of the full-time employment base at the time of application.  Companies that have obtained incentives under the Kentucky Industrial Revitalization Act (KIRA) within 5 years of the application are not eligible for the manufacturing reinvestment credit. 

Reinvestment credit opportunities include 50% of the cost of certain equipment, related purchases, and infrastructure improvements, as well as 100% of certain occupational training costs.  Credits may be taken against 100% of income tax and LLET liability on income, Kentucky gross profits, or Kentucky gross receipts from the project, subject to certain annual limitations.  Approved credits may be carried forward, but expire in 10 years if not used sooner.  Failure to comply with the reinvestment agreement may result in reduction, suspension or termination of the approved credits. 

Economic Development Credit and Assessments

The new economic development credits and assessments replaced those available under KREDA, KEOZ, KJDA and KIDA, and are available to entities in Kentucky, including national or regional headquarters operations and entities engaged in manufacturing, agribusiness, nonretail service or technology.

To be eligible for the economic development credit, the company must: incur at least $100,000 of eligible development costs, including equipment, land acquisition, construction, infrastructure improvement, or other related start-up costs (including start-up costs and 50% of estimated annual rent for leased projects); create and maintain at least 10 new full-time jobs (minimum of 35 hours per week); pay an average minimum wage for all new full time jobs of at least 150% of the federal minimum wage (125% in economically depressed counties); and provide employee benefits of 15% of the minimum average wage target established by the tax incentive agreement (or at least a total of 115% of the target in compensation and benefits). 

Approved companies may claim credits of up to 100% of the eligible development costs for owned projects or 100% of the eligible development costs and 50% of estimated annual rent for leased projects, all applied against 100% of income tax and LLET liability on income, Kentucky gross profits, or Kentucky gross receipts from the project; and up to 4% wage assessments for each employee whose job is created as a result of the project (up to 5% in economically depressed counties). 

The new law is not without limitations.  For projects that are not located in economically depressed counties, there is a maximum threshold of $20,000 in eligible equipment for each new full-time job created.  The term of recovery, including carry forward, is limited to 10 years (15 in economically depressed counties).  The legislation also provides claw-back provisions for companies failing to meet at least 90% of the job and minimum wage requirements.  

The legislation also provides incentives for very large and very small projects.  Companies that invest more than $500 million may be eligible for up-front advance disbursements of a portion of the economic development credits available under the program, based on a statutory formula.  Small businesses (not including affiliates of a larger corporate structure) with 50 or fewer full-time employees that invest at least $5000 in approved equipment and technology and that create one or more full-time employment positions may obtain specific tax breaks of up to $25,000 per year, with a maximum carry forward of 5 years.  

Other Incentives

In addition to the manufacturing credit and the economic development credits, the new law includes provisions affecting, among other things, the Kentucky Speedway, bi-state construction projects, alternative energy production, coal infrastructure, film production, hosts of Breeders Cup Races, active-duty military personnel and certain car and home buyers.

In general, the new law improves opportunities for financial incentives for both large and small job creation and retention projects.  However, the new provisions leave numerous pitfalls and other areas open to negotiation.  As always, the incentive agreements will control and will require particular attention to detail.  In any event, as the economy improves, the new law will provide the Commonwealth with better tools for generating economic development in Kentucky. 

If you have questions regarding manufacturing incentives, please contact any member of Greenebaum’s Economic Development and Incentives Team

Even though the content of the above Greenebaum Doll & McDonald e-bulletin is primarily informative, state and federal law obligates us to inform you that this is an advertisement. You have received this advisory because you are a client or friend of the firm.

About Greenebaum Doll & McDonald PLLC
Greenebaum Doll & McDonald PLLC is a widely-respected business law firm with approximately 200 legal professionals in six offices, serving local, national and international clients in virtually every industry. A forward-thinking business law firm, Greenebaum is committed to the practice of Breakthrough Law®.

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