New Law Restructures and Expands Tax Incentives
The Kentucky General Assembly enacted House Bill 3 [H.B. 3] during its Special Session in June. This new law significantly restructures and expands Kentucky’s tax incentive scheme. As a point of comparison, H.B. 3’s 259 pages contain many of the provisions of House Bill 229 which was introduced during the 2009 General Session and a few new ones. Following are those with the most potential to have a widespread impact on taxpayers.
Combined Tax Incentives Program
At its core, H.B. 3 combines several tax incentives programs to create a single, more flexible, program administered by the Kentucky Economic Development Finance Authority (“KEDFA”). The new program essentially consolidates the Kentucky Rural Economic Development Act (“KREDA”), Kentucky Economic Opportunity Zone (“KEOZ”), Kentucky Job Development Act (“KJDA”), and Kentucky Industrial Development Act (“KIDA”) programs.
A company is eligible for these tax incentives provided that it engages in manufacturing, agribusiness, non-retail service, non-retail technology or has a national or regional headquarters operation (regardless of the underlying business) in Kentucky. Available incentives include: a credit against the income tax and the limited liability entity tax (“LLET”) of up to 100% of the tax resulting from the project; an assessment against the wages of each new employee; and, an advance disbursement (but only for a project with an investment of $500 million).
It is also important to note that the sales and use tax incentives provided for by the Kentucky Enterprise Initiative Act (“KEIA”) were retained by H.B. 3 in the form of a new tax incentive program and extended to also encompass electronic processing equipment. This program is available to a business primarily engaged in manufacturing, non-retail services or technology activities, or operating or developing a tourism attraction and applies to building and construction materials, research and development equipment, and electronic processing equipment. To qualify, a business must make a minimum investment of $500,000 in the project or $50,000 in electronic processing equipment. A qualifying company could receive a refund of sales and use tax paid on approved eligible expenses. Each fiscal year, however, KEDFA cannot commit to sales and use tax incentives of more than $20,000,000 for building and construction materials and $5,000,000 for research and development or electronic processing equipment.
Expanded Manufacturing Tax Incentives
H.B. 3 extends and restructures tax incentives currently available for reinvestment in Kentucky for certain automotive-related and other manufacturers to all Kentucky manufacturing facilities in a KEDFA-administered program. To qualify, a manufacturing company must: agree to make an investment of at least $2.5 million (reduced from $100 million under the old program) in eligible equipment and related costs, maintain at least 85% of its full-time employment base and cannot have received incentives for existing industry development in the past 5 years. As restructured, under this tax incentive program, a manufacturer could recover up to 50% of eligible equipment and related costs and up to 100% of skills training costs via income tax and LLET credits.
Small Business Tax Incentives Program
H.B. 3 establishes a small business income tax incentive program administered by KEDFA for
companies with fifty (50) or fewer employees. To qualify, a business must create just one new job and spend at least $5,000 on qualifying equipment or technology. Qualifying businesses will receive a nonrefundable annual credit against income tax or LLET of up to $25,000, and the program has an annual cap of $3 million.
Sales and Use Tax Credit for Communication or Computer Systems
H.B. 3 creates a refundable, non-interest bearing sales and use tax credit of up to 100% (less vendor’s compensation) of the cost of a communications or computer system for an eligible technology company that is classified under one of certain statutorily designated NAICS industry codes. To qualify for the credit, a company must: file an application with the Kentucky Department of Revenue for preliminary approval prior to making the purchase, make an expenditure of at least $100 million on or after July 1, 2010, install a qualifying system at a single Kentucky location within eighteen months of purchase, and use the system for the full federal income tax depreciation period. It must also request a refund within 60 days after the completed installation of the qualifying system.
Film Industry Tax Incentives
A new tax incentive program to be administered by the Kentucky Film Office, newly established within the Tourism, Arts and Heritage Cabinet, was also created by H.B. 3. Under this new program, anyone who films or produces a motion picture or entertainment production, commercial or documentary could qualify to recover up to twenty percent (20%) of qualifying expenditures and recoverable payroll in refundable income tax and LLET credits. Qualifying
expenditures include those expenditures made in Kentucky that are directly used in or for a motion picture or entertainment production such as: the production script; set construction; wardrobe; set location, facilities, equipment and vehicle rental; photography; editing; food; and, accommodations. Recoverable payroll is that of “above the line” staff, generally higher-paid employees whose salaries are negotiated prior to production (limited to $100,000 per employee), and also that of “below the line” staff.
H.B. 3 increases the maximum income tax or LLET credit (30% for owner occupied residential property and 20% for all other property) for qualified rehabilitation expenses of certified historic structure approved by the Kentucky Heritage Council from $3,000,000 to $5,000,000 for applications received on or after April 30, 2010. The credit will be refundable and transferable.
The Bill also amends the computation of motor vehicle usage tax, which is levied at the rate of 6% on the purchase of a new vehicle. Rather than paying tax on the full sales price, effective September 1, 2009, the tax will be computed on the sale price less the value of a trade-in vehicle.
There are several other provisions with a more targeted impact:
· The pari-mutual betting excise tax is amended to create an exemption for wagering on an international horse racing event, presumably to attract a Breeders Cup race.
· A qualified taxpayer, i.e., a party to the Metropolitan College Consortium Agreement, may qualify for a 50% tax credit for tuition and other educational expense paid on behalf of a student participating in the Metropolitan College.
· Sales and use tax refund incentives for tourism development projects, administered by the Kentucky Tourism, Arts and Heritage Cabinet, were also revised to expand their availability to various types of tourist-related projects.
· Revisions were also made to the current tax increment financing (“TIF”) program for Signature Projects and a loan support program was also established.
· Income tax and LLET credits were created for railroad maintenance and improvement and for railroad expansion or upgrades to accommodate the transport of fossil energy or biomass resources.
· A structure for the construction, operation, financing (including tolls), and oversight of significant transportation projects between Kentucky and Indiana was established including the Kentucky Public Transportation Infrastructure Authority which would oversee such a project which could include new bridges between Louisville and Southern Indiana.
Tax Benefits Specifically for Individuals
H.B. 3 provides for a $5,000 nonrefundable new home tax credit against the individual income tax and has an overall cap of $25 million. The credit may not be carried forward or back, and is only available to those who do not qualify for the federal first-time homebuyer credit. To qualify, an individual must purchase a previously unoccupied home within the approved time (an approximately one year period beginning in July 2009), and it must be the purchaser's principal residence for at least 2 years from the purchase date. Additionally, the Department must receive the application within 7 calendar days from the purchase date, and the application must be received prior to the cap being reached.
Beginning with the 2010 calendar tax year, active duty military pay, including compensation for state active duty, is excluded from income for individual income tax purposes.