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Proposed Bill Creates New Tax Incentives and Significantly Expands Some Existing Incentives

03.04.2009

House Bill 229 (“HB 229”), introduced in the 2009 General Assembly, would replace and combine several Kentucky tax incentive programs, authorize new programs, and would also make significant changes to other existing programs, if enacted. It is reportedly supported by Governor Steve Beshear. HB 229 was posted for passage in the Regular Orders of the Day for March 3, 2009.

H.B. 229 will create a new “Combined Credit Program.” This program is designed to consolidate the Kentucky Rural Economic Development Act (“KREDA”), Kentucky Economic Opportunity Zone (“KEOZ”), Kentucky Job Development Act (“KJDA”), and Kentucky Industrial Development Act (“KIDA”) programs. Qualifying companies would include those in manufacturing, agribusiness, and non-retail service or technology as well as national or regional headquarters operations, regardless of the underlying business.

Under the Combined Credit Program, an eligible company could recover start-up costs and fifty percent (50%) of estimated annual rent through the term of the incentive agreement for a lease project or start-up costs and costs of land, building, site development, fixtures and equipment costs for an entity that owns its facilities. Recovery would occur via Kentucky income tax credits and wage assessments retained by the business, dependent upon local participation and the location of the project. Advance disbursement of funds would be available for those projects with costs of over $500 million.

The Bill would also authorize a credit to an employer for payment of tuition on behalf of its employees. A company that qualifies for the Combined Credit Program would also qualify for this tax incentive. A company could recover up to fifty percent (50%) of the tuition paid for any number of employees, bur not in excess of the number of new jobs created or retained, as an income tax credit for a term of six (6) years. It is not required that the employees receiving tuition reimbursement be the employees hired under the program. The employer must pay at least fifty percent (50%) of tuition. Recent Amendments would cap the annual credit at $5,000,000 and allow the credit only for tuition of Kentucky residents. After the original incentive term expires, the employer must create at least five (5) additional new jobs to re-qualify for the incentive.

Another new program created under H.B. 229 is a sales tax incentive for communications or computer systems. This program allows an eligible business to recover sales and use tax paid on qualifying purchases of communication or computer systems. In order to qualify, a business must make an expenditure of at least $200 million or more, 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. A business qualifies if it is included within certain NAICS categories such as: software publishers; data processing or hosting; internet publishing, broadcasting, and web search portal businesses; and, custom computer programming services.

A new tax incentive for the film industry would also be created by the Bill. Under HB 229, any person who films or produces a feature-length film, television program, documentary, or commercial within Kentucky could recover up to twenty percent (20%) of qualifying expenditures and payroll in income and limited liability entity tax credits. As originally submitted, the Bill would create a transferable and refundable credit. A recent Amendment makes the credit nonrefundable and nontransferable. “Qualifying expenditures” include amounts paid for scripts, set construction, design and operation, wardrobe, lease or rental of real property, photography, sound, writing, editing, and other services. “Recoverable payroll” is that of “above the line” staff, generally higher-paid employees whose salaries are negotiated prior to production, and “below the line” staff. The amount recoverable is limited to payroll expenses of $100,000 for “above the line” employees.

Regarding existing incentives, HB 229 would extend the incentives currently available for reinvestment in Kentucky for certain automotive-related and other manufacturers to all Kentucky manufacturing facilities. Currently, this incentive covers new equipment and construction costs for manufacturing facilities; however, the Bill proposes to cover the cost of training to upgrade employees’ skills too. Currently, up to ten percent (10%) of costs may be recovered through income and limited liability entity tax credits, but if approved, H.B. 229 would expand recovery to fifty percent (50%) of eligible equipment and related costs, as well as one hundred percent (100%) of the costs of skills training.

To qualify, a company would have to agree to maintain at least eighty-five percent (85%) of its full-time employment base and must not have received incentives for existing industry development in the past five (5) years. Also, a company eligible for the incentive could receive an advance disbursement of up to thirty percent (30%) of approved costs. The advance disbursement would be treated as a loan to be repaid by application of the available tax credits to the balance.

HB 229 would increase the income tax credit for qualified rehabilitation expenses of certified historic structure from $3,000,000 to $5,000,000. And, the credit would become refundable.

Also, H.B. 229 would recodify the provisions contained of the Kentucky Enterprise Initiative Act. These provisions would essentially remain the same but the recoverable sales and use tax under this incentive program would be amended to cover expenditures for electronic processing in addition to the construction and research and development equipment expenses currently allowed.

If you have questions about this topic or any other legal issue, please contact any member of the firm's State and Local Tax Team.

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