New-boat sales are holding strong this year, and there’s healthy optimism that demand will continue to grow as we escape the burdens of the pandemic. Many companies will seek to benefit from this momentum: New players will enter the market, established ones will look to expand, and others may relocate to less-competitive markets. Choosing the right location can be a difficult decision filled with unknowns, but state tax credits should not be a mystery.
State tax credits go straight to your bottom line, often as actual dollar-for-dollar offsets against taxes owed or paid. The availability of these credits should significantly affect your choice of business location. The challenge is keeping up with the tax codes of 30 coastal states. Below are a few common state credits to consider.
R&D Tax Credit
The research and development tax credit is an excellent opportunity to recoup current and previous-year expenses for qualified ongoing and completed R&D projects. Taxpayers of any size that design, develop, or improve products or processes are eligible for the credit. Not only can businesses claim this credit on their federal taxes, but in 34 out of 50 states, businesses can claim the R&D credit on their state taxes, as well.
While the computation can be complex, most companies receive federal credits of 9 percent to 20 percent of total qualifying expenditures. State credits generally equal 5 percent to 10 percent of total qualifying expenditures. If your company has been engaged in qualifying activities for the past several years, you may be eligible to retroactively claim these credits.
The definition of what qualifies is broad. Boatbuilders, for example, can claim the credit for activities such as developing a new model, experimenting with new lamination schedules to improve the manufacturing process, performing center-of-gravity or hydrodynamic studies, or working on propeller and engine-height design changes.
Dealer networks and other ancillary marine businesses, such as insurance brokers and financers, might qualify for the credit based on investments in new software. Off-the-shelf software systems do not qualify, but if a company hires a U.S.-based third party to customize software, those expenses may generate a credit. If your company has invested in new software for enterprise resource planning, customer management, inventory management or point of sale, you may qualify for this valuable tax-planning tool.
State Hiring Credits
Nearly every state offers employers incentives focused on job creation and on ensuring that businesses within the state remain successful and competitive. These tax credits encourage employers to create jobs, expand their existing payrolls, or retain or retrain current employees for new roles. These incentives are collectively known as state hiring credits.
For example, businesses in Georgia can take advantage of multiple job creation tax credits that provide as much as $5,000 in annual tax savings per job for up to five years. After offsetting corporate income tax liability, excess tax credits can also offset a company’s payroll withholding, as well.
Furthermore, many states offer “piggyback” credits for the federal Work Opportunity Tax Credit. This means that qualifying for the WOTC can earn double benefit: one federal credit and one state credit. The WOTC is designed for employers that hire individuals from target groups of Americans who have historically faced higher rates of unemployment, such as veterans, previously incarcerated people, the long-term unemployed, summer youth, and individuals receiving assistance from certain federal programs.
Headquarters tend to have higher-paying jobs, and the location often means the state can impose a sales tax. To offset this tax burden, some states offer generous incentives for locating your headquarters in their state.
A headquarters usually means an office where managerial and other core functions (such as financial, legal and personnel) are performed. Credits can reduce your tax payments or sales tax payments, or be paid directly to your business as a refundable credit.
For example, Mississippi’s Headquarters Credit equals $500 to $2,000 per job position in the state, an amount that reduces state income tax of the business.
Opportunity Zones are geography-based tax incentives. The Opportunity Zones program, part of the Tax Cuts and Jobs Act of 2017, provides an option for investors to profit and spur investment in undercapitalized communities.
Locating operations within an Opportunity Zone can provide three tax benefits: delaying payment of capital gains tax on gains invested into an Opportunity Zone until the end of 2026 or upon earlier sale of qualified assets; reducing capital gains for Opportunity Zone assets purchased by Dec. 31; and avoiding capital gains for investments held for at least 10 years in Opportunity Funds (the investment vehicle that invests in Opportunity Zones).
Qualified Opportunity Zones can be located at the U.S. Department of Housing and Urban Development’s website (opportunityzones.hud.gov/resources/map).
Business owners interested in learning more about these and other tax benefits should hire an experienced tax adviser. A strong tax adviser will provide information on availability and eligibility of state- and geographic-based tax incentives. n
For more information about state tax credits and their effects on the marine industry, visit Cherry Bekaert’s website (cbh.com/services/tax/credits-accounting-methods/) and reach out to Ron Wainwright and Michael Laur at the firm.
Cherry Bekaert’s Ronald G. Wainwright (email@example.com) is partner, tax, national leader credits/accounting methods. Michael C. Laur (firstname.lastname@example.org) is senior manager, credits/accounting methods. Russell R. Guilfoile (email@example.com) is a manager, credits/accounting methods.
This article was originally published in the June 2021 issue.