The Marcum 2016 Year-End Tax Guide continues our tradition of providing timely tax guidance for the upcoming year.
Enterprise Zone Programs
Connecticut was the first state in the country to establish Enterprise Zones. There are currently 17 Enterprise Zones in Connecticut, including Bridgeport, Hartford, New Haven, Norwich, and Windham. An Enterprise Zone is a designated area in a Targeted Investment Community (a municipality with a designated Enterprise Zone). Incentive benefits are provided for eligible business relocation/expansion projects within a zone. Eligible businesses include manufacturers, warehouse distributors (new construction/expansion only) and certain designated service-related businesses.
- A 5-year, 80% abatement of local property taxes on all qualifying real and personal property.
- 10-year, 25% or 50% credit on that portion of the Connecticut Corporate Business Tax that is directly attributable to the business relocation, expansion or renovation.
- Exemption from real estate conveyance tax.
In order to receive these benefits, a municipality must meet certain criteria.
Urban Jobs Program
This program provides benefits to eligible companies located in a Targeted Investment Community, but outside of the Enterprise Zone, that do not receive Enterprise Zone-level benefits. Urban Jobs benefits are lesser benefits than those of the Enterprise Zone-level, but the same qualifying criteria generally apply. An inducement letter is required with each application.
Benefits can include a property tax abatement of up to 40% and an income tax credit of up to 15% for the creation of new jobs.
Machinery and Equipment Expenditure Tax Credit
A tax credit may be applied against the tax imposed for expenditures in machinery and equipment by corporations that have no more than 800 full-time, permanent employees in Connecticut.
Machinery and equipment that are considered eligible for this credit include the basic machine itself, including all of its component parts such as belts, pulleys, shafts, moving parts, operating structures, replacement and repair parts, whether purchased separately or in conjunction with a complete machine and regardless of whether the machine or component parts are assembled by the taxpayer or another related party. All equipment or devices used or required to control, regulate, or operate the machinery, including, without limitation, computers and data processing equipment.
- 5% Tax Credit
A tax credit equal to 5% of the incremental increase in expenditure for machinery and equipment is available if the corporation employs between 251 and 800 full-time, permanent employees whose wages, salaries, or other compensation is paid in Connecticut.
- 10% Tax Credit
A tax credit equal to 10% of the incremental increase in expenditures for machinery and equipment is available if the corporation employs not more than 250 full-time, permanent employees whose wages, salaries, or other compensation is paid in Connecticut.
Second Insurance and Reinvestment Fund Tax Credit
The Second Insurance Reinvestment Fund tax credit is available to insurance companies that invest eligible capital with approved fund managers, who in turn invest such capital in eligible businesses. This eligible capital includes an investment of cash that fully funds the purchase price of an equity interest in the insurance reinvestment fund or an eligible debt instrument issued by the reinvestment fund, at par value or a premium.
In order to be eligible for this 10-year credit program, a business must have its principal business operations in Connecticut, fewer than 250 employees at the time of investment, and not more than $10 million in net income in the previous year. The tax credit is administered by the Department of Economic and Community Development (DECD).
Urban and Industrial Site Reinvestment Tax Credit
A tax credit administered by the Department of Economic and Community Development (DECD) is available to be applied against investments in eligible industrial site investment projects or eligible urban reinvestment projects.
Eligible industrial site investment project means a project located in Connecticut for the development or redevelopment of real property in which the program is necessary for the project to attract private investment.
Eligible urban reinvestment project means a project that adds important new economic activity and jobs in a new facility within the eligible municipality where the project is located and which will generate significant additional tax revenues to the state or the municipality. This project must be economically viable and provide economic benefits to the state that outweigh the costs of the project.
The tax credit is allowable over 10 years and can be up to 20% of the investment.
Fixed Capital Investment Tax Credit
A tax credit may be applied for amounts paid or incurred by a corporation for fixed capital.
Fixed capital means any new tangible personal property that meets all of the following criteria:
- It must have a class life of more than four years;
- It must have been purchased from someone other than a related person (individual, corporation, partnership, association, or trust controlled by the corporation);
- It is not leased or acquired to be leased to another person within 12 months of purchase;
- It will be held and used in Connecticut by a corporation for a period of at least five full years following its purchase; and
- It does not include inventory, land, buildings/structures, and mobile transportation property.
The tax credit amount is 5% of the amount paid or incurred by a corporation for any new fixed capital investment. No corporation claiming this tax credit shall claim any other tax credit against any tax with respect to the same investment. Any tax credit not used during the income year in which the acquisition was made may be carried forward to the next five succeeding income years until the entire tax credit is used. No carryback is allowed.
Human Capital Investment Tax Credit
A tax credit may be applied for expenditures made by a corporation for human capital investment. However, salaries, payroll taxes and fringe benefits earned by employees during training are not expenditures eligible for this tax credit. In order to apply, businesses must complete Form CT-1120 HCIC, Human Capital Investment Tax Credit, and attach it to Form CT-1120K, Business Tax Credit Summary, along with all required detailed schedules.
Human capital investment means:
- In-state job training of persons employed in Connecticut;
- In-state job training expenditures include training materials, direct expenses, course registration fees, and travel costs within Connecticut.
- Work education programs in Connecticut such as in public high schools or work education diversified occupational programs;
- Worker training and education of persons employed in Connecticut provided by Connecticut institutions of higher education;
- Donations or capital contributions to institutions of higher education in Connecticut for improvements or advancement of technology, including physical plant improvements;
- Planning, site preparation, construction, renovation, or acquisition of facilities in Connecticut for the purpose of establishing a day care facility to be used primarily by the children of employees in Connecticut;
- Child care subsidies paid to employees in Connecticut for child care provided in Connecticut; or
- Contributions made to the Individual Development Account Reserve Fund administered by the Connecticut Department of Labor.
The tax credit is equal to 5% of the amount paid or incurred by the corporation for a human capital investment. Any tax credit not used during the income year may be carried forward to the next five succeeding income years until the entire credit is used. No carryback is allowed.
Digital Animation Tax Credit
A Digital Animation tax credit is available to state-certified digital animation production companies that participate in digital animation production activities on an ongoing basis. This tax credit is administered by the Connecticut Department of Economic and Community Development (DECD).
For the purposes of this credit, digital animation production company means any business entity that is engaged exclusively in digital animation production activity on an ongoing basis and that is qualified by the Secretary of the State to engage in business in the state.
State-certified digital animation production company means a digital animation production company that maintains studio facilities located within the state where production activities take place, employs at least 200 full-time employees, is in compliance with the regulations, and has been certified by DECD.
The tax credit is equal to:
- 10% for production expenses or costs of $100,000 to $500,000.
- 15% for production expenses or costs of more than $500,000 to $1 million.
- 30% for production expenses or costs in excess of $1 million.
- No carryforward or carryback is allowed.
Green Buildings Tax Credit
For income years beginning on or after January 1, 2012, a tax credit is available for eligible construction, renovation, or rehabilitation projects. An eligible project means a real estate development project that is designed to meet the LEED Green Building Rating System gold certification standards or an equivalent certification determined by the Department of Energy and Environmental Protection.
Eligible projects must use Energy Star equipment and appliances, and must have energy use that does not exceed 70% for new construction projects or 80% for renovation or rehabilitation projects.
- The tax credit is equal to the allowable costs multiplied by the applicable tax credit percentage.
- The tax credit percentage depends on the certification level of the project, as follows:
Type of Eligible Project LEED Green Building Rating Tax Credit Percentage New Construction Gold 8% Major Renovation Platinum 10.5% Core and Shell Gold 5% COmmercial Interior Projects Platinum 7%
- The tax credit percentage from the above table increases by 0.5% if the eligible project is either a mixed-use development, is located in a brownfield or enterprise zone, does not require a sewer extension of more than 1/8 mile, or is located within ¼ mile distance of bus transit, rail, light rail, streetcar, or ferry services.
- Excess tax credit may be carried forward for up to five income years. No carryback is allowed.
- The initial tax credit voucher issued by DEEP will indicate the first income year that the tax credit may be claimed. A taxpayer may claim only 25% of the total amount of allowable costs in any year.
Donation of Land Tax Credit
Taxpayers that donate open space land or land for educational use in income years beginning on or after January 1, 2013, will be able to claim a tax credit for such donations.
The Donation of Land Tax Credit is available to businesses that donate:
- Any land to the state, a political subdivision of the state, a water company, a nonprofit land conservation organization, where the land is to be permanently preserved as protected open space or used as a public water supply source.
- Any land to the town, city, or borough, whether consolidated or unconsolidated, and any school district or regional school district for the purpose of schools and related facilities.
The tax credit available is equal to 50% of any donation of open space land and land for educational use. It may be carried forward for a period of 25 successive years until the tax credit is fully taken. However, no carryback is allowed.
Neighborhood Assistance Act Tax Credit
This tax credit is for businesses that make cash investments of at least $250 to certain community programs. The cash investments must be made in a community program that is proposed and conducted by a tax exempt or municipal agency, and must be approved by the municipality in which the program is conducted and the Department of Revenue Services (DRS).
- A tax credit equal to 100% of the cash invested is available to businesses that invest in energy conservation projects.
- A tax credit equal to 60% of the cash invested is available to businesses that invest in programs that provide community-based alcoholism prevention or treatment programs; neighborhood assistance; job training; education; community services; crime prevention; construction or rehabilitation of dwelling units for families of low and moderate income in the state; funding for open space acquisitions; child day care facilities and services; and any other program which serves individuals at least 75% of whom are at an income level not exceeding 150% of the poverty level for the preceding year.
- No carryforward is allowed. Any tax credit not taken in the income year in which the investment was made may be carried back to the two immediately preceding income years (beginning with the earlier of the two years).
- Tax-exempt entities and municipal agencies desiring to obtain benefits under the NAA tax credit program must complete Form NAA-01, Connecticut Neighborhood Assistance Act Program Proposal.
The NAA tax credit program has several statutory limits. There is a maximum of $150,000 in total tax credits annually for each business and a $5 million cap for the total amount of all tax credits allowed. Additionally, tax credits cannot exceed $50,000 per income year for investments in child care facilities. However, no business can claim both the tax credit for investments in child care facilities and the Human Capital Investment tax credit in the same year. The minimum contribution for a tax credit is $250.
Research and Experimental (Incremental) Expenditure Tax Credit
A tax credit may be applied against the tax imposed for an incremental increase in research and experimental expenditures conducted in Connecticut.
For the purpose of the credit, research and experimental expenditures are defined as all costs associated with the development or improvement of a product, including any pilot model, process, formula, invention, technique, or patent (including attorney fees and other obtaining costs). The product can be used by the corporation in its business or can be held for sale, lease, or license. This includes expenditures that represent experimental or laboratory research and development costs.
- In order to obtain the credit amount, multiply 20% of the excess of the research and experimental expenditures conducted in Connecticut during the current income year over the amount spent on such expenditures during the preceding income year.
- The tax credit shall be carried forward for 15 successive income years until the tax credit is fully taken. No carryback is allowed.
- Complete Form CT-1120RC, Research and Experimental Expenditures Credit, and attach it to Form CT-1120K, Business Tax Credit Summary.
Research and Experimental (Non-incremental) Expense Tax Credit
A tax credit may be applied against the tax imposed for non-incremental research and development expenses incurred in Connecticut.
Research and development expenses mean basic research and expenditure payments incurred for experimentation. This includes, but is not limited to, expenditures incurred for the development or improvement of a product, including any pilot model, process, formula, invention, technique, or patent (including attorney fees and other obtaining costs).
A qualified small business is entitled to a tentative tax credit equal to 6% of its research and development expenses. Qualified small business are companies that do not exceed a gross income of $100 million and have not met the gross income test through transactions with a related person.
All other companies calculate their tax credit as follows:
|Research and Development Expenses||Tentative Tax Credit Percentage|
|$50 million or less||1%|
|More than $50 million but not more than $100 million||$500,000 + 2% over $50 million|
|More than $100 million but not more than $200 million||$1,500,000 + 4% over $100 million|
|More than $200 million||$5,500,000 + 6% over $200 million|
If it results in a greater tentative tax credit, companies headquartered in an Enterprise Zone, with revenues in excess of $3 billion and employing more than 2,500 employees shall multiply their research and development expenses by 3.5% instead of using the tax credit percentage listed above.
Taxpayers that pay or incur more than $200 million in research and development expenses in an income year must reduce their Research and Development tax credit if workforce reductions exceed certain percentages, as follows:
|Workforce Wage Base Reduction Percentage||Reduction Percentage|
|Not more than 2%||0%|
|More than 2% but not more than 3%||10%|
|More than 3% but not more than 4%||20%|
|More than 4% but not more than 5%||40%|
|More than 5% but not more than 6%||70%|
|More than 6%||100%|
Allowable tax credits that exceed the limitation amounts may be carried forward to each successive income year until such credits are fully taken. All allowable tax credits from prior years must be carried forward and applied before the current year tax credit may be taken. No carryback is allowed.
How to Compute Tax Credit:
The allowable tax credit is the lesser of:
- One-third of the amount of the tax credit allowable for any income year; or
- The greater of:
- 50% of the taxpayer's tax liability, determined without regard to any tax credits allowed by this tax credit; or
- The lesser of 200% of the tax credit otherwise allowed for the income year or 90% of the taxpayer's tax liability, determined without regard to this tax credit.
Calculate the tax credit by multiplying the amount spent on research and development conducted in Connecticut by the appropriate percentage. The calculation reported on Form CT-1120 RDC, Research and Development Credit, must be entered on Form CT-1120K, Business Tax Credit Summary.
Electronic Data Processing Tax Credit
A tax credit equal to 100% of the personal property tax owed and paid on electronic data processing (EDP) equipment during any income year may be applied against imposed taxes.
Electronic data processing equipment includes, but is not limited to, computers, printers, peripheral computer equipment, bundled software, and any computer-based equipment acting as a computer.
The amount allowed as a tax credit is 100% of the Connecticut personal property tax owed and paid in any income year on EDP equipment. This does not include interest or penalties paid. If the amount of tax credit allowable in any income year exceeds the taxes imposed, then any unused tax credit balance may be carried forward to any of the five succeeding income years. However, no carryback is allowed.
In order to apply, complete Form CT-1120 EDPC, Electronic Data Processing Equipment Property Tax Credit, and attach it to Form CT-1120K, Business Tax Credit Summary, and/or Form CT-207K, Insurance/Health Care Tax Credit Schedule.
For more information on Connecticut's tax credits and incentives, please visit www.ct.gov
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