To conclude our series on State & Local Tax and Sales & Use Tax for technology companies, we explore a few lucrative state credits and incentives not to pass up. While the R&D credit is probably the most common credit that tech companies take advantage of, our specialists shed light on other, less commonly known credits and incentives.
Cherry Bekaert Tax Partner, Tim Larson, welcomes two members of our Tax Credits & Incentives Advisory group: Director, Melinda Young, and Senior Manager, Nick Cousino. Together, they discuss just how much companies could receive in state credits and incentives through the Job Tax, Employee Retention and Angel Investor credits. They’ll also explain how companies that own and operate data centers can qualify for notable tax incentives.
The conversation includes:
- Location-Based Job Tax Credits
- Disaster Employee Retention Credits
- Credits for Companies that Own and Operate Data Centers
- Angel Investor Credits & Incentives
If you haven’t already, catch up on the first three episodes in the series:
- Episode 1: What Tech Companies Overlook in Sales Tax Reporting
- Episode 2: Sales Tax Best Practices for Technology Sellers
- Episode 3: Three State and Local Tax Issues Tech Companies Need to Address Now
Other relevant insights:
- Transferable State Tax Credits: Opportunities to Reduce State Taxes
- State Taxes and a Remote Workforce
View All Technology Podcasts
TIM LARSON: Welcome everyone and thank you for tuning in to the fourth and final episode in this short series exploring tax issues and opportunities specifically for technology companies. My name is Tim Larson and I'm a tax partner in Cherry Bekaert's Austin office. Here with me today are two members of our credit and incentives team, Melinda Young and Nick Cousino. Melinda, Nick, welcome.
MELINDA YOUNG: Glad to be here.
NICK COUSINO: Happy to be here.
TIM LARSON: I want to start today's conversation by acknowledging that the research and development credit is probably the most common credit that technology companies take advantage of. We have a number of resources published that listeners can consult if they'd like more detail. Today, I thought we could dive into some other credits and incentives that tech companies may not be as aware of.
MELINDA YOUNG: There are many nuanced areas of state credits and incentives. For tech companies in particular, it can get tricky since oftentimes there's relatively little property involved. The first credit that comes to mind for a tech company is the location-based job tax credit. Many states offer a job tax credit for a company adding new employees to their workforce.
MELINDA YOUNG: For example, Georgia offers a credit up to $4,000 per job for a five-year period, which would total $20,000 if you create the job and maintain it. Depending on the company location, the credit can be used to offset the company's income tax liability first, and then any excess credit can be used to offset payroll withholding tax. Essentially, that functions like cash to the company.
MELINDA YOUNG: South Carolina offers a similar credit to Georgia. You can earn up to $125,000 per job over a five-year period if you are located in a more distressed area in the state. Currently, there are 12 counties that qualify for the Jumbo Tax Credit, Charity County being one of the new counties added to the list in 2022.
TIM LARSON: $125,000 per job? I don't know many companies that would pass up that type of benefit. It could help them hire and retain employees. Can companies qualify for these credits if they already hired the employees?
NICK COUSINO: Absolutely. These job tax credits are statutory in nature and can be applied on a retroactive basis. If you meet the statutory requirements, such as the number of jobs created and the average wage paid, you will qualify for the credit.
NICK COUSINO: On a prospective basis, if you're adding more than 25 jobs at a single location, we can also look at potential tax incentives that we can negotiate with state and local governments. Since the pandemic, states have been focusing on providing incentives for job retention and job creation specifically. For example, states like California and Texas are offering training grants to help companies upskill their employees.
TIM LARSON: The labor shortage is a significant issue right now, with many open positions and not enough workers. We're experiencing that ourselves. It's good to see states providing training grants to incentivize companies to maintain their workforce. Are there any other credits available for job retention?
MELINDA YOUNG: Another opportunity is the Disaster Employee Retention Credit. Do not confuse this credit with the Payroll Employee Retention Credit. The Disaster Credit is taken against federal income tax and is reported on Form 3800 as a general business tax credit.
MELINDA YOUNG: The credit is available when companies were affected by a natural disaster and continued to pay their employees when the business became inoperable. The term "inoperability" is vaguely defined by the IRS, so we look at direct and indirect factors such as supply chain interruption, decreases in employee attendance, or community financial impacts to determine a company's eligibility.
TIM LARSON: What types of natural disasters are we talking about here?
MELINDA YOUNG: Examples include hurricanes and wildfires. Any major disaster declared by the president where individual assistance is offered will qualify for the credit. These qualified disaster areas are normally designated on a county-by-county basis.
MELINDA YOUNG: For example, in 2019 there were 15 qualified disasters across 10 states, and in 2020 there were 20 disasters across 12 states. Notable disasters in 2020 included tornadoes in South Carolina and Tennessee, and the hurricane that impacted Louisiana, Alabama, and Mississippi. These credits are based on wages paid to employees during the qualified disaster period. Employees could be working, not working, or working at a different location and still qualify for the credit.
TIM LARSON: This disaster credit seems like a significant opportunity for technology companies since many employees are salaried and can work from different locations during disasters. So far we've talked a lot about employee-related credits. Are there other credits available for technology companies?
MELINDA YOUNG: Yes. Many tech companies operate data centers. About 20 to 30 states offer tax incentives for data centers, which can include property tax abatement, sales tax exemptions, or income tax credits on data center equipment. In some states, the electricity used by the data center may qualify for a sales tax exemption, such as Texas and the Carolinas.
MELINDA YOUNG: An application must be filed for these incentives and investment requirements vary by state. Some states require a $15 million investment to qualify, whereas Texas may require a $200 million investment and the creation of 20 jobs. We can help companies navigate the application and approval process.
MELINDA YOUNG: Another opportunity, aside from data center incentives, is angel investor credits, which are commonly seen in the tech industry. I'll let Nick discuss that.
NICK COUSINO: Twenty-nine states offer angel investor-style credits or incentives. The purpose of these credits is usually to encourage individuals to invest capital in startups in exchange for a credit against the angel investor's income tax.
NICK COUSINO: Typically the credit is calculated as a percentage of the individual investor's investment in the company. We recently assisted a client interested in investing in a Connecticut cannabis company. Connecticut is offering angel investors in cannabis companies a 40% tax credit on their investment.
NICK COUSINO: Keep in mind the investment needs to be a valid business opportunity. It cannot be made solely for the tax credit. Also, there are potential clawbacks when you sell your investment later on. Some states have a clawback where you may need to repay the credit or pay taxes on that.
TIM LARSON: That's helpful context. Both of you have raised opportunities that even after 30 years as a tax partner I still learn from. Thank you both for joining and sharing your insights. For listeners, our team will be glad to answer any questions you may have about credits and incentives for your technology company. We'll include Nick and Melinda's contact information in
PRODUCER: the episode description. Please be sure to check out our other podcast episodes for the technology industry wherever you listen. Thanks everyone.
