What are Transferable US Tax Credits?

In the United States, transferable credits available to businesses are regulated by the Internal Revenue Service and State, Regional and Local Tax Boards. The Military and Native Americans also have governing and tax authority in special cases.

A tax credit is an amount in dollars that is allowed to reduce a business’ income tax debt to the IRS or State or local taxing agency. Business’ that don’t owe income tax, due to operating losses or other factor can, in some cases, carry over the loss to the next tax year to offset income taxes due in that year.

An imposed tax is excise taxes such as the taxes that are built into the price of each gallon of gas. These taxes are imposed to cover the cost of building, maintaining and improving public infrastructure such as railroads, paved roads and bridges.

Trucking business pays special use tax and heavy vehicle road taxes to Federal and State Agencies. Since an excise tax is automatically imposed with every gallon of gasoline or diesel fuel purchased, businesses with a very high purchases of gas or fuel can claim a refund amount of that tax on their quarterly tax form or claim a credit against income taxes that would otherwise be due to avoid the unfair paying of the infrastructure tax twice. In simple terms, nearly all tax credits offset the amount of income tax that would otherwise be due to the Federal, State or local taxing agency.

Some tax credits are transferable to other tax payers. For example, if a company sets aside land for a conservation easement and the State allows a transferable tax credit, when the company sells the land, the new owner can assume and claim the income tax credit that remains available on that land easement.

The most commonly used and widely available tax credits were originally tied to the energy utilized and pollution generated by large manufacturers and polluters. The system of pollution credits was not tied to taxes but to emissions as a way to deal with smog issues that were choking large metropolitan areas such as greater Los Angeles.

In the Los Angeles Basin, the Government defined a cap in metric tons on each type of emissions emitted that contributed to pollution (smog) a common example is sulfur dioxide. Large sulfur dioxide emitting corporations were allotted a certain amount in tons of sulfur dioxide release allowable per year; if the company went over that amount they were stiffly fined.

Conversely, if the company emitted less than they were allowed, they could sell the remaining credit tons to another company in danger of going over its allotment. The pollution credit system heavily rewarded companies for reducing pollution and proved much more effective in reducing the smog problem in California than government regulation.

According to the Energy Policy Act of 2005 Tax Credits are available to Business applicants for a wide range of energy incentives. The Energy Policy Act covers all forms of energy from coal thru hydrogen and everything from drilling and generation plants to prototype cars. Energy Credits are issued by the Secretary of Energy or specific State agencies and are subject to the laws of the issuing entity.

Internal Revenue Code Sec 181 is widely known for creating federal incentives for entertainment companies. The purpose is to retain media productions dollars in the United States by providing tax credits for businesses that produce their movies here. More appealing is the ability to combine these credits with state incentives.

Federal Tax laws for the current tax year are often modified after the tax year closes and before the due date of April 15^th. Sometimes congress or the president will modify or add tax credits or rebates through September in response to a poor economy, real or perceived energy shortage or extraordinarily high energy prices.

How Sellers of These Credits Find Buyers

Many states including New Jersey, Maryland, North Carolina and Georgia are enabling the buying and selling of tax credits in the form of Net Operating Loss Carry Forwards (NOL’s). In essence, this practice allows for profitable companies to buy unused credits at a discount from other companies. This results in reducing corporate state tax obligation. The State Economic Development Authority generally administers this process in an effort to stimulate economic growth and expand industries within the state.

In some economically depressed areas, the city or regional development agency will advertise that it will allow property tax credits and will assume the necessary infrastructure change costs if a business chooses to locate there.

For example, an economically depressed town with a large amount of vacant land will use these incentives to attract a Super Wal-Mart to choose to locate in their town rather than a town it’s considering that’s 20 miles away. By allowing Wal-Mart to defer or forgo the normal permit fees and property taxes for a period of time the starts up costs for Wal-Mart are reduced and the local economy benefits from the revenue generated by jobs and consumer spending. The credits and promise of a cheap labor pool increase the willingness of the company to take the gamble of locating their store in an economically depressed area.

In many cases, development agencies will actually call corporate offices and ask if the corporation is considering building a store anywhere in the area and then send information or a sales person to pitch the available incentives to the company.

Other methods used include searching the Internet for coming soon announcements, watching the papers for fictions business name filings and sending someone to the City, County or State Department of Records to go through the publicly available records, a method highly publicized in the movie Erin Brocovich.

In the case of transferable property tax credits, the seller would typically advertise the available credit along with the property posting to provide incentive to potential buyers.

How Big is This Market?

Since no one business can qualify for all available incentives and the caps on the allowable credits change annually, the value of the market varies by industry and location. The transferable tax credit market is relatively small, but growing each year. In the case of the transferable Land Conservation tax credits, that at this writing is allowed by 3 states, each of those states have seen up to 3 fold increases in lands donated as conservation easements, causing other states to look into making their available tax credits transferable as well.

Potentially millions of Income tax dollars can be saved through the application of tax credits, the more profitable the corporation the bigger the amount of income tax that the corporation wants to avoid.

As pressure on the United States Government from other developed countries increases to clean up the environment and avoid further global warming, more tax credits are becoming available and transferable from corporation to corporation. Additionally, as companies expand their operations into other countries, they are receiving pressure to clean up their US operations from the countries their other offices are located in.

PriceWaterhouseCoopers, in a summer 2008 paper, claimed that companies will see that in the long term they can be both high performers and environmentally responsible, with the rewards outweighing the cost over an extended time. PriceWaterhouse predicts a potential of a Trillion dollars a year market in Carbon and Green Credits alone.

An entire industry has grown up around “green” building design and strategies to reduce energy usage with buildings being promoted internationally as examples of what can be done to reduce energy costs and preserve the earth’s resources. This movement is highly subsidized by limited time tax credits and loan programs to help get the movement off the ground.

Available Federal Tax Credits

There are an amazing and constantly shifting amount of tax credits available to business’ of all sizes, which explains why tax law is a booming specialty area. There are research credit, fuel surcharge credits, infrastructure credits, and bed tax credits available from Federal, State, City and Regional tax and economic development agencies.

Movie Production Federal Tax Incentive - In the 2004 tax act a Federal tax credit for film making with a 100% write of for up to $15 million of production costs provided that the work created does not include sexually explicit conduct. This tax credit expires Jan 1, 2009 and has been applied to a wide range of audio visual productions, including each episode of ongoing TV series.

Under this same law, independent producers can receive a tax credit for a movie made in a single year if 75% of that budget is spent in the United States. The cap on independent productions goes up to $20 million if that movie is made in a low-income area of the United States. This Federal incentive can be combined with State and Local Incentives.

Historic Preservation Credits - 20% of rehabilitation costs are available to commercial entities meeting Federal regulations which can be used in coordination with many State incentives, subject to meeting Federal criteria.

Conservation Easements and Land Gifts - Recent tax law changes allow for much higher Federal deductions for a longer period of time for conservation easements or land gifts, especially for farming or ranching operations. Laws recently enacted by congress and made retroactive to the 2008 tax year allow for up to $800,000 in credits over 15 years for a million dollar value donation.

The Conservation incentive was originally intended for landowners who cared for their land and were interested in conserving open space. Recently however, this credit has been horribly abused by developers and promoters who bought land intending to build large housing tracts but were unable to sell the units due to the housing bust. The IRS is cracking down on this abuse and tightening regulations and qualifications to stop unscrupulous parties from utilizing this incentive to regain lost revenue rather than preserve and care for open space.

An Overview of Available State Tax Credits

All State incentives are subject to each States Tax Boards rules and regulations and many have caps on the total dollar amount allowed for each year, must be applied for in advance and are issued on a first come, first served basis. For more information, see the resources page at the end of this document. Some state tax credits are transferable as noted. Not all states with incentives are included on this list.

California offers free on-line property permits for productions filmed on State property. Most cities or counties that impose a local hotel tax have a tax exemption for occupancies in excess of 30 days. Los Angeles and San Francisco also offer city tax rebates and incentives. Additionally, there is a 5% sales tax exemption on production or postproduction equipment. (Exemption is taken by the seller of the equipment and passed on to the buyer at the point of purchase.)

California also offers an unlimited Conservation Credit, subject to statewide caps, for land that is set aside for preservation and conservation. The rules are very restrictive and require a lot of time and effort; it is not a widely used program.

Colorado allows any production company that spends at least 75 percent of its production costs in Colorado can receive a 10% tax incentive if the expenditures meet State qualifications. Subject to annual caps. Colorado also offers a 20% rehabilitation credit for eligible properties that can be used with the 20% Federal rehabilitation tax for commercial property. Additionally, Colorado allows Conservation Credits for land that is set aside for preservation and conservation.

Connecticut supplies a 30% tax credit for qualified movie productions spending over $50,000 optioning or the purchasing of any intellectual property including, but not limited to, books, scripts, music or trademarks relating to the development or purchase of a script, screenplay or format, if the purchase meets the states restrictions. Connecticut also offers an unlimited Conservation Credits for land that is set aside for preservation and conservation.

Florida provides financial incentives for qualified productions of up to 15%, but production is capped at $25 million, with other restrictions. There is also an additional 5% for productions shot during hurricane season. There are further incentives for Rural and Urban jobs provided and designated enterprise zones.

Georgia allows and Investment Tax Credit of 9% for qualifying productions that spend at least $500K. There are additional incentives for underdeveloped areas. Additionally, Georgia allows 20% Rehabilitation credit for income producing properties. Georgia also offers Conservation Credits for land that is set aside for preservation and conservation.

Hawaii offers a refundable tax credit on qualified projects. The credit equals 15% of qualified production costs on Oahu and 20% on the other islands, subject to a $8 million cap per production. Hawaii’s high tech business investment tax credit provides a 100% return on cash investments in a "qualified high tech business" (QHTB) as state income tax credit disbursed over 5 years. This credit allows investors a 100% return for their investments of up to $2 million per year per QHTB. Moreover, if money from outside Hawaii is invested, the tax benefits can be transferred to Hawaii investors enabling up to a 150% return. For example, if a Hawaii investor put up $1,000,000 and an New Jersey investor invests $500,000, the parties can agree to transfer the tax credit, equal to $1,500,000 to the Hawaii investor (since the New Jersey investor doesn't pay Hawaii taxes and can’t claim the credit in New Jersey).

Maryland provides a 20% incentive for commercial properties. Maryland also offers Conservation Credits of 100% up to $5,000 per year with a 15 year carry forward for land that is set aside for donation of conservation easements.

New Mexico allows 50% for the rehabilitation of all properties listed in the State Register. New Mexico also offers up to $250,000 of transferable Conservation Credits for land that is set aside for preservation and conservation.

New York allows 30% of the 20% that qualifies for the Federal Rehabilitation Credit. New York also offers up to $100,000 applied to income taxes up to 25% of the owners property taxes in Conservation Credits for land that is set aside for the donation of conservation easements.

North Carolina provides a 20% credit for income producing commercial properties and 30-40% for non-income producing historical properties that meet State criteria. North Carolina also offers up to 25% of the donated value or $500,000 in Conservation Credits for Corporate land that is set aside for preservation and conservation.

South Carolina 10% for income producing properties that meet the criteria for the Federal Rehabilitation credit. South Carolina also offers up to $100,000 of transferable Conservation Credits for land that is set aside for preservation and conservation.

Virginia 25% for certified historic, income producing, properties. Virginia also offers transferable, unlimited Conservation Credits for land that is set aside for preservation and conservation; no more than $100,000 can be applied to State Taxes annually, and is subject to statewide caps.

How Sellers of Credits Find Buyers

Many states including New Jersey, Maryland, North Carolina and Georgia are enabling the buying and selling of tax credits in the form of Net Operating Loss Carry Forwards (NOL’s). In essence, this practice allows for profitable companies to buy unused credits at a discount from other companies. This results in reducing corporate state tax obligation. The State Economic Development Authority generally administers this process in an effort to stimulate economic growth and expand industries within the state.

Federally, Net Operating Losses are generally only applied for individuals, estates and trusts. Partnerships and S Corporations cannot claim them, but the individual shareholders and partners are allowed if all conditions are met.

The most common form of Net Operating Loss in business is when businesses have more expenses and deductions or credits, than income. The resulting loss can often be applied to offset income taxes due in an earlier by taking a credit against taxes that may be due in a later year or apply that credit to taxes payments due in later tax year, or a combination of both.

In recent times, carbon credits have become fashionable to buy for celebrities and politicians wanting to offset their jet setting ways and improve their public image. Arnold Schwartzenegger recently bought carbon credits from the 21,000 acre Fred M. van Eck Forest Foundation in Humboldt California to offset using his private plane to fly back and forth from his southern California home to his $1 a year paid job as the Governor of California.

Environmental groups may be artificially driving up prices of carbon credits by purchasing them for resale to private citizens rather than polluting corporations. An entire industry has popped up to sell “carbon credits” that don’t really even exist. In California, a certification program has been instituted to ensure that the carbon credits environmentally conscious consumers buy are actually offsetting carbon emissions, not just fattening someone’s bank account.

What Role do Banks Play in Financing These Credits?

Most businesses are run utilizing short-term or “bridge” loans from banks. The term bridge refers to bridging the gap between when a company generates income by receiving orders for goods or services and when the company is actually paid for those goods or services by the buyer.

The recent credit crisis has adversely affected companies of all sizes and even some states abilities to get these loans in a negative way, causing some businesses to close their doors and lay off employees, deepening the downward spiral effect. Some large companies are receiving emergency cash from non-traditional sources recently; Warren Buffet came to the highly publicized rescue of Goldman Sachs investment bank, infusing 5 billion dollars.

Mid to Small business owners are tapping personal funds in order to pay their employees and asking for extended credit from their suppliers in an effort to keep their businesses afloat until this credit crisis is relieved. The expected relief from the $700 billion bailout package passed by congress has failed to materialize thus far in the stock market, with market losses and corresponding company valuation losses continuing to spiral downward.

The impact of this credit crisis has spread worldwide and other developed countries are taking measures to try and stave off the disastrous effects seen here in the United States.

What is the Typical Discount on these Credits?

Like the recent credit markets, the discounts allowed for Net Loss Carryover and Conservation Easements credits depend on the desperation of the seller. The market discount typically works along the same lines as the cash value vs. long term value of money that is used to sell loan debt or long term income.

The most common example of the time value of money is lottery winnings. If the prize is $20 Million paid over 20 years, the winner can choose to take the cash value of the long term winnings in today’s cash value at a substantial discount and accept a $12 Million dollar lump sum today rather than waiting 20 years to receive the full $20 Million.

The same principal is used to value mortgage loans and loans of all types, with different factors affecting the present cash value of the loan, for example, certain types student loans are backed or guaranteed by the government, and so less risky and the present value of the loan is higher than a mortgage loan given with no down payment, shaky borrower credit and artificially inflated house valuation making the mortgage loan harder to sell and the discount expected much higher.
Resources - Information for Buyers, Sellers, Brokers, etc

As mentioned earlier, a new market has sprung up around the Carbon Credit and Green Building Industry. Some research is required to see which offers are legitimate and which are scams. As with so many industries, this one is largely internet driven and unscrupulous marketers abound.

Links provided in this paper were relevant at the time of publishing, but may expire or become irrelevant over time. The provider of this paper does not necessarily recommend these sites, they are provided as a resource for those wishing more information. As always, be aware and ensure that you are on a secure site before inputting any personal or credit information on any Internet site.

http://www.doe.gov The United States Department of Energy Web Site, very up to date information straight from the agency responsible for Energy regulation in the United States.

http://www.irs.gov Business and Personal Tax information from the Internal Revenue Service.

http://www.chicagoclimatex.com/ Links you to the Chicago Climate Exchange, founded in 2003. Numerous resources and explanations of the Carbon Credit Market in the North Eastern United States.

http://www.energystar.gov/index.cfm?c=products.pr_tax_credits Is the link to the Energy Star tax credit program. This program is available to both consumers and commercial builders as well as appliance manufacturers.

http://www.rggi.org/home The Regional Greenhouse Gas Initiative’s website. The first mandatory, market based Greenhouse Gas Initiative in the United States.

http://www.usgbc.org/ the US Green Building Council, a non-profit resource for builders who want to include green building practices in their engineering plans for both commercial and home applications.

http://www.pointcarbon.com/ A web resource from a worldwide perspective for both energy and environmental markets. News stories, links to conferences, carbon markets and other resources. Subscription may be required.

http://www.ecobusinesslinks.com/carbon_offset_wind_credits_carbon_reduction.htm boasts links to over 11,000 earth friendly sites.

http://www.preservationnation.org/resources/find-funding/additional-resources/taxincentives.pdf A State by State analysis of available incentives, their regulations and annual caps.

http://www.landtrustalliance.org/policy/documents/state-tax-credits-report.pdf A comprehensive report of the 12 States that allow tax credits in addition to the Federal Credit for the Conservation and Preservation of open space.

©2008 KC Leader Writing