A business executive can be excused for not knowing which of the various state income tax credit incentives is appropriate for his or her company. At first blush, the various tax incentives all seem to be similar. The following summarizes the various income tax incentives available to a company to expand operations in Wisconsin, and explains how a company would want to choose from among these programs.
Four Main Programs
There are four Wisconsin income tax incentives available to companies that seek to expand activities in Wisconsin, which are the following:
1. Economic Development Tax Credits;
2. Jobs Tax Credits;
3. Relocation Tax Credits; and
4. Enterprise Zone Tax Credits.
Many business owners are familiar with the Wisconsin Angel Investment Tax Credits (commonly known as “Act 255 Credits” after the statute creating the program several years ago) and the Early State Seed Investment Tax Credits. A key thing to remember is that these two investment tax credit programs provide tax credits to investors seeking to invest in a company, which is a good way to assist a company to raise capital from investors. However, these two programs don’t directly provide tax incentives to the company itself.
There are also other tax credit programs that are specific to certain industries (e.g. credits for dairy, meat processing, food processing, woody biomass, film production manufacturing, etc.). For the moment, let’s focus on the four major programs described above that can directly incentivize a company’s expansion plans without regard to industry type.
Economic Development Tax Credits
In 2009, Wisconsin (recognizing that simplicity is welcome in the business community) condensed five overlapping tax credit programs into the Economic Development Tax Credit program. This program provides a non-refundable state income tax credit for certain types of economic development projects. This program provides tax credits for companies that: (i) create jobs, (ii) invest in equipment or real estate, and/or (iii) train employees. For job creation, the credit ranges from $3,000 to $7,000 per job depending on the salary paid to the full-time employee. For capital investment, the credit can be up to 3% of the investment in equipment and 5% of the investment in real property. A credit for employee training is up to 50% of the training costs. These credits are typically less $3M per company, unless special approval is provided by the state. In 2011, the state increased the aggregate amount of tax credits that may be allocated to all applicants by $25M. Further information is available here.
Jobs Tax Credits
Available for the first time last year, Wisconsin provides a refundable state income tax credit specifically for creating jobs in Wisconsin pursuant to the Jobs Tax Credit program. The credits are up to 10% of new full-time employee wages. New jobs must pay annual wages of at least $20,000 ($30,000 depending on the classification of the county or city) but not more than $100,000. The total amount of these credits available to all applicants per year is $5M. Further information is available here .
Relocation Tax Credits
In 2011, Wisconsin created a new non-refundable state income tax credit known as the Relocation Tax Credits program. These credits are available for a company that moves at least 51% of its workforce payroll or at least $200,000 of wages to Wisconsin from another state or country. The credit equals the company’s total Wisconsin income tax liability (after taking into account all other credits, deductions and exclusions). The credit can be claimed for two consecutive years, beginning in the year the business relocates to Wisconsin.
Enterprise Zone Tax Credits
In 2011, Wisconsin expanded the Enterprise Zone Tax Credit program to allow up to 20 “zones” (up from the existing 12 zones). The zones are created at the discretion of the Wisconsin Economic Development Corporation (the “EDC”), taking into account the area’s economic need. Although not self-evident from the statutes, in practice a “zone” has been the area around a particular company’s facilities rather than a broad area. So in practice, this program should be thought of as an incentive for a particular company’s expansion plans. A company receiving these credits should make a significant investment in jobs and/or capital. Our discussions with EDC staff suggests that projects that would receive these credits are for those that create or retain 800-1,000 jobs in Wisconsin and/or invest $80M – $100M of capital investment. Several refundable state income tax credits are available under this program. For job creation or retention, the credit is up to 7% of wages in excess of $20,000 ($30,000 depending on the classification of the county or city). For job training, the credit is up to 100% of the training costs. For capital investment, the credit is up to 10% of expenditures. A final credit is equal to 1% of purchases of goods or services from Wisconsin suppliers.
To obtain any of the credits described above, a company needs to get certification from the EDC prior to starting the job creation or capital investment upon which the credits will be computed. Certification is a competitive process and depends on the allocation constraints of the EDC (i.e. how much of the limited credits remain available). Our experience with the EDC is that certification for a credit also depends on the quality of jobs created (i.e. whether the jobs are low-wage or transitory) and, for non-refundable credits, whether the company has taxable income to use such credits. The EDC has also told us that while there is no statutory prohibition against double dipping to obtain multiple credits, the EDC would never in practice certify a company to receive multiple credits for doing the same thing. For example, the EDC wouldn’t certify a company to receive the Jobs Credit and the Economic Development Credit for creating the same jobs. On the other hand, the EDC has told us that it might be possible for a company on a case by case basis to be certified, to get the Jobs Tax Credits for creating jobs and also to be certified to receive the Economic Development Tax Credits for other activities (e.g. capital investment or employee training).
Choosing Among Programs
The EDC will ultimately choose among the above described incentives that are available/offered to a company. Nonetheless, a company would need to know which incentive to push for. The following lists some of the factors that should be taken into consideration from the perspective of the company.
- Tax Appetite. The obvious difference among these programs is that the Jobs Tax Credit program and the Enterprise Zone Tax Credit program provide for refundable credits. Thus, if a company doesn’t have taxable Wisconsin income that can be offset by these credits, the state will literally send a check in the mail to the company for the unused portion. In contrast, the Economic Development Tax Credit program and the Relocation Tax Credit program offer non-refundable credits. If the company doesn’t have taxable Wisconsin income that can absorb the credit, it would have a preference for the Jobs Tax Credit or Enterprise Zone Tax Credit.
- Size of Project. Based on our discussions with EDC staff, the Enterprise Zone Tax Credits is not for small projects. Thus, unless a company is planning a major job creation or capital investment program, the company is unlikely to be certified to receive Enterprise Zone Tax Credits.
- Quality of Wages. For some programs, the level of wages for new jobs created must be above a certain threshold (e.g. Jobs Tax Credit and Enterprise Zone Tax Credit programs) due to statutory requirements. Unless the expected jobs exceed this threshold, such programs can be disregarded. For the Economic Development Tax Credit program, which allows tax credit solely due to capital investment activities, our experience is that if the jobs resulting from or saved by the capital investment are not well-paying jobs (e.g. migrant workers earning minimum wage), then the EDC is unlikely to certify the program for credits.
The economic value of these tax credit incentives can be powerful. A company considering a business expansion would be advised to spend some time evaluating the various state incentives and contacting the EDC to see if any of these incentives are available.