Even without further incentives, state is competitive with other states
By Alex Discepolo
October 24, 2011
The current State of Connecticut C Corporate income tax is 7.5 percent with a 10 percent surtax for companies with gross income of $100 million or greater. At this rate, we are about in the middle of the pack when you look at the rates of other 45 states (Nevada, South Dakota, Washington & Wyoming have no corporate income tax), plus the District of Columbia.
On May 4, the state enacted Public Act 11-6 which changed our C Corporate tax structures in two ways.
First, for C corporations with gross income of $100 million or greater, Public Act 11-6 replaced the surtax of 10 percent with 20 percent surtax in 2012 and 2013, which effectuates a 9 percent tax rate. Note that taxpayers filing unitary or combined returns are subject to the surtax regardless of gross sales. The surtax will expire Dec. 31, 2013 and requires no further legislative action. I make this note of the expiration date and place emphasis on the importance of no further action required to emphasize and compare surtax to an actual rate increase. In reviewing the corporate income tax rates across the country for 2011 & 2012, there were a number of states with rate increases but none with decreases, which just adds to our historical experience that few rates go down.
The second corporate tax structure change is good news for all C corporations. Historically, the C corporate taxpayer is limited in the use of tax credits to 70 percent of pre-credit tax. However as part of Public Act 11-6 and with the intent to increase jobs in Connecticut, a corporate taxpayer can increase their credit by $6,000 times their average monthly increase in employees that work a 35-hour work week. This makes it possible for a corporate taxpayer to use tax credits to offset 100 percent of pre-credit tax. No trickery though — an employee hired by a related person within 12 months will not be considered a new employee.
Apart from the C corporate tax changes enacted in Public Act 11-6, Connecticut currently does have one of the nation’s strongest research and development incentive programs, and attractive credits to generate capital spending and jobs creation. In addition to credits and incentives, the state provides additional benefit for companies headquartered in Connecticut and doing business in multiple states through the state’s methodology to determine the percentage of corporation profits (or losses) that are taxable in Connecticut. All of the benefits mentioned thus far are further defined below.
Research & Development
Connecticut’s has two tax credits that are available for research and development performed in the state.
The first and most lucrative tax credit, the Research and Expenditure Incremental tax credit, takes 20 percent of the annual incremental research and development expenditures incurred for services performed in the state as the allowable tax credit. Should you not be in a current corporate tax paying position, the state, with some restrictions, will purchase the current year tax credit for cash at 65 cents on the dollar. An alternative option is to carry forward any unused tax credits for 15 years.
The second tax credit, the Research and Development Non-Incremental Credit, allows for a 2 percent tax credit on the non-incremental research and development expenditure incurred in the state. This credit allows the same state purchase at 65 cents on the dollar but has an unlimited carryforward provision. There is currently no other state with such a robust research and development tax credit program as Connecticut.
Capital expenditures incentives
Connecticut has an Electronic Data Processing tax credit equal to 100 percent of personal property tax owed and paid to Connecticut on electronic data processing equipment (EDP). Computers, printers, bundled software, peripheral computer equipment, etc. are considered EDP. There is, as well, a Fixed Capital Investment tax credit equal to 3 percent of the purchase price paid for tangible personal property with a useful life of more than 4 years that will be used by the corporation in the ordinary course of business for more than five years. Please note there would be a recapture if the property was not used for the five year period. Also, Connecticut G.S. § 12-17o provides a credit against income/capital tax imposed on any corporation equal to 10 percent of the amount spent by the corporation on machinery and equipment acquired for and installed in a facility in this state, which amount exceeds the amount spent by such corporation during the preceding income year of the corporation for such expenditures. The 10 percent credit is for corporations that have 250 or few full-time employees; those corporations with fewer than 800 employees are afforded a 5 percent credit on the incremental expenditure.
Apportionment of income between the states
Most states require taxpayers that are multi-state tax filers to utilize the Three Factor Apportionment Formula or some variation thereof that was adopted by the Uniform Division of Income for Tax Purposes (UDITPA). This traditional methodology requires the net income or loss of a company to be apportioned within and without the state by multiplying such net income or loss by a fraction, the numerator of which is the sum of the property, payroll and receipts factor and the denominator is three. Each factor is simple calculated by taking property in the state (as an example) divided by total property of the company. The variations mentioned usually pertain to the number of factors used for instance some states will double weight sales and have a divisor of 4 instead of 3. Other states will use a one factor formula such as sales, calculate the percentage of sales in the state and simply multiply that percentage times net income to get the percentage of net income that will be taxed in the state. Connecticut uses this single factor formula for most technology and manufacturing companies.
If you are headquartered in a state, more often than not, you will have your highest payroll in that state and possibly your highest property value. By excluding the payroll and property factor to determine the percentage of your income that is taxable in Connecticut again, more often than not you will end up with a lower apportionment factor in the state which means lower tax.
Still room for improvement
From a tax perspective, we are a good state for a corporation to be headquarter and without significant cost, we could become a great state! For jobs creation and hiring incentives, Connecticut has the following credits in place:
9. Apprenticeship training in manufacturing, plastics, plastics-related, or construction trades credit ( ¶12-075)
10. Human capital investment credit ( ¶12-075a)
I deal with taxes, credits and incentives every day, and I find these programs confusing, and difficult to maintain. In my mind, this creates an inability to cost-justify getting into these programs.
Do we need 10- plus (I may have missed a few) credit programs and the extensive documentation requirements? Does the geographic location of the unemployed that are hired, such as enterprise zones mean that much today?
The foundation of Connecticut’s corporate tax structure is solid. Our rate, even with the surtax is in the middle of the pack; with an expired surtax, the rate becomes impressive. We have above average tax credits and incentives especially our research and development credits and for the most part, through our taxing methodology, we tend to “favor our own,” — those entities headquarter in the state.