Earlier this year, the state of Kentucky approved House Bill 445 which established the state’s two year spending budget, but also enhanced several tax breaks for in-state businesses. The incentives are designed to help the economically challenged areas of the state by encouraging additional investment in startups, reducing the tax burden on select industries and offering new incentives for historical rehabilitations. It’s important to note that several of these tax credits are not available until January 1, 2015; however each has its own specific effective date. In order to provide insight into how these new incentives can impact your business, Barnes Dennig has provided a summary of key tax changes with relevant information below.
Key State Tax Changes
- Angel Investor Tax Credit – Starting in 2015, Kentucky investors will be able to make investments in startup companies while at the same time receiving a state tax credit. The goal is to give new companies access to new sources of cash flow to fund product development, machinery purchases, hire new employees or make capital investments. Kentucky taxpayers who make qualified investments receive a 40% state tax credit (50% in struggling counties). Out of state residents are even encouraged through the credit to participate. If an out of state resident qualifies for the credit they are able to sell the credit to a Kentucky resident to claim on their income tax.
- Bourbon Industry Tax Credit – A new income tax credit has been created to support the bourbon industry which helps offset property tax expenses incurred when storing bourbon in the aging process. Starting in 2015, distilleries are able to claim a credit equal to 20% of property taxes. This amount increases over a 5 year period to 100% in 2019. There is one requirement however, distilleries are required to reinvest tax savings back into their Kentucky operations.
- Wholesale Tax Reduction on Alcohol – In addition to helping distilleries, the new legislation also provides a tax break for beer and wine wholesalers. Beginning in 2015, the 11% tax rate on the sale of alcohol between companies will be reduced to 10% over a 3 year period.
- New Markets Tax Credit Expansion – The New Markets Tax Credit, originally created in 2010, was designed to encourage spending and investment in economically challenged areas. Much like its federal counterpart, state taxpayers receive a tax credit of 39% for investment in entities that make loans to or fund business in these areas. The program had an annual cap of $5M per year, but starting in 2015, the cap size will double to $10M encouraging much needed investment.
- Historical Preservation Tax Credit – The legislation also credits a historical preservation tax credit for qualifying projects. The credit is available to historical rehabilitation projects located within a half mile of Tax Increment Financing (TIF) areas (mainly located in downtown Lexington and Louisville). In order to qualify for the maximum $6M credit (20% credit on expenses up to $30M), the project must be non-residential in nature, at least $15M in size and receive initial approval on or before July 1, 2015. It’s also important to note the credit is transferable and refundable, meaning a refund can be received even if no taxes were paid in the year the credit is claimed.
Assess Your Eligibility
While these incentives don’t begin immediately, now is the time to determine if your individual or corporate activities qualify you to take advantages of these new opportunities. For additional information on these new incentives or for assistance with your 2014 tax planning, please click here to contact us.