Most small business owners are surprised to learn that they may qualify for a business incentive from the state. This common tactic used by many states can offer qualifying companies a significant savings for ordinary business activities such as hiring new employees. In fact, if your small business has created new jobs over the past two years, then it’s possible you qualify for state tax relief via the Kentucky Small Business Tax Credit. The good news is if your company has created new jobs there is still time to apply and benefit for the 2015 tax year. Applications are being accepted through November 20, 2015. To help clients, prospects, and others understand and leverage the credit, Barnes Dennig has provided a brief summary below.
About the Credit
Any Kentucky for-profit small business – those with 50 employees or fewer – is eligible to apply for tax breaks for investments in employees and equipment, worth up to $25,000 if your business meets two basic criteria:
- Hire at least one new employee for an eligible position and keep that position filled for 12 consecutive months
- Spend at least $5,000 in qualifying equipment or technology within six months of the new hire – either prior to or after the hire is made
The amount of the tax credit you can claim is the lesser of $3,500 per new employee or the total amount spent on equipment and technology, capped at $25,000 each calendar year.
There are several guidelines that determine whether a new employee qualifies for purposes of the credit. A new hire is considered an “eligible position” if all of the following conditions are met:
- The new employee must be subject to Kentucky income taxes
- They must be a full-time employee (35 hours or more per week) for at least twelve consecutive months within the two years preceding application for the tax credit
- If you must replace the position, you have 45 days to do so in order to have it considered as one position and not start re-start the 12 month clock
- Their average hourly wage must be at least $10.88 (150% of the federal minimum wage), which can include tips, overtime, bonuses, and commissions
- The new hire must increase the “base employment” of the business, meaning that they must be an addition to the current workforce, not a replacement of a previous employee
Calculating Base Employment
To determine your “base employment,” establish the total number of employees as of the day before the hire date of the first new employee who will be used to meet the criteria for the tax credit. You cannot include part-time employees or those who are not subject to Kentucky income tax in your base employment calculation. When you apply for the tax credit, re-calculate your current net employment and compare it to the base employment number. The increase in that number is the number of new hires that are eligible for your company’s tax credit calculation. This means that you can’t hire two new employees, release two old employees, and claim the credit.
Qualifying Equipment and Technology
The second criterion for the tax credit is an investment of $5,000 or more in qualifying equipment or technology related to the new hire(s), including computers, other equipment, furniture, fixtures, and business vehicles. For an investment to qualify, it must meet all of the following conditions:
- It must be tangible property purchased for business use (not re-sale or personal use)
- Each individual item purchased must cost at least $300 and have an expected useful life greater than one year
- It must be purchased within six months before or after a new eligible position was filled and within the two years before the business applies for the tax credit
Be sure to retain verification of all purchases, as you must submit proof of payment with the tax credit application.
Applying for the Credit
Once your business meets the eligibility requirements, you can apply for the KY Small Business Tax Credit. All qualifying activity that you submit must occur within the twenty-four months immediately preceding the application submission date. Businesses that apply must also be in good standing on their federal, state, and local taxes, not engaged in any elicit or illegal activity, and not derive more than 50% of their annual gross revenues from lobbying activities in order to qualify.
If your business is approved, the credit must be claimed on the state tax return for the taxable year during which the credit was awarded. Unused credits may be carried forward up to five years.
Applying for the credit requires correct understanding of all the statutory regulations and program guidelines as well as financial verification for particular requirements. For this reason, it’s important to consult with a qualified advisor to make the assessment on your behalf. If you would like more information or want to learn how your company can qualify for the Kentucky Small Business Tax Credit, Barnes Dennig wants to help. For additional information, please call us at 513-241-8313 or click here to contact us. We look forward to speaking with you soon!