GOVERNMENT CONTRACTING

Government Contractors: Are You Missing Out On Valuable Tax Credits?

BY MICHAEL L. COLAVITO JR. AND JAMES D. FENNEL, CPA

If you’ve ever had the nagging suspicion that your company or your clients are paying too much in taxes, chances are you’re right.

A wide variety of state tax credits available within the mid-Atlantic region often go unnoticed by government contractors and other eligible companies in Virginia, Maryland and Washington, D.C.

Being in compliance with the state and local tax filing requirements is a key priority for most businesses — and justifiably so. Often, however, companies become so focused on maintaining the proper levels of compliance that they fail to be strategic in their tax planning approach, ultimately missing out on valuable credit opportunities and leaving significant tax dollars on the table. Government contractors doing business in Virginia should take note of the Major Business Facility Job Tax Credit, which is ultimately a job creation credit that allows for a $1,000 credit per employee (over the 50th employee) for companies that have a central management location in Virginia. For companies headquartered in an economically distressed area, the employee threshold goes down to 25. This credit, which can be carried forward 10 years, requires that a Form 304 be filed 90 days before the return is filed, making now a great time to start preparing.

Virginia employers may also be eligible for the Telework Expense Credit. It should come as no surprise to anybody who drives on the

GOVERNMENT contracting

beltway each morning that this program is designed to reduce traffi c in the state by encouraging employers to transition current employees into telecommuters. In order to qualify for the credit, which maxes out at $50,000 per year, a company must have formal telework policies and agreements in place. Employers should visit telework.gov for more information on how to put a formal telecommuting program in place. While the deadline for applying for this year’s credit has already passed, companies should keep it in mind for next year and start planning their telework strategies today.

Th e state of Maryland recently rolled out a Cybersecurity Investment Tax Credit that allows Qualifi ed Maryland Cybersecurity Companies (QMCC) — specifi cally those that secure investments from investors selling cybersecurity products — to claim a refundable tax credit of up to 33 percent of the investment. While similar to the state’s biotechnology investment credit, this program allows the company to take the credit, rather than the investor. Th is may be a potentially benefi cial credit for many companies, but the application procedure, which began on Dec. 9, 2013, will require a fair amount of documentation. As such, interested businesses are encouraged to consult with a tax advisor and to start preparing paperwork immediately.

As another example, some Maryland taxpayers may be eligible for the Employer Security Clearance Costs (ESCC) credit, which includes provisions for security clearance administrative expenses, Sensitive Compartmented Information Facility (SCIF) costs, and fi rst-year leasing costs for small businesses. Applications for this credit must be submitted by Sept. 15 following the year in which the eligible expenses and costs were incurred, and taxpayers must then fi le an amended return to claim the credit once certifi cation has been procured.

Washington, D.C., taxpayers should be aware of the jurisdiction’s various Qualifi ed High Technology Company credits (QHTC) and incentives. Th ere are various QHTC incentives, including a reduced franchise tax rate, a fi ve-year corporate franchise tax and entity-level unincorporated business tax exemptions, as well as credits related to the hiring and training of qualifi ed disadvantaged employees, employee relocation costs and much more. While the District is having some diffi culty properly administering their programs, well-prepared and researched applications have the potential to net major tax savings for qualifying companies and activities.

Th is is by no means an exhaustive list of available tax credits. For a more complete picture, companies should consult with their tax advisors and consider several key questions: 1. Where are you performing work? For example, if you are headquartered in Virginia and performing work in Maryland and D.C., you might be eligible for multiple jurisdictional credits.

2. What type of work are you performing? Th ere are a wide variety of work categories that are eligible for tax credits.

3. What triggers do you have in place to identify available credits?

As your business model, services and locations change, it is important to have a system in place to track data and revenue in consideration of tax credits.

Th e bottom line is that with the myriad of tax credits available to businesses in the region, eligible government contractors and companies alike have the opportunity to take advantage of considerable tax incentives and, in the process, save a signifi cant amount of money in the coming years. If your business is not making tax planning part of your core operational strategy, you’re very likely leaving money on the table. n

Reprinted from AronsonBlogs, courtesy of Aronson, LLC.

MICHAEL L. COLAVITO JR. is a senior manager in Aronson LLC’s Tax Services Group, where he provides multistate taxation services pertaining to income, franchise, sales and use and property taxes.

JAMES D. FENNEL, CPA, is a partner in Aronson LLC’s Government Contract Services Group. He has extensive experience in helping a wide array of clients with matters such as audits, fi nancial statement review and compilation and government regulation compliance. * mcolavito@aronsonllc.com * jfennel@aronsonllc.com

WANT MORE? Visit http://tinyurl.com/AronsonWebinar to watch a program from Aronson LLC on tax credits for government contractors.