Empire zone tax credits in New York for wind farms and other renewable energy projects have federal tax consequences.
The IRS described them in an internal legal memorandum that was made public in late October. The memorandum is ILM 200842002.
The tax credits are credits against corporate income or franchise taxes in New York and can be claimed by businesses that bring new jobs to areas the state is trying to promote. Credits can be claimed for up to 14 years on older projects. Credits on new projects run for 10 years. The credit was tied in the past to the amount the project increased local employment. Under the current program, the credit is the greater of 25% of wages, health and retirement benefits paid to net new employees or 10% of the amount the company had to spend on “real property” the company owns in the zone. A company cannot claim a greater credit in any year than it paid in property taxes.
The credits are refundable to the extent the company does not pay enough in income or franchise taxes in a year to take full advantage of them. However, the company has an option of carrying the unused credits forward and using them the next year rather than asking for a refund.
The United States lets companies deduct the state income taxes they pay when calculating their incomes for federal tax purposes.
The IRS suggested the credits reduce the state income taxes a company is allowed to deduct. However, if the credit in a year exceeds the states taxes owed, then the company must report any refund as income. It said that because the company has the option of receiving a refund, it must report the full excess credit as income, even the part that it chooses to carry forward, but, in that case, the full state income taxes owed in a future year would be deductible, ignoring any tax credits that are carried forward and used as an offset.
The IRS plans to address the same general issues in a published ruling — called a revenue ruling — by next June. The analysis should be considered tentative until the ruling is issued.