Prepared by: Robert L. Wollfarth Adams and Reese LLP NEW LOUISIANA TAX CREDITS RESULT IN HIGHER PROFITABILITY FOR BUSINESSES THAT UTILIZE LOUISIANA PORTS THESE CREDITS INCLUDE THE “INVESTOR TAX CREDIT” WHICH EQUALS FIVE PERCENT PER YEAR OF THE TOTAL CAPITAL COSTS OF A QUALIFYING PROJECT IN A LOUISIANA PORT JURISDICTION AND THE “IMPORT EXPORT CREDIT” THAT EQUALS $5.00 PER TON OF CARGO IMPORTED OR EXPORTED THROUGH THE LOUISIANA PORTS. THIS OUTLINE DESCRIBES THE BASIC REQUIREMENTS TO QUALIFY, AND APPLY, FOR THESE CREDITS. SUMMARY OF PORTS OF LOUISIANA TAX CREDITS – LA RS 47:6035 A. INVESTOR TAX CREDIT a. Credit Terms i. Taxpayers Eligible Eligible taxpayers include any individual or entity that invests in a “qualifying project” (as defined below). The statute refers to eligible taxpayers as “investors.” Baton Rouge Birmingham Houston Jackson Memphis Mobile Nashville New Orleans Washington, D.C. ii. Taxes Offset The credit can be used to offset Louisiana income tax and/or Louisiana corporate franchise tax. iii. Investment Structure The statute contemplates that a company will be formed to own and develop the project (hereinafter referred to as the “Developer Company”). The investors contribute funds to the Developer Company that it spends on developing the qualifying project. According to the statute, the investors may not earn credits on contributed funds until the Developer Company spends the funds on project costs, which most likely means when the company makes a non-refundable payment of the costs. A structure commonly used in connection with other Louisiana tax credits involves a limited liability company, taxed on a pass- through basis, formed to own and develop the project and to serve as the Developer Company. A second limited liability company is inserted between the investors and the Developer Company (hereinafter referred to as the “Investment LLC”). Investors are admitted as members of the Investment LLC for the limited purpose of paying a negotiated purchase price for, and receiving an allocation of, the tax credits earned by the Investment LLC. The investors make capital contributions of the tax credit purchase price to the Investment LLC which then makes a second capital contribution of the purchase price and the remainder of the project cost to the Developer Company. In this case, it is the Investment LLC that serves as the investor contemplated by the statute and it is the Investment LLC’s investment in the Developer Company of the entire cost of the project that triggers the earning of the credits. The Investment LLC then allocates the tax credits to the investors as they are earned or at a later time as the investors are identified and admitted as members of the Investment LLC. In this structure, these investors have limited rights and obligations – their only obligation, to contribute the negotiated purchase price of the credits they are buying, and their only right, to receive by allocation the credits for which they are paying the negotiated purchase price. Because of their limited rights and obligations, these investors may not even be recognized as partners of the Investment LLC for tax purposes but as mere purchasers of the tax credits, making it possible for the Investment LLC and the Page 2 Baton Rouge Birmingham Houston Jackson Memphis Mobile Nashville New Orleans Washington, D.C. Developer Company to remain single-member limited liability companies for tax purposes without the filing requirements of a multi-member partnership. Some form of membership/ownership structure comprised of tax credit buyers/investors will be necessary for earning the port investor tax credit because the statute does not allow for the transfer of the credit other than by allocation with respect to a membership/ownership interest. It may be that not all the buyers of the tax credits can be identified before the credits are earned. If the Investment LLC is able to fully fund the cost of the project from sources other than the tax credit buyers, then the credits earned by the Investment LLC may have to be parked until buyers can be found. Specific language is included in the Investment LLC’s operating agreement to prevent the credits from automatically flowing up to the members so that the credits can be directed to specific tax credit buyers later admitted as members. Guidance will have to be sought as to whether this commonly-used structure and the corresponding tax treatment will be approved by the taxing authorities for this particular non-transferable tax credit. iv. Credit Amount In contrast to other Louisiana tax credit statutes which state that a taxpayer or investor “shall” receive a credit of a certain amount, this statutes states that the Department of Economic Development “may” grant a tax credit equal to the total capital costs of a qualifying project. This language difference is important as it may mean that the credit amount is within the Department’s discretion and, thus, state budget concerns could result in the Department granting credits for larger projects at only a percentage of the total project cost rather than the entire project cost. The statute also states that the credit must be claimed over time at 5% per year, another device intended to alleviate annual state budget restrictions. Page 3 Baton Rouge Birmingham Houston Jackson Memphis Mobile Nashville New Orleans Washington, D.C. v. Credit Carry Forward An investor can hold and use the credits for up to ten years. b. Qualifying Projects A qualifying project is a project for which each of the following is true. i. Cooperative Endeavor Agreement The project must be undertaken by one or more private Developer Companies pursuant to a cooperative endeavor agreement with a public port (as defined in the statute) in whose jurisdiction the project is to be located. ii. $5 Million Minimum Cost The cost of the project must not be less than $5 million. iii. Required Trade or Business Activity The predominant trade or business activity to be conducted at the project must constitute industrial, warehousing, or port and harbor operations and cargo handling, including any port or port and harbor activity (as defined in the statute). c. Qualifying Project Costs There are two primary conditions that must be satisfied for the credit to be earned: (1) the financing of the project must be passed to the Developer Company from one or more investors, which may be the ultimate tax credit buyers or the Investment LLC in which they are invested, and (2) the financing must be expended by the Developer Company on the project. Although the passing of the funds from the tax credit buyers or the Investment LLC, as the case may be, to the Developer Company is essential, it is not sufficient as the credits are not earned until the Developer Company spends the funds on the project. The expenditures that will qualify to generate the credits are all costs and expenses incurred in connection with the acquisition, construction, installation and equipping of a qualifying project. These include, but are not limited to, the cost to acquire the land, the cost of bonds and insurance related to the acquisition, construction or installation, architectural and engineering costs and all costs required to be capitalized for federal income tax purposes pursuant to Internal Revenue Code Section 263. Page 4 Baton Rouge Birmingham Houston Jackson Memphis Mobile Nashville New Orleans Washington, D.C. A lessee’s costs otherwise defined as capital costs may also qualify if the lease is for a term of not less than 5 years. d. Certifications Required i. Initial Certification Letter Typically, the Department of Economic Development will issue an initial certification that a project qualifies for a state tax credit in the form of a certification letter. The letter states that the project is eligible to earn the tax credits and sets forth the total amount of tax credits that can be earned based on the project cost submitted and sets forth the time frame over which the tax credits may be claimed by a taxpayer (5% per year according to the statute). As with other state tax credits, the Department of Economic Development may provide a standard form to be used to apply for this initial certification letter. With respect to this particular tax credit, the statue requires that the application include a detailed description of the project, an estimate of the total project cost including estimated payroll for Louisiana resident employees, estimated project start and completion dates and the names of the Development Company and the names of its owners that will become entitled to the credits (probably means not only the names of the Investment LLC and any other pass-through entities in the ownership chain but the ultimate taxpayer owners, that is, non-pass-through entities, in the ownership chain). According to the statute, before issuing an initial certification letter, the Department of Economic Development must obtain certifications from the commissioner of administration, after approval of the Joint Legislative Committee on the Budget, and the state bond commission that the proposed project will generate sufficient revenue for the state to offset the cost of tax credits provided (tax revenue foregone). These certifications will impact the amount of credits granted to a project. For this reason, the Development Company should seek follow-up certification of any actual project expenditures that exceed the estimates submitted with the initial certification application. Although the statute contemplates that the numbers submitted with the initial certification application will be estimates, approval of cost Page 5 Baton Rouge Birmingham Houston Jackson Memphis Mobile Nashville New Orleans Washington, D.C. differences should not be assumed because material differences could have an impact on the state’s budget not contemplated by the state when the initial certification letter was issued. ii. Tax Credit Certification Letter Before the state will actually issue the credits, the statute states that the Department of Economic Development “may” require, but in all likelihood the Department of Economic Development will require, that the Development Company submit a cost report audited by an independent Louisiana certified public accountant. Following an examination of the cost report, the Department of Economic Development will issue a tax credit certification letter that indicates the amount of tax credits certified as earned with respect to the project and the amount to be taken at 5% per tax year. e. Recapture The statute does provide that the credits will be recaptured if the Department of Economic Development finds that funds on which the credits were granted were not actually invested or spent as required by the statute. Although the statute does provide that credits previously allowed but later disallowed may be recovered by the Department of Revenue through authorized collection remedies within three years from December 31 of the year in which the credits were earned, the language implies, and with respect to other Louisiana credits usually means, that it is the responsibility of the Department of Economic Development, and not the Department of Revenue, to trigger a recapture action. With respect to other state tax credits, the Department of Revenue will not initiate a recapture unless triggered by the Department of Economic Development except in the case of material representation or fraud. Thus, to close off recapture, it is important that the Development Company include language in both the initial certification letter and the tax credit certification letter whereby the Department of Economic Development agrees that once it has had a chance to review the audited cost report and has issued a tax credit certification letter certifying an amount of tax credits earned that it will not trigger a recapture action barring material misrepresentation or fraud. f. Termination of Credit The statute provides that these tax credits shall not be issued after January 1, 2015. Page 6 Baton Rouge Birmingham Houston Jackson Memphis Mobile Nashville New Orleans Washington, D.C. B. Import Export Cargo Credit a. Credit Terms i. Taxpayers Eligible Only entities that apply to the Department of Economic Development for certification are eligible to earn and claim this credit. In contrast to the port investor tax credit described above, it seems, although it is unclear, that the statute provides that this credit cannot be transferred and/or allocated to other individuals or entities owning interests in the entity that applied for the credits, that the credit is only useful to the entity if it is itself a taxpayer as opposed to a pass-through entity whose tax items are claimed by its owners. Guidance will be needed to clarify what appears to be very restrictive language in the statute. The application must include a verified statement of the total annual volume and tons of machinery, equipment, materials, products, or commodities imported and exported from or to, manufacturing, fabrication, assembly, distribution, processing or warehousing facilities located in Louisiana for a prior calendar year. ii. Taxes Offset The credit can be used to offset Louisiana individual, corporate income and/or corporate franchise tax liability of the taxpayer that received the certification described above. iii. Credit Amount In contrast to the port investor tax credit, with respect to this tax credit the statute does state that the amount of the credit “shall” be equal to $5.00 multiplied by the taxpayer’s number of tons of qualified cargo (as defined by the statute) for the tax year. However, the statute also indicates that the amount of the credits that the taxpayer will be certified to earn will be limited to the total allocation granted to the taxpayer for such tax year. And, as with the port investor tax credit, the statute indicates that the allocation will be limited to the allocation amount certified by the commissioner of administration, as approved by the Joint Page 7 Baton Rouge Birmingham Houston Jackson Memphis Mobile Nashville New Orleans Washington, D.C. Legislative Committee on the Budget and the state bond commission, which amount will depend on whether the state will receive sufficient revenue from the taxpayer’s port activities to offset the cost of granting the tax credits. iv. Credit Carry Forward A taxpayer can hold and use the import export cargo credits for up to five years. With respect to some tax credits, primarily in other states, recapture is foreclosed by statute. However, with respect to the Port of Louisiana Tax Credits and other Louisiana tax credits, recapture remains a real possibility. Therefore, it is imperative that project owners intending to take advantage of these incentives have their legal counsel weigh in on the language used by the Department of Economic Development in their certification letters and obtain other rulings that will be necessary to minimize the possibility of recapture. This approach will engender confidence in tax credit buyers as to the soundness of the credits they are buying and, thus, create a readily available financing source for these projects. For more information, please contact: Robert L. Wollfarth Christopher J. Kane Adams and Reese LLP Adams and Reese LLP Tel: (504) 585-0410 Tel: (504) 585-0155 firstname.lastname@example.org email@example.com This is not an advertisement. The information in this newsletter does not constitute legal advice or opinion and should not be viewed as a substitute for legal advice. The information provided is based on laws and regulations in effect at the time of creation and is subject to change. Adams and Reese is a multidisciplinary law firm with over 250 lawyers and advisors. The firm has offices in New Orleans, LA; Baton Rouge, LA; Birmingham, AL; Mobile, AL; Memphis, TN; Nashville, TN; Houston, TX; Jackson, MS; and Washington, DC. For additional information, please see the firm website at www.adamsandreese.com. If you no longer wish to receive this bulletin or have an address change, please send an email to firstname.lastname@example.org. This newsletter is a periodic publication of Adams and Reese LLP and is intended for general purposes only. This newsletter is sent to friends and clients of Adams and Reese LLP. The sending of this newsletter is not a privileged communication and does not create a lawyer/client relationship. No representation is made that the quality of the legal services to be performed is greater than the quality of legal services performed by other lawyers. FREE BACKGROUND INFORMATION IS AVAILABLE UPON REQUEST. Page 8 Baton Rouge Birmingham Houston Jackson Memphis Mobile Nashville New Orleans Washington, D.C.
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