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Louisiana Corporate Income Tax Credits

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Louisiana Corporate Income Tax Credits Powered By Docstoc
					                                                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.”




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                           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


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                              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.




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                      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.


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                    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


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                              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.


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        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


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                                          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
                    robert.wollfarth@arlaw.com                                             christopher.kane@arlaw.com




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