Maryland has enacted a corporate and personal income tax credit that is available for certain costs relating to (i) federal security clearances for employees in the state; or (ii) the construction or renovation of certain sensitive compartmented information facilities (SCIFs) in the state.1 Under the new law, the Department of Business and Economic Development will administer the credit and is permitted to award up to $2 million in credits during each calendar year from 2013 through 2016.

Available Credit

For taxable years beginning after December 31, 2012 but before January 1, 2017, both individuals and businesses can claim a dollar-for-dollar credit against Maryland income taxes for certain costs incurred to obtain federal security clearances for employees in the state or to construct or renovate SCIFs.2

Federal Security Clearance

The federal security clearance portion of the credit applies to costs for security clearance administration incurred for an employee in Maryland.3 Qualifying costs expressly include:

  • Processing application requests for clearances;
  • Maintaining, upgrading or installing computer systems as required to obtain federal security clearances; and
  • Training employees to administer the application process.4

Additional examples and guidance addressing specific qualifying expenses are anticipated to be included in the Department's final regulations, which are expected to be released by the end of 2012.5

SCIF Construction or Renovation

The SCIF component of the credit is available for "construction and equipment costs incurred to construct or renovate" an SCIF "as required by the federal government."6 An SCIF is an "area, room, or group of rooms where sensitive or classified information may be stored or processed."7 The Department's regulations are expected to provide additional information and examples of what constitutes a qualifying "construction and equipment" cost.

Credit Amounts

A taxpayer can claim both components of the credit in a given tax year, though each segment is subject to annual limitations. A taxpayer's claim for the credit for security clearance expenses cannot exceed $100,000 in any year.8 For SCIF construction costs, a taxpayer's annual credit claim is limited to the lesser of 50 percent of the qualifying costs, or $100,000, for expenses relating to a single SCIF.9 However, if the taxpayer constructs or renovates more than one SCIF during the tax year, the taxpayer's limit for this component of the credit is increased to $250,000.10

The total amount of credits allowed to all taxpayers is limited to $2 million for any calendar year.11 In the event that the credit applications for a given calendar year exceed this limit, the credit amounts approved for each taxpayer will be prorated.12 A taxpayer is permitted to carry forward a credit indefinitely until the credit is used if the credit for a taxable year exceeds the total tax due.13

Claiming the Credit

As the credits are expected to be issued retroactively, a taxpayer must submit an application for credit approval to the Department by September 15 of the calendar year following the end of the taxable year in which the costs were incurred.14 The Department is required to certify and approve the credit application by December 15 of the same year.15

Once the credit approval is obtained, the taxpayer must complete and submit Form 500CR, the Maryland Business Income Tax Credits Form.16 Along with the form, the taxpayer must submit an amended income tax return for the taxable year in which the costs were incurred (Form 500X for corporations or Form 502X for individuals) and attach a copy of the "Department's certification of the approved credit amount."17

Commentary

The new legislation recognizes that the proximity of Maryland to the nation's capital facilitates substantial job creation in the state by government agencies requiring security clearances. The credit is expected to assist such agencies in hiring additional Maryland workers by reducing the costs of the federal security clearance process.18 This particularly benefits small government contractors that have not yet purchased sophisticated equipment to implement the systems required to comply with the federal government's security clearing process. The legislation also effectively reduces the costs associated with the construction and renovation of SCIFs within Maryland.

While the legislation may immediately result in revenue losses for the state beginning with fiscal year 2014,19 such legislation is designed to eventually attract more business to the state. In addition, because the Federal Investigative Services of the Office of Personnel Management conducts the vast majority of all federal security clearances and the costs associated with these clearances generally are reimbursed by other federal agencies, the actual amount of credits awarded in each year may be less than the maximum allowed.20

Footnotes

1. Ch. 478 (S.B. 296), Laws 2012, effective July 1, 2012.

2 MD. CODE ANN., TAX-GEN § 10-731. Note that the statute references "employees in the state," but does not define this term. Future regulations may provide clarity.

3 MD. CODE ANN., TAX-GEN § 10-731(A)(2)(I).

4 Id.

5 Under the legislation, the Department is required to consult with the State Comptroller to adopt regulations to implement the new provisions. MD. CODE ANN., TAX-GEN § 10-731(E).

6 MD. CODE ANN., TAX-GEN § 10-731(A)(2)(II).

7 Maryland Department of Legislative Services Fiscal and Policy Note regarding S.B. 296, 2012 Session.

8 MD. CODE ANN., TAX-GEN § 10-731(B)(1).

9 MD. CODE ANN., TAX-GEN § 10-731(B)(2)(I).

10 MD. CODE ANN., TAX-GEN § 10-731(B)(2)(II).

11 MD. CODE ANN., TAX-GEN § 10-731(C)(2)(I).

12 MD. CODE ANN., TAX-GEN § 10-731(C)(2)(II).

13 MD. CODE ANN., TAX-GEN § 10-731(D).

14 MD. CODE ANN., TAX-GEN § 10-731(C)(1).

15 MD. CODE ANN., TAX-GEN § 10-731(C)(3).

16 See A Guide to Maryland Business Tax Credits, Comptroller of Maryland, updated July 2012.

17 MD. CODE ANN., TAX-GEN § 10-731(C)(4).

18 Maryland is home to a number of federal government intelligence agencies such as the Department of Defense, the Department of Homeland Security and the Department of Justice.

19 See Maryland Department of Legislative Services Fiscal and Policy Note regarding S.B. 296, 2012 Session.

20 Pursuant to the Maryland Department of Legislative Services Fiscal and Policy Note regarding S.B. 296, 2012 Session, the Office of Personnel Management states that it conducts more than 90 percent of the federal government's background investigations for federal employees, contractors and military members of various federal agencies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.