United States: Maryland Releases Employer Security Clearance Costs Tax Credit Application And Guidance

The Maryland Comptroller has issued regulations regarding procedures on how taxpayers can apply for the employer security clearance costs tax credit with the Maryland Department of Business and Economic Development.1 Further, the Department has released additional information including an updated application form, as well as Frequently Asked Questions on its Web site.

Available Credit Amounts

In 2012, Maryland 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, and (ii) the construction or renovation of certain sensitive compartmented information facilities (SCIFs) in the state.2 The applicable statutes were amended to increase the available amount of credit in 2013.3

A taxpayer may 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 qualified security clearance administrative expenses cannot exceed $200,000 in any year.4

Qualifying costs expressly include:

  • Processing application requests for federal security clearance;
  • Maintaining, upgrading, or installing computer systems in Maryland that are required to obtain security clearance;
  • Training Maryland employees to administer the clearance application process; and
  • Other and additional administrative expenses related to obtaining security clearances as the Secretary of the Department may approve.5

Taxpayers may also claim an income tax credit for costs related to construction or renovation of a Maryland SCIF.6 Maryland requires that the SCIF be accredited by an appropriate federal agency. For SCIF construction costs, a taxpayer's annual credit claim is limited to the lesser of 50 percent of qualifying costs, or $200,000, for expenses related to a single SCIF.7 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 $500,000.8

In addition, a credit for expenses incurred for rental payments owed during the first year of a rental agreement for spaces leased in Maryland for a small business that performs security-based contracting is available, not to exceed $200,000. "Small business" includes an entity that:

  • Is independently owned and operated;
  • Is not a subsidiary of another firm;
  • Does not dominate its field of operation; and
  • In its most recently completed fiscal year, did not employ in its operations more than 25 individuals.9

The total amount of credits allowed to all taxpayers remains limited to $2 million for any calendar year.10 Excess credits may be carried forward until fully utilized.11

Regarding mergers and acquisitions, the Comptroller follows federal rules in determining the carryover of unused credits. Entities are treated as separate business units and any rules permitting separate merged (or acquired) corporations to carry forward unused credits also apply for Maryland purposes.12

For asset purchases, unused credits are not permitted to be transferred to the purchaser and the units must remain with the entity to whom the certification was used.13

Special Rules for Calendar Year 2013

Due to the legislative change which became effective July 1, 2013 increasing the maximum credit amounts available to each taxpayer, taxpayers claiming the credit for calendar year 2013 must provide qualified security clearance administrative expenses separately for: (i) the period between January 1, 2013 and June 30, 2013; and (ii) the period between July 1, 2013 and December 31, 2013.14 The credit claimed for each of these periods may not exceed $100,000 and the total credit claimed for the entire year may not exceed $200,000.15 Similarly, taxpayers claiming a SCIF costs credit must report costs separately for: (i) the period from January 1, 2013 through June 30, 2013; and (ii) July 1, 2013 through December 31, 2013. Each taxpayer may claim a credit for 50 percent of the qualified SCIF costs up to $100,000 for each of these periods related to a single SCIF. For taxpayers renovating or constructing multiple SCIFs, the credit claimed may not exceed $250,000 for each period.16

The credits are available for eligible expenses for taxable years beginning after December 31, 2012, but before January 1, 2017.17 To take advantage of the credit, 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 incurred18 and the Department is required to certify and approve the credit application by December 15 of the same year.19

Once the credit approval is obtained, the taxpayer must complete and submit Form 500CR, the Maryland Business Income Tax Credits Form, along with an amended income tax return for the taxable year in which the costs were incurred. The taxpayer must attach a copy of the Department's certification of the approved credit amount to the amended return.20

Commentary

As noted in our earlier Alert regarding this available credit, this incentive recognizes the proximity of Maryland to the nation's capital and 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 associated with the federal security clearance process.21 This credit 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 clearance process. The legislation also effectively reduces the costs associated with the construction and renovation of SCIFs within Maryland.

The amendment by the legislature to the original legislation doubling the maximum amount of credits available to each taxpayer endorses the belief that the legislation will successfully attract more business to the state.

As the states continue their paths of recovery from the effects of the Great Recession, similar credits and incentives which focus on attracting and retaining jobs related to a perceived center of excellence should continue to be attractive to legislators.

Footnotes

1 MD. REGS. CODE tit. 05, § 24.05.06.01.

2 Ch. 478 (S.B. 296), Laws 2012, effective July 1, 2012. See GT SALT Alert: Maryland Enacts Income Tax Credit for Federal Security Clearance and SCIF Construction Expenses.

3 Ch. 482 (S.B. 482), Laws 2013, effective July 1, 2013. This legislation increased the taxpayer limit on the security clearance administrative expense portion of the credit from $100,000 to $200,000 and the SCIF portion of the credit from $100,000 to $200,000 for a single SCIF and from $250,000 to $500,000 for multiple SCIFs.

4 MD. REGS. CODE tit. 05, § 24.05.06.02.

5 MD. CODE ANN., TAX-GEN. § 10-732(a)(2)(i); MD. REGS. CODE tit. 05, § 24.05.06.01.B(3)(a).

6 MD. CODE ANN., TAX-GEN. § 10-732(a)(2)(ii).

7 MD. CODE ANN., TAX-GEN. § 10-732(b)(1), (3);MD. REGS. CODE tit. 05, § 24.05.06.02.A.3.

8 MD. CODE ANN., TAX-GEN. § 10-732(b)(3);MD. REGS. CODE tit. 05, § 24.05.06.02.B.

9 MD. REGS. CODE tit. 05, § 24.05.06.01.B.10.

10 MD. CODE ANN., TAX-GEN. § 10-732(c)(2);MD. REGS. CODE tit. 05, § 24.05.06.04.

11 MD. CODE ANN., TAX-GEN. §10-732(d);MD. REGS. CODE tit. 05, § 24.05.06.07.

12 MD. REGS. CODE tit. 05, § 24.05.06.08.

13 MD. REGS. CODE tit. 05, § 24.05.06.08.B.

14 Maryland Department of Business and Economic Development Web site.

15 Id.

16 Id.

17 MD. CODE ANN., TAX-GEN. § 10-732(b).

18 MD. CODE ANN., TAX-GEN. § 10-732(c)(1).

19 MD. CODE ANN., TAX-GEN. § 10-732(c)(3).

20 MD. CODE ANN., TAX-GEN. § 10-731(c)(4).

21 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.

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.

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