United States: Discounted Tax Credits Soon To Be Available For Purchase By Insurers In Pennsylvania

As part of the Commonwealth's 2013-2014 budget process, the Innovate in Pennsylvania Tax Credit was established, authorizing the Department of Community and Economic Development (the Department) to sell up to $100 million of tax credits to insurance companies at a fraction of their value for use against future insurance premiums tax liability.¹   Revenue generated from the sale of the tax credits will be used to fund the start-up or expansion of technologically focused business in Pennsylvania.²

Sale of credits to take place soon—The Department was authorized to sell the Innovate in Pennsylvania Tax Credits beginning in October 2013, however, none have been sold to date.  This is because the Department is currently seeking a third party to administer the program and to sell the credits—a Request for Proposal was issued to this effect on January 8, 2014.³  Per the Department, the RFP process will close February 21, 2014, and a third party administrator will be selected in March.

Method of purchase—The Department has not yet settled on a platform for selling the credits.  Options currently being considered include selling credits directly to insurance companies through a broker, or online via a real-time auction process—a decision on the method of sale will also be made in March.  The target date for sale of the credits is now the second quarter of 2014.⁴  The minimum tax credit amount available for purchase will be $500,000, and the purchase price for each credit will be payable in five installments.⁵ 

Projected sales price—The implementing statute suggests that the Innovate in Pennsylvania Tax Credits may be purchased for 75% of the requested credit amount, although the Department has the authority to raise that percentage consistent with market conditions as of the offer date.⁶  Per the Department, there has been quite a bit of interest by insurers in the credit.  Expectations are for the credit to reach its minimum $40,000,000 sale threshold to make the program viable and projections place the purchase price for the credits at 85% of the requested credit amount.⁷

Restrictions on use—The Innovate in Pennsylvania Tax Credits may be used to offset insurance premiums tax liability incurred over a ten-year period, starting with the tax year beginning on or after January 1, 2016, through and including the tax year beginning before January 1, 2026.⁸  However, the Department has noted that no credits may be redeemed prior to January 1, 2017, leaving some uncertainty as to whether insurers may take the credit into account when remitting their 90% estimated payment in March 2016.  It is worth noting that with respect to corporate income tax credits, the Pennsylvania Department of Revenue has traditionally allowed taxpayers to take such credits into account when remitting required quarterly estimated payments.⁹

The total amount of Innovate in Pennsylvania Tax Credits that may be utilized collectively by all insurance premiums taxpayers is statutorily limited to $20,000,000 per year.¹⁰  The way the Department has solved for this collective limitation is to limit the amount of credit a taxpayer may use to 20% per year, therefore, no matter the amount of credit purchased by an insurer, the value will be realized over at least a five-year period.

Credits may be sold—Upon written notice to the Department and the Commonwealth's Insurance Department, taxpayers may transfer the tax credits to any "qualified taxpayer" that is in good standing with the Insurance Department.¹¹  A "qualified taxpayer" includes any insurance company authorized to do business in the Commonwealth as well as any holding company that has at least one insurance company subsidiary authorized to do business in the Commonwealth.¹²  In other words, the credits may be sold if the purchasing insurer's circumstances change before 2017.

Are the credits a good investment?—Whether the Innovate in Pennsylvania Tax Credits are good investments for insurance companies subject to the Commonwealth's insurance premiums tax will depend on the price at which they can be purchased.  For example, for a credit acquired in the second quarter of 2014 for 85% of the credit amount and used to offset tax liability on returns filed in the second quarters of 2017 through 2021,¹³ the internal rate of return on the invested dollars will be 4.4%.  A credit similarly acquired for 75% of the requested credit amount has an internal rate of return on the invested dollars of 7.9%.¹⁴   

We plan to keep you updated on the status of the Department's Request for Proposal and any resulting purchase or auction platform.  In the meantime, please contact the authors, or the Drinker Biddle lawyer which whom you regularly work, with any questions on the Innovate in Pennsylvania Tax Credit.

 Footnotes

1 Pa. Stat. Ann. §§ 8804-F, 8805-F.

2 Pa. Stat. Ann. § 8802-F; Innovate in PA FAQ: http://www.newpa.com/business/innovate-in-pa/faq

3 Innovate in PA FAQ.

4 Id.

5 Pa. Stat. Ann. § 8808-F(e).  Installments due 6/30/2014, 12/31/2014, 6/30/2015, 12/31/2015 and 6/30/2016.  See Pa. Stat. Ann. § 8809-F(a); Innovate in PA FAQ.

6 Pa. Stat. Ann. § 8808-F(e).

7 Pa. Stat. Ann. § 8808-F(g).

8 Pa. Stat. Ann. §§ 8806-F, 8807-F(a).

9 Pennsylvania Corporation Tax Bulletin, No. 2011-03, 11/15/2011.

10 Pa. Stat. Ann. § 8808-F(d).

11 Pa. Stat. Ann. § 8807-F(b).

12 Pa. Stat. Ann. § 8803-F.

13 This assumes that the credit cannot be taken into account when making the March 2016 estimate, if it may be, the IRR would improve to 6.3%.

14 If the credit is acquired for 75% of the requested credit amount and may be taken into account when making the March 2016 estimate, the IRR would improve to 11.5%.

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.