New Wisconsin tax credit law to benefit startups

On April 2, Gov. Scott Walker signed a tax credit bill, Senate Bill 449, into law as Act 184. Sen. Rick Gudex (R-Fond du Lac) and Rep. Amy Loudenbeck (R-Clinton) were the lead authors of this bipartisan legislation, which passed the Senate 32-0 and the Assembly 96-0. The bill adds new functionality to an existing Wisconsin Economic Development Corp. tax credit program and aims to encourage economic development and improve the tax climate for Wisconsin businesses.

Currently, businesses can apply to the WEDC for the Wisconsin Economic Development Tax Credit. The amount (if any) of the credit awarded to an applicant is determined by the WEDC and depends upon a variety of factors relating to the level of economic development to be generated by the applicant. While this credit can be used to reduce Wisconsin taxable income, it is nonrefundable. If a company is unable to utilize the full amount of the credit to offset Wisconsin taxable income, it may carry forward the credit up to 15 years.

Under SB 449, WEDC is provided the ability to approve the transfer of Economic Development credits by an applicant (i.e., after the award of such credits) to another person. The applicant must meet at least one of the following conditions: 1) is headquartered and employs at least 51 percent of its employees in Wisconsin; 2) intends to relocate its headquarters to Wisconsin and employ at least 51 percent of its employees in Wisconsin; 3) intends to expand its operations in Wisconsin, and that expansion will result in an increase in the number of full-time employees employed by the applicant in Wisconsin in an amount equal to at least 10 percent of the applicant’s full-time workforce in Wisconsin at the time of application; and 4) intends to expand its operations in Wisconsin, and that expansion will result in the applicant making a significant capital investment in property located in Wisconsin, as determined by the corporation.

This request for a transfer must be requested by the applicant on its initial application to WEDC for Economic Development Tax Credits, and such application must identify the would-be transferee. While there is no requirement that the transferee must itself generate any economic development activity, the transfer must be for some consideration other than money, and must be in connection with the business activity of the applicant underwriting the award of these tax credits.

The possibility for transfer of these Wisconsin Economic Development Tax Credits will make it more valuable to a company that cannot currently absorb the credits against taxable income. For example, many startups can take several years to generate taxable income. Commentary by the bill’s sponsors makes it clear that this change in the law was intended to benefit startups.

However, some planning will be required for a potential applicant for tax credits to benefit from this new change. First, the company will need to identify the recipient of the credit in its initial application to the WEDC. The law does not appear to permit a recipient of tax credits to subsequently request a transfer of the Economic Development Tax Credits (in contrast to the current transferability of Wisconsin Early Stage Seed Tax Credits). Second, the company will need to transfer the Economic Development Tax Credits for non-cash consideration related to its business (also in contrast to current rules regarding the transferability of Early Stage Seed credits).

Under SB 449, WEDC is authorized to transfer Economic Development Tax Credits up to $15 million during the next 36 months, with a possible expansion for an additional $15 million over the following 36 months if WEDC determines that continuation of the program will promote significant economic development in the state.

Hamang Patel is a partner and Laura Riske is government affairs director at Michael Best & Friedrich, which has offices in Milwaukee and Madison.

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