A widely-used and successful program, Pennsylvania’s Keystone Opportunity Zone (KOZ), has provided tremendous growth throughout the state since its inception in 1999. By the end of 2017, this program had created more than 7,000 jobs and incentivized more than $2.6 billion of private capital investment into these designated areas. Understanding the tax impact, while actively participating in the program and after its expiration, is critical for businesses.
Businesses are eligible if certain job creation and capital investment requirements are met. Participation in the program requires annual certification. If certified, taxpayers can significantly reduce or eliminate many state and local taxes, including but not limited to: Corporate Net Income, Personal Income, Sales & Use, and Real Estate. For example, the Corporate Net Income Tax rate is 9.99%. A business operating in a KOZ that recognizes Pennsylvania allocable taxable income of $2,000,000 can save nearly $200,000 annually in income tax, before the consideration of other eligible tax savings.
The designation of these Zones is completed by state and local jurisdictions on a parcel-by-parcel basis. The zones have varying expiration dates based on a location and some tax benefits may be available through December 31, 2020. The benefits often last ten years, and, in certain designated locations, benefits can be extended if certain requirements are met. It is important that upon expiration of the benefits, businesses carefully consider the short and long-term effects.
For example, businesses that have benefitted from the KOZ, suddenly paying real estate taxes for the building occupied, sales tax on purchases used, state corporate net income tax, and local gross receipts tax may become a drain on the cash position of the company. Mitigating these impacts requires careful planning as state and local taxes don’t always align. Additionally, the Tax Cuts and Jobs Act (“TCJA”) was signed into law in late 2017, which amended and introduced new regulations under the Internal Revenue Code. These amendments and new regulations also have a significant impact on Pennsylvania state and local income tax and should be considered during the planning.
As zone expiration nears, analysis of the after-program impact should be reviewed as it relates to compliance requirements, cash-flow, and the company’s bottom-line.
To learn more about how Withum can help strategically partner with your company regarding this and other state and local tax incentives, please contact Shawn Henderson or fill in the form below.
Author: Shawn Henderson, CPA | firstname.lastname@example.org