Oklahoma-Innovation
Oklahoma’s neighboring states, namely Texas, get a lot of
publicity for their lenient, business-friendly tax
policies. While bordering states continue to receive
accolades from media and lawmakers, Oklahoma business has
quietly flourished under recent tax policies. Over the
past 10 years personal income tax cuts have benefitted tax
payers and the state government alike.
Despite many economists’
predictions, Oklahoma’s income tax cuts have increased tax
collections. Individuals account for 85% of Oklahoma’s
small business owners and tax cuts on these individuals over the
past 10 years has promoted tremendous growth in small business
income. In fact, Oklahoma’s small business income is
growing twice as fast as the national average.
This growth is projected
to continue with Oklahoma’s continued commitment to the
reduction of personal income tax. It is important for
Oklahoma businesses of all sizes to capitalize on all available
tax incentives, particularly the more lucrative ones such as
state and federal Research and Development Tax Credits.
The Research & Development Tax
Credit
Enacted in 1981, the Federal Research and Development (R&D)
Tax Credit allows a credit of up to 6.5 percent of eligible
spending for new and improved products and processes. Qualified
research must meet the following four criteria:
New or improved products, processes,
or software
Technological in nature
Elimination of uncertainty
Process of experimentation
Eligible costs include
employee wages, cost of supplies, cost of testing, contract
research expenses, and costs associated with developing a
patent. On January 2, 2013, President Obama signed the bill
extending the R&D Tax Credit for 2012 and 2013 tax years.
Oklahoma State Tax Incentives
In
addition to the federal R&D Tax Credit, eligible Oklahoma
businesses can claim a state R&D tax credit. While
available R&D Tax Credits are excellent tax incentives,
Oklahoma offers a number of other favorable tax
incentives. These incentives include: various Quality Jobs
programs, Investment/New Jobs Tax Credit, Economic Development
Pooled Financing and a Former Indian Lands Incentive and Tax
Credit. Although eligibility requirements for each of
these incentives is dependent on a number of different
variables, taking
advantage of these incentives can significantly reduce, and
potentially eliminate, the tax liability of a company operating
in Oklahoma.
Oklahoma State R&D Tax Credit
The
Oklahoma State R&D Tax Credit is calculated based on the
number of computer services, data processing, or research and
development employees hired by a company in a given fiscal
year. For each of these employees hired, the company is
eligible for a $500 tax credit. The employee must be paid
at least $35,000 and be employed during the final quarter in the
applicable tax year to qualify for the credit. The credit
is capped at 50 employees ($25,000) per year.
Quality Jobs Program
Oklahoma’s Quality Jobs Program targets manufacturers and
certain service industries. The program offers a cash back
incentive to companies that have a new payroll investment of
$2.5 million or more. This payroll investment threshold is
$1.5 million for certain food processing and R&D projects or
to firms located on certain former military bases. For
companies producing new direct jobs to the state that are
greater than or equal to 1% of the total labor force of the
county an even lower payroll threshold of $1 million is
applicable. The cash payment is up to 5% of new taxable
payroll or 6% if at least 10% of a company’s workforce is
veterans. It is also required that qualifying companies
meet the lower of the average county wage or the state index
wage ($31,684). These minimum wage requirements do not
apply in the various Opportunity Zones throughout
Oklahoma. All business receiving the cash back incentive
must also offer basic health coverage to all employees working
30 hours or more per week whose pay is included in the payroll
figures for qualification.
Small Employer Quality Jobs Program
Oklahoma’s Small Employer Quality Jobs Program gives qualifying
enrolled companies cash rebates up to 5% of newly created
taxable payroll for up to 7 years. Like the Quality Jobs
Program, this program targets manufacturers and certain service
companies. A qualified company can have no more than 90
employees and must create between 5-15 new jobs depending on the
size of the population of the city where the project is to be
located. The same health care requirements apply for the
Small Employer Quality Jobs Program that applied for the Quality
Jobs Program. Qualified companies must also pay employees
included in the application an average of at least 110% of the
average county wage where the project is located.
Applicants in economically challenged counties may qualify at an
average of 100% of the county average.
21st Century Quality Jobs Program
21st
Century Quality Jobs Program was passed in 2009 and rewards
businesses with a highly skilled, knowledge-based
workforce. The goal of the program is to promote impactful
high wage jobs without competing with existing incentives.
Qualifying companies may be eligible for up to twice the Net
Benefit rate of the Quality Jobs program, i.e. 10% of taxable
payroll for eligible new jobs. The 21st Century Quality
Job Program lasts up to 10 years. Qualifying companies
must create a minimum of 10 New Direct Jobs and employees in
these jobs must work 30 or more hours per week. The
average wage requirement for the New Direct Jobs is greater than
or equal to 300% of the average county wage which does not
exceed a state wage index calculated at $94,000 for the program
in 2013.
Investment/New Jobs Tax Credit Package
Manufacturers in the state of Oklahoma can claim a New Jobs
Credit for based on the number of new employees hired in a
specific tax year. For each new manufacturing employee
hired with wages above $7,000 for the applicable tax year, a
company is eligible for a $500 tax credit. If the new
employee is working in a manufacturing facility located in an
Oklahoma enterprise zone, the credit per new employee increases
to $1,000. The Investment Tax Credit is available for
companies with at least $50,000 worth of investments in
depreciable property placed in service in the applicable tax
year. The depreciable property must be used in
manufacturing, or in a web search portal establishment, and the
investment cannot come as a direct result of a decrease in the
number of employees. The credit totals 1% of the qualified
investment and doubles if the business is located in an Oklahoma
enterprise zone or if the investment exceeds $40 million.
A company must choose between New Jobs or Investment Tax Credit
and cannot receive both.
Federal American Indian Lands
Incentives
The
revenue Reconciliation Act of 1993 provided for substantial tax
incentives based on certain business activity within Indian
reservations. The incentives passed were an employment tax
credit for employers of certain enrolled tribal members and
their spouses who work within an Indian reservation and an
accelerated depreciation allowance for certain business property
used within an Indian reservation. Although the American Indian
Lands Tax Credit is one of many tax incentives expired as of
December 31, 2013 that is awaiting extension by Congress,
eligible Oklahoma businesses should amend past year’s returns
and/or monitor the status of the expired credit.
Oklahoma has the largest percentage of American Indian
population in the country and roughly two-thirds of Oklahoma
qualifies for the federal accelerated depreciation allowance,
which results in savings of up to 40%.
Oklahoma State University Incubator
The
Riata Center of Entrepreneurship and the Spears School of
Business at Oklahoma State University operate one of the most
successful student business incubators in Oklahoma, the Student
Startup Council. In 2014 the Student Startup Council was
awarded the Incubator of the Year at the Small Business Awards
in Oklahoma. The council accommodates students at
different stages of entrepreneurship and offers students with
early business concepts assistance. Sponsors also fund
cash prize incentives for annual competitions within the
incubator. In addition to the Riata New venture Incubator,
which helps students who have already launched a business, the
hatchery program helps students who are still in the development
and planning stages of creating their business.
Conclusion
It
is important that businesses operating in Oklahoma capitalize on
all state and federal tax incentives in which they are
entitled. As Oklahoma continues to adopt more lenient tax
policies, companies should take advantage of the numerous
incentives that follow. The incentives mentioned in this
article, especially the federal and Oklahoma R&D tax
credits, can reduce, and even eliminate, the taxes owed by
eligible companies. Additional incentives such as Economic
Development Pooled Financing and the Aerospace Engineer
Workforce tax Credit are also available for Oklahoma companies.
