In the most recent Washington legislative session, lawmakers declined to extend several important research and development (R&D) tax incentives in Washington. The High Technology B&O Tax Credit for R&D Spending and the High Technology Sales and Use Tax Deferral/Waiver, will expire December 31, 2014. While there is some possibility these incentives will be restored in 2015, taxpayers should proceed as if these incentives will expire permanently at December 31, 2014.

Many taxpayers know of the high technology B&O tax credit, which provides a B&O tax credit of roughly 1.5% of taxpayer’s research and development expenditures. Although not as well known, the high technology sales and use tax deferral is also a valuable incentive to high-technology businesses investing in research and development facilities. Although the sales tax is only deferred on the construction costs of the research and development facilities, the sales tax is completely waived if the facility continues to be used in research and development for a period of eight years.

In a recent meeting, the Washington Department of Revenue (DOR) discussed issues that arise concerning these expiring incentives.

The DOR interprets the expiration of the high technology deferral statute to provide that no deferral certificates can be issued to taxpayers after December 31, 2014. However, if a taxpayer obtains a deferral certificate before December 31, 2014 for a qualifying project, the project will be eligible for sales tax deferral on construction performed after December 31, 2014. Merely filing for a certificate before December 31, 2014 is insufficient. Instead, the deferral certificate must be issued before December 31, 2014.

The DOR anticipates there will be many applications made for high technology sales and use tax deferrals towards the end of 2014. The DOR suggests that taxpayers have those applications for deferral certificates to the DOR no later than November 1, 2014 to assure that a deferral certificate will be issued before year-end. Applications received after November 1, 2014 will be processed in the order in which they are received, but no assurances can be made that a deferral certificate will be issued before December 31, 2014 if it is not received by November 1, 2014.

The DOR also cautioned taxpayers to err on the high side in the request for the high-tech sales tax deferral. The DOR is apparently concerned they may not legally amend existing certificates after December 31, 2014 to increase the available sales tax deferral. Taxpayers can avoid a potential loss of benefits by applying for a deferral certificate with plenty of cushion for unanticipated expenditures.

Although the DOR indicated it would expect most projects to be finished within one and a half to two years of application, there is no deadline for starting or finishing a project. The DOR cautioned that taxpayers must continue to follow the rules of the deferral program, including an application for deferral must be made before the construction of the project is initiated.

The DOR also indicated that persons using the high technology B&O tax credit must establish this credit prior to December 31, 2014. As this credit is ordinarily established by applying the credit to B&O tax on a return, the DOR advice would require the credit to be taken on the last tax return filed before December 31, 2014. From this practitioner’s perspective, the advice of the DOR is not supported by the statute. Although the credit will expire January 1, 2015, it should apply to tax periods ending before January 1, 2015. That the filing date of these returns is after January 1, 2015, should not affect the availability of the B&O tax credit. Hopefully, additional guidance from the DOR will confirm the proper requirements.

Taxpayers looking to take advantage of either incentive should review Chapter 82.63 RCW (sales/use tax deferral), RCW 82.04.4462 (B&O tax credit) and WAC 458-20-24003 (tax incentives for high-technology businesses). I am also available to work with taxpayers on securing the benefits of these valuable incentives.

In accordance with Circular 230 Disclosure

Original Source By: Ron Bueing