With the recent news of the FoxConn multi-billion deal to start operations in Wisconsin, it became apparent to the Illinois legislature that having key incentives in place is an important factor to induce companies to expand operations in Illinois. The Illinois legislature took an important step in that direction on August 13, 2017 when it passed and sent HB 162 to Governor Rauner to be signed into law, which he did yesterday. HB 162 has officially extended and revised the Economic Development for a Growing Economy (EDGE) tax credit, which had previously expired back on April 30, 2017.
As a reminder, the EDGE credit as it existed prior to the changes enacted by HB 162 is a nonrefundable income tax credit equal to a percentage (not to exceed 100%) of the Illinois income tax withholdings from new employees. Companies that wish to take advantage of this credit must first apply for approval and awarding of the credit from the Illinois Department of Commerce and Economic Opportunity (DCEO). The credit can be earned over a ten year period and the application request should be filed with the DCEO before any new investment or hiring occurs at the project site.
Applicants are required to commit to investing at least $5 million in capital improvements and to create at least 25 new full-time jobs. If the company has 100 or fewer employees, the thresholds are lowered to at least $1 million in capital improvements and at least five new full-time jobs. In addition, the company must be able to demonstrate that multiple state options exist for the project; at least one other state is being considered for the project; or that the tax credit is essential to the company’s decision to create and/or retain jobs in Illinois.
Finally, taxpayers in certain industries that met minimal investment and employment thresholds and would not otherwise be able to use the EDGE credit (due to net operating losses) could elect to claim the credit against its income tax withholding obligations.
New EDGE Developments
With the passage of HB 162, the granting of EDGE tax credits has been extended to June 30, 2022. In addition, the following changes have been made to the EDGE program:
- The maximum credit is now limited to the lesser of: 50% of the additional income tax withholdings from the new employees + 10% of the training costs for such employees; or 100% of the additional income tax withholdings from the new employees.
- If the project is for an underserved area the 50% limit is increased to 75%. An “underserved area” means a geographical area in which there is at least a 20% poverty rate, at least 75% of the children participate in the federal free lunch program, at least 20% of the households receive Supplemental Nutrition Assistance Program, or the area has an average unemployment rate that is more than 120% of the national unemployment average.
- If the company can provide evidence and demonstrate that it has multi-state location options which it could efficiently locate outside of the state, or that at least one other state is being considered for the project, then the limitation can be increased to an amount equal to 25% of the income taxes withheld on retained jobs for that project.
- Companies with EDGE agreements that were entered into on or after January 1, 2015 are no longer able to elect to use the credit against their income tax withholding obligations.
- The $5 million capital investment threshold for companies with more than 100 employees has been reduced to $2.5 million and removed altogether for companies with 100 or fewer employees.
- The number of new employees required for the credit will be equal to the lesser of: 10% of the company’s current world-wide employment, or 50 new employees. If the company has 100 or fewer employees than it is the lesser of: 5% of world-wide employment, or 50 new employees.
- The new law reduces the options for a company to show that if not for the credit the project would not occur in Illinois to providing evidence that the receipt of the credit is essential to the company’s decision to create new jobs in the state. The only example of such evidence, though not necessarily meant to be exclusive, provided for in the statute is an analysis showing the magnitude of the cost differential between Illinois and a competing state.
- A “claw back provision” is enacted in which a company ceases its principal operations with the intent to shut down the project permanently during the term of the EDGE Agreement. In that case, the entire EDGE credit amount previously awarded is required to be refunded to the DCEO.
- The company will be required to file an informational report with the DCEO no later than April 15 of each year that the company claims the EDGE credit.
The result of the EDGE credit extension bill with revisions mentioned above affords companies with an opportunity to gain a competitive edge by reducing the costs of expanding or initiating new business operations in Illinois. Please feel free to contact your Sikich advisor if you have any additional questions, or wish to discuss this tax credit and its application in more detail.