Many businesses can maximize their tax savings by buying and selling transferable federal and/or state tax credits. Find out how tax benefit exchanges like ADP's National Tax Benefit Exchange (NTBE) helps simplify and streamline the process for both buyers and sellers of tax credits.

For many businesses, tax credits and incentives are a valuable element of their tax planning strategy. Beyond securing and taking advantage of tax credits for which they may be eligible, businesses also may have the option of buying or selling transferable credits offered by certain U.S. states.

Taking advantage of transferable credits can be an effective part of a business's tax incentives strategy—one that can benefit from access to a tax credit exchange where buyers and sellers can come together for mutual benefit.

What are transferable credits?

Over 35 states now offer businesses the ability to buy these credits from qualifying companies who have generated them through certain activities but are unable to use (or benefit from) them. Companies with tax liabilities may be able to purchase the tax value of other companies' unused eligible credits across a variety of categories. These transactions can provide financial benefits to both the purchasers and sellers of such credits.

For the purchaser/transferee, buying credits can provide a company without qualifying activities the ability to use tax credits to offset its current and future tax liability. Sellers may be able to monetize a percentage of their otherwise unusable tax credits and purchasers may be able to realize a state tax savings of 5–16% by buying credits.

There are over 100 credits in multiple categories that may be available for sale. In addition to transferable federal credits like low-income housing and historic conservation credits, some of the most common credits offered by states include:

  • Film production — currently, 36 states provide credits to promote the film industry, and 13 of those permit transfer of those credits.
  • Historic rehabilitation — more than 39 states now offer some type of historic preservation or rehabilitation credits designed to encourage investment in maintaining or restoring the architectural integrity of historically significant structures.
  • Research and development
  • Neighborhood assistance
  • Donations
  • Industrial recovery
  • Land conservation
  • Brownfield development
  • Low-income housing credits
  • Jobs credits

Who can benefit from transferable tax credits?

Companies that can benefit from selling transferable tax credits include those who are not paying tax in a state because they are operating at a loss, have Net Operating Loss carryforwards, or have other non-transferrable credits that are otherwise offsetting their tax liability. Similarly, start-up companies for which no taxable income may be forecast, where there are significant investments of capital and/or labor, can benefit from selling tax credits to offset costs.

Companies with significant tax liabilities in states for which little or no qualifying tax credit activity is anticipated can benefit from purchasing transferable tax credits. Likewise, companies undergoing activity that are may trigger increased state tax liabilities also can benefit from purchasing transferable credits.

Challenges and risks of buying/selling tax credits

In the absence of a benefit exchange, buyers and sellers may inquire with state or federal agencies for assistance with possible matches. Some agencies are able to release names of qualified sellers or available buyers to facilitate an exchange. However, agencies do not facilitate the completion of the necessary paperwork, determine the pricing for the transfer, or manage the exchange of compensation for the transfer.

One risk to prospective tax credit buyers/sellers is the potential for fraud.

Fraudulent sellers may attempt to sell and transfer credits for which they do not qualify. Some may attempt to resell previously sold credits, leading to penalties, fines, and possible audits for the purchaser.

Beyond avoiding the risk of fraud, attempting to navigate state and federal regulations, filing the proper paperwork, and gaining access to sellers and buyers, can be difficult to navigate for prospective buyers/sellers lacking the expertise.

Reducing risk and connecting buyers/sellers

Benefit exchanges, like ADP's National Benefit Exchange on the other hand, connect transferable tax credit buyers and sellers using a proprietary database, matching buyers' liabilities with an inventory of tax credits offered by sellers.

Completing the tax credit exchange requires the seller and buyer to complete and submit transfer documents. The applicable taxing agency approves the transfer, resulting in the buyer receiving the credit in exchange for monetary compensation to the seller of the credit.

ADP helps buyers to assess their needs, matches those needs with an appropriate seller, and submits the necessary paperwork to complete the transfer.

Learn more

Download our guidebook: Tax Credit Strategy Guide

The Tax Credit Strategy Guide thoroughly explains how tax credits work, how to optimize your business tax credits, the essential components of a successful tax credit strategy and how ADP Tax Credits Incentives Manager can help your business.

ADP Tax Credit Strategy Guide

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