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West Virginia Gov. Jim Justice signed legislation earlier this year that created the High-Wage Growth Business Tax Credit Act (the “Program”).1
The state currently is considering proposed rules that would implement the Program and clarify the limited refundability of unused credits.
The Program provides a tax credit for eligible taxpayers creating high-wage jobs in West Virginia.2
Securing tax credits from the Program requires coordination with the West Virginia Development Office and the West Virginia State Tax Department. The Program has a statewide cap of $5 million for the Development Office to use each fiscal year and limits the maximum credit available to each eligible employer to 10% of the total salary amount for the new jobs.3
The legislation provides definitions for the Program’s key terms. An “eligible employee” must be a resident of West Virginia and 100% of the employee’s income from such employment must be from the state. An “eligible employer” must be registered to do business in West Virginia and offer health benefits to all full-time eligible employees and certify that it pays at least 50% of such health benefit premiums. A “new high-wage job” is a new job created in West Virginia by an eligible employer on or after July 1, 2020 that is occupied for at least 48 weeks of a qualifying period by an eligible employee who is paid wages calculated for the qualifying period to be at least 2.25 times the state’s median salary. A new job may not include any job that is a result of job shifts due to the gain or loss of an in-state contract to supply goods and services, and may not include a retained employee following the acquisition of all or part of an in-state business by an employer. A “qualifying period” means the 12-month period following the start date of a high-wage job. A “threshold job” may be included if the job was occupied for at least 44 weeks of a calendar year by an eligible employee, and the job meets the wage requirements for a new high-wage job.4
An eligible employer must apply to the Development Office prior to the taxable year that the employer plans to seek the credit. The employer must include any designees who will represent the employer in the application and must be in good standing with the Tax Department.5
The Program also requires the Development Office to evaluate an application, such as the net benefit to the state, the employer’s need for the credit, the economic distress in the area, and other factors.6
The Development Office can allow the employer to generate the credit from the Program for up to five years.7
Finally, if the employer hires new employees over the award amount, the employer will not be able to claim the credit for those employees and will have to submit another application to receive benefits over the original parameters awarded.8
Claiming the benefit
If the employer’s application to participate in the Program is accepted, the employer will need to submit another application to the Development Office to use the credits at the end of each approved tax year. In this application, the Development Office will verify that there was a net overall increase in statewide employment, at least 10 new high-wage jobs were created and that these jobs met the requirements of new high-wage jobs. The Development Office will also evaluate the location of jobs since the credit is based on the specific location that the employee works.9
A credit will not be awarded for employees moved from one location to another and is also generally prohibited for jobs that are gained or involved with a merger or acquisition.10
However, if a new high-wage job is created by an employer that applies for the credit before the employer is acquired by or merged into another employer, then the resulting new employer may claim the credit for the balance of the qualifying periods for which the new high-wage job is otherwise eligible.11
If the application is approved, the credit must be applied in a specific order: first against the business franchise tax, next, the corporate net income tax, and then the personal income tax.12
Unused credits may be refunded up to $100,000 per year per taxpayer, including owners and the controlled group.13
Any unused credit available after refunds may be carried forward to succeeding taxable years until the full amount of the credit is used or 10 years after the taxable year in which the salaries of the new jobs were paid, whichever is earlier. If neither of these conditions is met, the benefit is forfeited.14
Proposed rules clarifying refundability
On June 22, 2020, the Tax Department filed proposed rules to implement the Program and clarify credit refunds.15
On Oct. 5, 2020, the Tax Department filed modified proposed rules that were revised in response to the review and comment by the Legislative Rule-Making Review Committee.
The latest set of proposed rules include the West Virginia State Tax Commissioner as part of the approval process. Following the Development Office’s approval of an application to use the credits, the Tax Commissioner will review the application, may request additional information from the employer, and may revise the application approved by the Development Office. The Tax Commissioner also has the authority to deny the credit to the extent the employer does not fulfill the application requirements.16
The proposed rules also provide additional clarification for how the unused credit may be refunded. An employer subject to the West Virginia corporation net income tax must first apply the Program’s credit before any other allowable credit. Unused credits can be carried forward for up to 10 years after the taxable year in which the annual salaries for the new jobs are paid or until the full amount of the excess credit is used. Any credit not used in this 10-year window of time is forfeited.17
Taxpayers may request a refund of up to $100,000 of unused tax credits by submitting a timely claim for refund to the Tax Commissioner.18
Pass-through entities must allocate the credit to their equity owners in the same manner as profits and losses are allocated for the taxable year. Equity owners may apply the credit against their personal income tax liability for the tax year. An equity owner that pays corporate net income tax may apply the credits against this tax liability for the taxable year. This credit must be applied before all other tax credits are applied. The 10-year carryforward period also applies.19
Lastly, the proposed rules further clarify refundability to owners of pass-through entities and corporate members of controlled groups. Affiliated groups or combined groups of corporations in which one or more of their members applied for the credit are limited to a refund of $100,000 at the entity level and the total credit must be divided among the members of the group.20
Overall, the Program provides a new opportunity for high-paying employers to offset a portion of their tax liability through new hires, which can help to attract business to West Virginia. Though enacted in March and effective in June, the Program is not an incentive in response to the COVID-19 pandemic. The current state median wage is $33,379.86 based on workforce data provided by WorkForce West Virginia, which means interested companies must create at least 10 new jobs with wages greater than $75,104.69 in order to qualify as an eligible employer.21
Additionally, given the $5 million statewide cap, it is currently unclear if the Program applications will be reviewed by the Development Office on a first-come-first-serve basis, or awarded based on merit. Therefore, any taxpayer considering the Program should consider submitting an application as soon as plans for new hires are confirmed.
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