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Updates for 2013 Law Changes: New Maryland Employer Security Clearance Costs (ESCC) Tax Credit

Maryland individuals and corporations can claim an income tax credit to reduce their share of Maryland income taxes for qualified expenses related to federal security clearance measures. The allowable credit amounts outlined below show the modifications resulting from legislation passed in the 2013 session of the Maryland General Assembly. These amounts are effective for expenses incurred on or after July 1, 2013. The credit has two components.

Security Clearance Administrative Expenses

  • Processing application requests for clearances of employees located in Maryland;
  • Maintaining, upgrading or installing computer systems in Maryland to obtain federal security clearances;
  • Training employees in Maryland to administer the application process

Credit for expenses incurred not to exceed $200,000 per taxable year.

Sensitive Compartmented Information Facility Costs

  • The costs of construction and equipment related to the construction or renovation of a Sensitive Compartmented Information Facility (SCIF — an enclosed area within a building that is used to process classified level information) located in Maryland (up to 50% of the costs or $200,000, whichever is less). The total credit for a taxpayer constructing or renovating multiple SCIFs is $500,000 per taxable year; and
  • The costs for rental payments made by a qualified small business during the first year of a rental agreement for leasing spaces to perform security-based contracting work (up to $200,000 of the costs).

 

Rules Applicable to 2013 Applications
Since the 2013 law changes were not made retroactive to the beginning of 2013, special rules will apply to expenses incurred during the 2013 calendar year.
For eligible expenses incurred between January 1, 2013 and June 30, 2013, the above credit limits are as follows:

  • Portion of credit for security clearance administrative expenses cannot exceed $100,000
  • Portion of credit for construction or renovation costs of a single SCIF cannot exceed $100,000 ($250,000 for multiple SCIFs)
  • Special rule for qualified small business first year leasing costs did not exist. Therefore, no credit is available for these costs incurred prior to July 1, 2013.

Taxpayers with eligible expenses incurred before and after July 1, 2013 must carefully complete their 2013 credit application. The application for 2013 requires separate disclosure and itemization of costs for each component of the credit incurred during the periods of January 1, 2013 to June 30, 2013 and July 1, 2013 to December 31, 2013. To obtain the credit, taxpayers will need to itemize eligible costs in list or spreadsheet format and attach it to the application. Currently, there is no prescribed format for the attachment other than it must clearly identify the date, description and amount of the expense incurred.

Applying for the Credit
The credit will still continue to be administered by the Maryland Department of Business and Economic Development (DBED). In addition, the total credits to be issued remains at $2 million for each calendar year and will be allocated on a pro-rata basis among applicants if total applications exceed $2 million.
The application process also remains unchanged. The taxpayer must submit an application to DBED by September 15th of the year following the year the costs were incurred (September 15, 2014 for the 2013 calendar year). By December 15th of that year, DBED will certify the “approved” amount for each applicant. The taxpayer will be required to file an amended income tax return to reflect the credit and attach a copy of the certification.

Utilizing the Credit
The credit is nonrefundable and is available for taxable years beginning after December 31, 2012 and before January 1, 2017. The credit has an indefinite carry forward period and can only be taken against Maryland income tax.
With the 2013 year coming to an end, taxpayers who may be eligible for any portion of the credit should review their files and start gathering the information necessary to complete their application.