Steve Holden

Former Indian Territory Federal Tax Incentives

If you are from Oklahoma, some of this may be old news; if you are not from Oklahoma, get out your U.S. history book. The Revenue Reconciliation Act of 1993 provided for substantial tax incentives for business activity within Indian reservations. In 1997, Congress clarified that former Indian reservation land qualified for these tax incentives. More than two-thirds of Oklahoma was Indian tribal land, which was divided into individual family allotments by the Dawes Act of 1887 and Dawes Commission of 1893. To accurately determine which land qualifies, Indian Territory maps, treaties and other records from the 1880s have been consulted. Maps were prepared showing which counties are fully eligible, fully ineligible and split since county lines do not coincide with historical boundaries. In general, eastern Oklahoma and most of southern Oklahoma qualifies, with Tulsa being the largest metropolitan area on former Indian reservation land. Oklahoma City and Enid, which are noted for their land runs by pioneering settlers, do not qualify. No Man’s Land—the Oklahoma Panhandle—also does not qualify.

Taxpayers who have an active trade or business on former Indian land qualify for the following incentives:

• Tax depreciation lives are approximately 40 percent shorter. For example, seven-year property is depreciated over four years, and 39-year property is depreciated over 22 years.
• Federal tax credits are available for employing Native Americans or their spouses. The 20 percent credit applies to the first $20,000 of wages and health insurance premiums paid, as long as the employee’s wages and health insurance premiums do not exceed $40,000. Thus, a tax credit of up to $4,000 per qualifying employee per year is available. Form 8845 is used to calculate this general business credit.

Both of these incentives expired in 2009. Currently, they have not been extended, but in the past, Congress has extended both each time they were due to expire.

Oklahoma Manufacturing Incentives

Industry-specific incentives are common among states. Oklahoma encourages manufacturers to invest in depreciable property or hire new employees by offering a five-year credit against the Oklahoma income tax. The credit is the greater of 1 percent of qualifying investment or $500 per new employee and is taken for five years. This equates to a 5 percent credit for new investment or $2,500 per new employee. The credit can double if the investment is in an Enterprise Zone or if investments exceed $40 million. Unused credits can be carried over until used. A $50,000 investment in manufacturing equipment or a building on a manufacturing site qualifies for the credit. In addition, the investment must not decrease employment. The credit can be taken at the corporate level or can pass through to pass-through owners. The forms can be confusing, especially if multiple years of credits are involved. The state legislature suspended this lucrative incentive in mid-2010. As of July 1, 2010, the credit can accrue but cannot be fully used until 2012.

Oklahoma Aerospace Incentives

Oklahoma also promotes its aerospace industry with aerospace engineer tax credits. Beginning January 1, 2009, Oklahoma aerospace companies received a state tax credit equal to 5 percent of wages paid to an engineer during the first five years of employment. The credit, which is limited to $12,500 per qualified employee per year, is doubled if the engineer graduated from an Oklahoma college.

In addition, an Oklahoma tax credit is available to the aerospace company equal to 50 percent of tuition reimbursed to a new engineer during the first four years of employment. Furthermore, the engineer can receive an individual tax credit for up to $5,000 per year for five years. After 18 months of availability, the state legislature repealed this credit as of June 30, 2010.

Summary

These are three examples of tax incentives available in Oklahoma that are no longer on the table. Many incentives, however, are still applicable and have not changed. These include various Oklahoma Quality Jobs programs that include cash payments, ad valorem tax exemptions, energy industry tax credits, investor tax credits and sales tax exemptions.

For a company operating in multiple locations, determining which incentives are applicable can be difficult. BKD advisors can help identify tax incentives available in existing locations and those targeted for expansion.