Rhode Island Basic Business Taxes 2010
Rhode Island's economic development, finance and tax organizations provide a range of incentive programs to initiate new business and commercial investment. Specific programs include corporate income and apportionment, sales tax abatement, and the Job Growth Act.
Corporations pay only one business tax to the state that uses the U.S. Form 1120 as a basis. Rhode Island's apportionment formula only uses sales shipped to Rhode Island in the sales portion of the gross receipts part of the formula. For tax years beginning on or after January 1, 2004, when calculating income tax payable to the state, a manufacturer with income from business partially within the state may elect to apportion its net income by means of an equal weighted formula or with an increased sales allocation fraction. Beginning on or after January 1, 2005, the alternate formula allows for 25 percent of the property factor, 25 percent of the payroll factor, and 50 percent of the sales factor. Affiliated multistate corporations may file single separate Rhode Island corporate returns or file a consolidated return. In either case, the net income is subject to apportionment.
Rhode Island has a 7 percent Sales or Use Tax, Unemployment Compensation fund tax, and local property taxes. There are no county taxes or governments in Rhode Island.
Sales Tax Abatement:
Firms using bond financing programs offered through the Rhode Island Economic Development Corporation or which are given "Project Status" by the RIEDC are exempt from Rhode Island sales tax on construction materials and equipment, furniture, fixtures, machinery, computers and equipment for the facility that are not already exempt from sales tax under other provisions of the state law, e.g.: pollution control equipment. To be considered for project status, a project must result in firms wages exceeding the median annual wage by 5% (105% of median annual wage) for full-time jobs (minimum of 30 hours per week) and gain approval by the RIEDC.
Job Growth Act - Income tax reduction on performance-based income:
The jobs Growth Act of 2005 (RIGL 42-64.11-1) allows eligible businesses in any industry to offer their employees an exclusion of 50 percent of performance-based compensation from their Rhode Island gross income. In return, the company pays a 5 percent tax each year on the performance-based income paid that year. In order to qualify, a company must hire 100 new employees in the state and add at least $10 million to its state payroll. Those new workers must earn at least 125 percent o the state's annual average compensation. Employees must be hired or relocated after June 1, 2005 and cannot have been previously employed by the company. The tax cut applies only to bonus or incentive income, not base salary.
Corporate income tax rate reduction:
The Rhode Island Jobs Development Act grants incremental income tax reductions to companies that create new employment in Rhode Island after July 1, 1995. The new jobs reduce a company's corporate income tax rate (currently 9 percent) by a quarter percentage point (0.25) for each 50 new jobs created during a three-year period. For companies with fewer than 100 employees, the tax reduction occurs if at least 10 jobs are added during a three-year period. The maximum reduction is 6 percent, allowing the present state income tax to be reduced to as low as 3 percent. New employees must be paid at least 250 percent of the state minimum wage, which is presently $7.40 per hour. The rate reduction is permanent as long as the company maintains the same level of employment that it had at the end of the third year following the election of the base period.
Investment tax credits:
A manufacturer is allowed 4 percent tax credit against the Rhode Island business corporation tax and the personal income tax on new facilities and machinery and equipment used in the production process.
The 4 percent investment tax credit may not reduce the taxpayer's liability below minimum tax ($250). Unused credits may be carried forward for up to seven years. Manufacturers may elect to use a three-factor equal weight apportionment or a three-factor with sales double weighted. They may elect the apportionment formula that benefits them the most each year.
"High performance" manufacturers are allowed a 10 percent credit against the Rhode Island business corporation tax and the personal income tax on newly purchased or constructed facilities or structural components, and machinery and equipment used in the production process. The 10 percent investment tax credit may not reduce the taxpayer's liability below 50 percent of the taxpayers total tax liability before credits for that year. Unused credits may be carried forward for up to seven years. Manufacturers may not take the 10 percent and the 4 percent tax credits on the same items.
"Qualified taxpayers" (firms paying above average wages or investing significantly in worker training) are able to take a 10 percent credit on leased or tangible personal property and other tangible property acquired, constructed, reconstructed, or erected on or after January 1, 1998. To qualify, the firm must be a "qualified taxpayer" and meet one of the four "high performance" criteria. The 10 percent investment tax credit applies to items acquired after January 1, 1998. The credit is not allowed on office equipment, trucks, vehicles, and miscellaneous workshop tools. Except for "high performance" manufacturers, the investment tax credit may not reduce the taxpayer's liability below 50 percent of the taxpayers total tax liability before credits for that year. Unused credits may be carried forward for up to seven years.
Research and development:
A 22.5 percent tax credit is allowed for increases in qualified research expenses - the highest rate in America. If the increase above base period expenditures exceeds $111,111, the credit equals 16.9 percent of the excess. The credit is available to corporations, sole proprietors or passed through from partnerships, joint ventures, or subchapter S corporations. Unused credit may be carried forward for up to seven years.
A taxpayer is allowed 10 percent tax credit for expenditures paid or incurred during the taxable year for the construction, reconstruction, erection, or acquisition of any property that is used or to be used for the purpose of research and development in the experimental or laboratory sense. The property must be depreciable and have a useful life of three years or more. The credit is available to corporations, sole proprietors or passed through from partnerships, joint ventures, or subchapter S corporations. Unused credit may be carried forward for up to seven years.
In lieu of depreciation or investment tax, a taxpayer is allowed a one-year write-off for expenditures paid or incurred during the taxable year for the construction, reconstruction, erection, or acquisition of any property that is used or to be used for the purpose of research and development in the experimental or laboratory sense.
Sales of scientific equipment, computers, software and related items to a qualifying firm to be used predominantly by that firm for research and development purposes are exempt from Rhode Island Sales Tax.
Job training tax credit:
The job training tax credit grants a credit against the corporate income tax (or the insurance premium tax in the case of insurance companies) equal to 50 percent of the actual training spending, whether for new or existing employees, by companies in accordance with an approved training plan. Plans must be filed with the Rhode Island Human Resources Investment Council for approval prior to the training. The credit allowed is capped at $5,000 for each employee in any three-year period.
Job training grants:
Rhode Island offers a unique Human Resources Investment Council training program for business and industry funded through a job development assessment of 0.15 percent on the firm's taxable payroll to $18,200 per employee. This pool of money is available for industry to create customized training programs tailored specifically for a company and free from restrictions imposed by federally funded programs.
Rhode Island employer's apprenticeship tax credit:
The annual credit allowed is 50 percent of the actual wages paid to the qualifying apprentice or $4,800, whichever is less. The credit applies to the following trades in the metal and plastic industries: machinist, toolmaker, model-maker, gage maker, pattern-maker, plastic process technician, tool and machine setter, die-sinker, mold-maker, tool and die maker, machine tool repair.
Educational assistance and development credit:
A credit is 8 percent of the contribution in excess of $10,000 made to a Rhode Island institution of higher education and the contribution is to be for the establishment or maintenance of programs of scientific research or education. Documentation requires written statement from the institution. Unused credit may be carried forward five years.
Adult education tax credit:
The Rhode Island adult education tax credit allows for both a work site and non-work site tax credit for vocational training or basic education of 50 percent of the costs incurred up to a maximum of $300 per employee and $5,000 per employer per calendar year. The employee must remain in the business for 13 consecutive weeks and a minimum of 455 hours of paid employment. Excess credit cannot be carried forward.
Enterprise zone tax incentives:
Firms qualifying for enterprise zone tax credits by increasing total company employment by 5 percent within an R.I. enterprise zone may take a credit equal to 75 percent of the total wages paid to enterprise zone employees domiciled in an enterprise zone or 50 percent of wages paid to workers not domiciled in an enterprise zone. The maximum credit is $5,000 per enterprise zone resident employees and $2,500 for other enterprise zone employees.
High performance manufacturers may include nonresident employees who pay personal income taxes to the state, whether newly hired or transferred from out of state, as enterprise job employees for purposes of calculating the enterprise zone tax incentives.
Resident business owner tax modifications:
In computing his or her personal income tax, a resident of an enterprise zone who owns and operates a qualified business facility in that zone may deduct $50,000 per year as a modification reducing federal adjusted gross income during the first three years of operation; and $25,000 during the fourth and fifth years. A resident business owner may elect this modification or the business tax credit (above), but not both.
Historic preservation investment tax credit:
Rhode Island's state tax credit is for owners who fix up historic income-producing buildings. The state tax credits may be combined with federal tax credits for historic preservation and housing. This 30 percent commercial historic tax credit, effective January 1, 2002, is for qualified rehabilitated buildings and certified historic structures representing investments of at least 50 percent of a property's value. However, as of 2008, wrestling with the difficult budget, the RI General Assembly has limited the programs to projects already in the pipeline.
Small business capital investment tax incentives:
Deductions, modifications, capital gain exclusions, and wage credits are permitted only to business entities or venture capital partnerships certified by the Rhode Island Economic Development Corporation. The certification number must be shown on all incentive claims.
Incentives under provisions include:
• Deductions or modifications: A deduction or modification equal to the taxpayer's qualifying investment in a certified venture capital partnership or equal to the entrepreneur's investment in a qualifying business entity. Restrictions prohibit the deduction of modification from reducing the business corporation tax, public service corporation tax, or bank excise tax to less than the minimum tax. Personal income tax or gross premiums tax may not be reduced to less than $0. The amount of unused deductions or modifications may not be carried over to following years.
• Capital gains exclusion: Business corporation tax, public service corporation tax, bank excise tax, or personal income tax may exclude long-term capital gains from sale or exchange of an interest in a qualifying business entity or certified venture capital partnership. Taxpayers seeking exclusion of capital gains must provide proof of the date and amount of the investment in the qualifying business entity or certified venture capital partnership. The Rhode Island Economic Development Corporation must certify the business entity or partnership.
• Wage credit: A wage credit is available against an entrepreneur's personal income tax for a qualifying business entity for 3 percent of wages paid to employees for the calendar year in excess of $50,000. The following are excluded: wages paid to owners, wages paid more than five years after the start or purchase of the business, and wages paid to employees who are not principally employed in Rhode Island. Unused credit may be carried over to the following year. The credit ceases in the taxable year following the taxable year in which the annual gross revenue of the business equals or exceeds $1.5 million.
Disabled access credit for small business:
The expenses must be made to enable the small business to comply with federal or state laws protecting the rights of persons with disabilities. The credit is equal to 10 percent of the total amount expended during the tax year in Rhode Island up to a maximum of $1,000.
Telecommunication sales tax exemption:
Regulated investment companies with at least 500 full-time equivalent employees are exempt from the sales and use tax imposed on toll-free terminating telecommunication service. An eligible company is a regulated investment company or a corporation to the extent such service is provided, directly or indirectly, to or on behalf of a regulated investment company, and employee benefit plan, a retirement plan, or a pension plan.
Intangible personal property sales tax exemption:
Sales or transfers of intangible personal property such as stocks, bonds, accounts receivable, money, or insurance policies are exempt from the sales tax.
Rebuilding after a natural disaster:
Manufacturers who have lost 60 percent or more of their facilities due to a natural disaster resulting in the inability of active employees to continue production may qualify for corporate income tax rate reductions under the Jobs Development Act for jobs retained or added. Damaged businesses may also qualify for a sales tax exemption on reconstruction materials that are not reimbursed by insurance.
Incentives for employers to hire unemployed or low-income Rhode Island residents:
A tax credit of 40 percent of an eligible employee's first year wages up to a maximum of $2,400 is available to businesses and individuals that employ and retain previously unemployed or low-income Rhode Island residents. Each eligible employee must meet certain criteria and be certified by the Department of Labor and Training.
Bonus Program private participation:
An employer who participates in the Bonus Program, which provides job training for former AFDC recipients, shall be entitled to a $250 tax credit per participant.
Child and adult daycare tax credit:
A taxpayer that purchases or provides for adult or child daycare services for adult family members or dependent children of the taxpayer's employees or to employees of its commercial tenants in Rhode Island is allowed a tax credit in the amount of 30 percent of the total amount expended during the taxable year for services purchased and 30 percent of the total amount expended during the taxable year for the establishment and/or operation of a daycare facility by the taxpayer alone or in conjunction with others. The maximum credit allowed is $30,000 and the amount of unused credit may not be carried forward. Credits for child daycare require confirmation that the facility agrees to accept children for whom the services are paid by Rhode Department of Human Services.
Industrial fuels and raw materials:
Sales of tangible personal property, computer software, and public utility services when the property or service becomes a component part of a manufactured product for resale, or when the property or service is used in the process of manufacturing or processing products for resale are exempt.
Scientific equipment used in research and development is exempt from the state sales tax.
Pollution-control property and supplies are exempt from the state sales tax.
Professional services such as those provided by physicians, attorneys, accountants, engineers, and others are exempt. However, the tax applies to any tangible personal property that may be sold at retail by such professionals (e.g., opera glasses, field glasses, etc.).
Intangible personal property:
Sales or transfers of intangible personal property such as stocks, bonds, accounts receivable, money, or insurance policies are exempt from sales tax.
Aircraft and fuel used for propulsion of airplanes:
Effective January 1, 2005, Rhode Island exempts the sale, storage, use or other consumption of new or used aircraft and aircraft parts from taxation. Labor charges continue to be exempt where labor charges are separately stated by the seller. Fuel used for propulsion of aircraft (i) gasoline and other products taxed under chapter 36 of title 31, and (ii) fuels used for the propulsion of airplanes is exempt.
Property tax abatement:
Local governments may exempt real estate used by manufacturing and commercial firms from property taxes or the tax rate may be stabilized for 10 years.
Manufacturers' machinery and equipment:
Manufacturers' machinery and equipment used in the manufacturing process is exempt from local property tax.
Manufacturers' inventory is also exempt from local property tax.
Certified pollution-control equipment and equipment that generates hydroelectric power is exempt from local property tax.
Cities and towns have the option of exempting office equipment such as computers and communications equipment from local property tax.
Wholesale and retail inventories:
Cities and towns have the option of exempting wholesale and retail inventories from local property tax. The local property tax on wholesale and retail inventories is being phased out over 10 years beginning in 1999. The tax will be eliminated in 2009.
Rhode Island State Contact:
Rhode Island Economic Development Corporation
315 Iron Horse Way, Ste. 101
Providence, RI 02908
Incentive and tax information is provided to Area Development by each state's economic development or commerce agency for information purposes only and is subject to revision at any time by the state government. Please contact the state agency directly for full requirements and offerings.