Maryland – Cash Investments and Tax Credits Add up to Business Success for Cybersecurity Companies

00848e14-bcf8-4463-b8f0-cd72a69aa6fbThe Internet Age has changed the business environment in the world. For instance, Silicon Valley in California has become the home to many high-tech business giants. New businesses attracted to Silicon Valley have brought high-paying jobs and with the jobs comes tax revenue for the state. With the changeover from a manufacturing economy to a digital economy, the states want to attract new age businesses that employ highly paid professionals and the tax base that comes with this industry.

Recognizing the positive impact having a high-tech industry centered in your state can bring, Maryland is offering incentives for Cybersecurity companies that locate here. With its close proximity to Washington DC and a highly educated workforce, Maryland has the perfect combination of factors for rapid growth of the Cybersecurity industry. Recognizing the benefits of Maryland, the federal government has made Fort Meade, Maryland a hub for Cybersecurity and is looking for other locations in the nearby Maryland suburbs to establish relationships with Cybersecurity businesses. Many of the federal government agencies that are focused on Cybersecurity are centered in Maryland including NSA, U.S. Cyber Command and the National Institute of Standards and Technology, making this area one of the fastest growth areas in the country for the industry.

With the rapid expansion of Cloud Computing and the steady stream of new “Bugs,” everyone is worried about their online security. Both government and commercial businesses need help with protecting their computer operations and are seeking qualified consultants. Like other states, Maryland has developed Cybersecurity experts, education and training programs, technology, products, systems and infrastructure. These programs are specifically tailored to the needs of the emerging Cybersecurity industry. The states are fighting to attract these types of businesses to their state because of the good jobs and tax revenue that comes from this new age business model. Recently Maryland lured a Cybersecurity company – Luminal – to relocate to the state with several cash and tax credit incentives. The incentive package included a $600,000 investment by the state in the company and tax credits. These incentives helped the company secure a new round of market investments so the company can move up to the next level of growth.Beginning in 2014, Maryland began offering a tax credit to Cybersecurity companies. The Maryland Cybersecurity Tax Credit is based on new investments in the Maryland-based company. The investors do not get the tax credit, because the Maryland lawmakers wanted the incentive to stay in Maryland. Instead the tax credit is given to the Cybersecurity company. The tax credit is equal to 33% of investments in the Qualified Maryland Cybersecurity company. The credit can be up to $250,000 per investor and 15% of the program appropriation. The tax benefit is realized in one of three ways – reduce the income tax obligation of the company or reduce the owner’s tax bill or the company can get the credit in cash if there is no tax obligation. The details as to what is a qualified Cybersecurity company are extensive. In summary it is a Maryland-based, small non publicly traded company that does specific activities and has a qualified investor, who leaves the investment in the company for a period of time.In late 2013, the Maryland Department of Business and Economic Development began accepting applications for the first year of the state’s CyberSecurity tax credit. When the state’s fiscal year ended June 30, 2014, a little over $1 Million of credits had been issued to three qualified companies based on 15 investments in these companies. The state budgeted $3 Million for the credit and only one-third of the money was claimed. There were several reasons suggested why some of the state money was left on the table such as the short six-month period for applying for the credit, the strict qualification requirements and the fact that the credit dollars must remain in Maryland. For the new year starting July 1, 2014, state officials are hoping more businesses will be attracted to apply for the credit and other incentives offered to businesses. The Maryland Business and Economic Development officials are working on ways to bring new investments to the state by actively courting Cybersecurity companies with cash investments of state dollars and tax credits. The state is hoping the creativity of the investment market will find new ways to entice investors into the Cybersecurity industry and overcome the rule about the investment remaining in Maryland.

It is pretty obvious that Cybersecurity will be a high priority for government agencies and businesses for the foreseeable future. The almost daily news reports about high profile digital “breakins” will ensure this industry enjoys above average growth and business success. Cybersecurity companies should make sure they take advantage of the government incentives – such as the Maryland tax credits and cash investments – to improve their bottom line and add to their growth factor.

Andy Bareham, a Principal with KatzAbosch, joined the firm in 2008. He has more than 25 years of tax experience with a focus on helping businesses with state tax matters. He is a member of the firm’s Tax Department and is chair of the firm’s State and Local Tax group. Andrew speaks frequently on state tax topics such as planning strategies, audit and appeals representation and compliance issues. For more information, please contact Andy at abareham@katzabosch.com or 410.307.6442. www.katzabosch.com

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