Maryland Security Clearance Tax Credit

In January 2012 a bill was introduced in the Maryland State Senate that proposed a State income tax credit for costs incurred to obtain federal security clearances. The first reading of the bill (SB296) proposed a requirement for “the Governor of Maryland to make a $6,000,000 appropriation in FY2014 and FY21015 for the tax credit, applying the Act to all taxable years beginning after December 31, 2011.” The bill was unclear as to what costs would qualify for the tax credit and who could claim it. Basically it just appropriated money for the tax credit.

News articles originally suggested that the “proposal would offer tax credits worth up to $3,000 or half the cost of the security clearance, whichever is less, to the individual or company paying for it.”  But individuals and companies rarely pay for federal security clearances.  Someone must have educated the sponsors of the bill on this fact, resulting in significant changes to the bill before it was signed into law on May 22, 2012.  Even the title of the bill changed from “Income Tax Credit – Security Clearance Expense” to “Income Tax Credit – Security Clearances – Employer Costs.”

The new law allows employers to claim a Maryland tax credit of up to $100,000 per year for:

(I) Security clearance administrative expenses incurred with regard to an employee in the state including, but not limited to:

1. Processing applications requests for clearances for employees in the state;
2. Maintaining, upgrading, or installing computer systems in the state required to obtain federal security clearances; and
3. Training employees in the state to administer the application process; . . . .

Employers can also claim an annual tax credit of 50% of the costs or $100,000 (whichever is less) for the construction or renovation of a Sensitive Compartmented Information Facility (SCIF) located in the state.  If multiple SCIFs are involved, the maximum tax credit is limited $250,000 per year.

The credits will be available for tax years beginning after December 2012, but before January 2017.  Two million dollars in tax credits will be available each year.  If applications for tax credits exceed $2,000,000 per year, the credits will be allocated to employers on a pro-rata basis. 

The law provides the basic procedures for applying for the tax credit, but leaves it to the Maryland Department of Business and Economic Development to craft a regulation that defines the exact nature of administrative expenses that will qualify for the tax credit.

The law will help smaller Maryland companies improve their clearance processing capabilities.  It is particularly timely, since many small cleared defense contractors have not yet purchased electronic fingerprint capture equipment needed by December 2013 to implement the Secure Web Fingerprint Transmission (SWFT) system as required by the Department of Defense for security clearance processing.