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Employer Security Clearance Costs (ESCC) Tax Credit

The tax year 2023 program is now closed.

​​​​​​​​​​​​​The ESCC Tax Credit provides income tax credits for expenses related to federal security clearance costs, construction of Sensitive Compartmented Information Facilities (SCIFs) and first-year leasing costs for small businesses doing security-based contract work.

BENEFITS

Security Clearance Administrative Expenses Tax Credit

A business may qualify for an income tax credit up to $200,000 per taxable year for qualified security clearance administrative expenses.

Qualified expenses include:

  • Processing application requests for federal security clearance,
  • Maintaining, upgrading or installing computer systems in Maryland that are required to obtain federal security clearance, and
  • Training employees in the State to administer the clearance application process.

Sensitive Compartmented Information Facility Costs Tax Credit

A business may also claim a credit against its Maryland income tax for costs related to the construction or renovation of a SCIF located in Maryland. The SCIF must be accredited by the appropriate federal agency. For costs related to a single SCIF, the credit is equal to the lesser of 50% of the costs or $200,000. For costs related to multiple SCIFs, the credit is the amount of costs up to $500,000 per calendar year.

The First Year Leasing Costs Tax Credit for Qualified Small Business

A qualified small business may also claim a credit against its Maryland income tax up to $200,000 for costs for rental payments during the first year of a rental agreement for leasing spaces to perform security-based contracting work.

The credits are capped at $2 million for each calendar year. If the amount of credits all businesses apply for exceeds the cap, each business receives its pro rata share. Businesses must submit an application to the Maryland Department of Commerce (Commerce) by September 15 for expenses incurred in the previous tax year.

ELIGIBILITY

For a business to be eligible, it must apply to and be certified by Commerce. The credit is available for eligible expenses for taxable years beginning after December 31, 2022, but before January 1, 2028

Companies that employ more than 500 employees are not eligible for the ESCC tax credit.

APPLY

To claim the ESCC tax credit; a business must submit an application to Commerce by September 15th following the tax year in which the related expenses and costs were incurred. A business claiming the First Year Leasing Costs Tax Credit for Qualified Small Business must submit a Small Business Affidavit with an application. By December 15th of that year, Commerce will certify the approved amount for which the applicant will be required to file an amended Maryland income tax return with the Comptroller of Maryland to claim the credit and attach a copy of the Commerce certification.

The total ESCC tax credit approved by Commerce may not exceed $2 million for any calendar year. If the total amount of credits applied for by all businesses exceeds $2 million, the credits will be approved on a pro-rata basis. Excess credit may be carried forward until the excess amount is fully used.​

RESOURCES

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CONTACT

For more information about ESCC Tax Credit contact:

Jason Sobel, Tax Specialist
Maryland Department of Commerce
Office of Finance Programs
jason.sobel1@maryland.gov

FREQUENTLY ASKED QUESTIONS

  • What is the Employer Security Clearance Costs (ESCC) Tax Credit?

    • ​Maryland's ESCC Tax Credit program provides income tax credits to businesses that incur qualified federal security clearance administrative expenses, and construction and equipment costs for constructing or renovating sensitive compartmented information facilities (SCIFs) in Maryland. 

      In addition, a qualified small business that performs security-based contracting in Maryland may be eligible for income tax credits for the first year of rental payments of leased space in Maryland. The total amount of credits depends on the amount of eligible expenses and costs incurred with a limit of $2 million for all businesses that apply. Tax credits are more valuable than deductions because credits are subtracted directly from income tax liability.

  • What are qualified security clearance administrative expenses?

    • The qualified security clearance administrative expenses must be administrative expenses that are incurred for obtaining federal security clearances for employee(s).

      The qualified security clearance administrative expenses include, but not are limited to:

      1. Processing application requests for federal security clearance,
      2. Maintaining, upgrading or installing computer systems in Maryland that are required for obtaining federal security clearances, and
      3. Training employees in Maryland to administer the application process.

      Wages and Salaries for employees applying for security clearance are not an eligible expense.

  • What are the qualified first year leasing costs?

    • The qualified first year leasing costs are expenses incurred for rental payments during the first year of a rental agreement for spaces leased in Maryland to perform security-based contracting.

      The business must be a "small business" to be qualified for a credit for the first year leasing costs.

  • What is the qualified “Small Business”?

    • A qualified "small business" must meet all of the following conditions:

      1. Independently owned and operated,
      2. Not a subsidiary of another firm,
      3. Not dominant in its field of operation, AND
      4. Did not employ in its operations more than 25 individuals in its most recently completed fiscal year.

  • What is a “Sensitive Compartmented Information Facility (SCIF)”?

    • Sensitive Compartmented Information (SCI): SCI is classified intelligence information concerning or derived from sensitive sources, methods or analytical processes which is required to be handled exclusively within a formal access control system established by the Director of National Intelligence.

      Sensitive Compartmented Information Facility (SCIF): SCIF is an area, room, group of rooms, or installation accredited by the proper authority to store, use, host discussions of, and/or process SCI.  The SCIF must be certified by the Assistant Deputy Director of National Intelligence for Security (ADDN/SEC) or by the sponsoring federal agency.

  • How much credit does a business receive?

    • Businesses may qualify for the credits for security clearance administrative expenses, first year leasing costs and SCIF costs.

      The Credit for Security Clearance Administrative Expenses:  A business may receive a credit against its Maryland income tax up to $200,000 per taxable year for qualified expenses.*

      The Credit for First Year Leasing Costs:  A "small business" may receive a credit against its Maryland income tax up to $200,000 for the leasing costs for the first year of rental agreement.*

      The Credit for SCIF Costs:  A business may receive a credit against Maryland income tax of 50% of the qualified costs for a single SCIF up to $200,000.  For Costs related to multiple SCIFs the credit is the total costs up to $500,000.*

      *If total credits of security clearance administrative expenses, first year leasing costs and SCIF costs claimed exceed $2 million for a calendar year, the ESCC Tax Credit is prorated.

  • How can I prove eligible ESCC expenses and costs?

    • Business Certification Requirement:  A business must be certified as a qualified business entity that is eligible for the tax credit. Applications must be submitted through the web portal by September 15th following the end of the tax year for which expenses are being claimed. Late applications will not be accepted.

      Commerce will certify to the taxpayer the amount of ESCC Tax Credit that the taxpayer may claim by December 15th of the same year.

      The Credit for Security Clearance Administrative Expenses:  A business must include with their application a detailed itemized accounting or spreadsheet of the qualifying security clearance administrative expenses, and invoices and proof of payment for each expense.

      The Credit for First Year Leasing Costs:  A business must provide a copy of a rental agreement for spaces leased for qualified lease costs, a payment schedule, and proof of payment of all claimed rent expenses.  The business also must provide the signed Small Business Affidavit as an attachment to the application.

      The SCIF Costs:  A business must provide a detailed itemized accounting of the qualifying SCIF costs that shows SCIF assets and equipment for each facility if there are multiple SCIFs in Maryland, and include this schedule as an attachment to the application.

      The business entity must retain a copy of any supporting documents of these costs for its records.  Supporting documents include all the following.

      • Proof of service and/or equipment purchases, such as the invoices from SCIF contractor(s) and/or SCIF equipment provider(s).
      • Proof of payment, such as a cancelled check, bank statement, or credit card statement.
      • Proof of SCIF construction/renovation performed in Maryland, for example, contracts or work orders from SCIF contractors(s) and/or SCIF equipment provider(s).

      Note 1:  The Maryland Department of Commerce recognizes that the business entity may need to keep the address of the SCIF confidential; therefore, the physical SCIF address shall be deleted from the documents.

      Note 2: Cash transactions are generally not eligible for tax credits as they cannot be easily tracked to the eligible applicants.

  • Are eligible Security Clearance administrative expenses only associated with NEW federal security clearance applicants or are administrative expenses of currently processing applications and maintaining federal security clearance for current employees?

    • ​Qualified administrative expenses includes not only for new federal security clearance associated expenses but also include for costs associated with maintaining federal security clearance existing employees.

  • Are fringe benefits and other overhead costs of administrative personnel for the federal security clearance also eligible for Security Clearance Administrative Expense Tax Credit?

    • ​Qualified administrative expenses include the administrative personnel's salary/wage on the W-2, but fringe benefits are excluded from eligible expenses. Also if the administrative personnel has other duties, only duties directly related to process or maintain federal security clearances are eligible for this tax credit. 

      For example, if an administrative personnel's annual salary is $50,000 and he/she spent 1/2 of his/her work hours for federal security clearance related duties. Then, the eligible administrative expense is $25,000.

  • Can a business claim the federal security clearance administrative expense if it contracts out the security clearance process for its employees?

    • ​Yes, as long as the company has documentations to prove those costs as the eligible expenses (i.e., itemized bill/statement from the contractor with hours of work and what he/she did).

  • Can a business apply for multiple credits such as both administrative expenses and SCIF costs?

    • Yes, the business may apply for multiple credits.  For example, if the business is the qualified small business that incurred $200,000 for administrative expenses, $200,000 for the first year leasing costs, and $500,000 for multiple SCIFs costs, it may apply for the total of $900,000 in tax credits. 

      Note 1: If total credits of security clearance administrative expenses, first year leasing costs and SCIF costs claimed exceed $2 million for a calendar year, the ESCC Tax Credit is prorated.

      Note 2: Special rules apply for the calendar year 2013.

  • What if a business does not have enough income tax liability to use all of the credit?

    • ​If the ESCC tax credits exceed the tax imposed for that year, the credits may be carried forward until fully utilized.

  • How does a business claim the ESCC Tax Credit on its Maryland tax return?

    • Maryland Tax Form 500CR is used to claim this credit. The business must file an amended Maryland income tax return for the taxable year in which the qualified expenses were incurred and attach a copy of the Commerce certification OR; may file an income tax return for any taxable year after the qualified expenses were incurred and attach a copy of the Commerce certification. Also, note that the credit is taken against the state income tax only. It is not taken against the county income tax "add-on."

      An applicant is also eligible to attach a copy of the Commerce certification of the approved credit amount to any income tax return filed for any taxable year after the qualified expenses were incurred.


  • What records must a business maintain?

    • ​The business, in accordance with standard tax record procedures, must maintain information on the expenses and costs claimed for the credits.

  • Is business information submitted to the Department confidential?

    • ​Generally yes, subject to the provisions of the Maryland Public Information Act and the Maryland Code, Tax-General Article, Title 13, Subtitle 2. In addition, the company consents to the release of certain information in the tax credit application.

  • How long does the ESCC Tax Credit program last?

    • The credit is available for eligible expenses and costs for taxable years beginning after December 31, 2022, but before January 1, 2028.

  • What if the total ESCC Tax Credit applied for by all businesses exceeds $2 million?

    • ​If applications by all businesses for ESCC Tax Credit exceed $2 million, the credit amount will be calculated by multiplying the credit applied for by the following fraction: $2 million divided by the total value of credits applied for by all applicants. For example, if the credit amount that a business is applying for is $250,000 and the total amount of credits applied for by all business is $4 million; it will be eligible for $125,000.