On December 22, 2017, President Donald Trump signed the most comprehensive federal tax reform package in three decades.1 Whereas media reports focused mostly on how tax reform would affect businesses and individuals, to tax professionals it quickly became apparent that reform would spur increased state and local tax credits and incentives activity. Due to a number of changes to federal tax provisions, such as lower rates, expensing, depreciation, a favorable pass-through deduction, and repatriation, many companies are projected to have more money in their coffers to expand and grow their businesses. With this growth potential, businesses in industries of all shapes and sizes have new opportunities to seize countless state tax credits and incentives specifically aimed at encouraging growth and expansion.2 Accordingly, it is imperative that businesses understand the depth and breadth of credits and incentives available in a given jurisdiction—and break the habit of leaving valuable benefits on the table. A business that successfully obtains these benefits will have identified the best practices and pitfalls. This article addresses a generic process for obtaining incentives, but requirements and procedures can vary greatly from state to state.
Understand Your Project
When you consider state and local incentives, your first step is to understand the “project”—that is, what assistance does your business need? Incentives are available for all types of projects. Is the business considering a large capital investment? Retrofitting existing equipment? A new plant or facility? Hiring or training new employees? A new headquarters? Essentially, a business must first understand how it wants to grow and then look for an incentive opportunity that matches that intent.
Incentives can take many forms, including but not limited to financial assistance, workforce assistance, and logistical and infrastructure assistance. Additionally, nonfinancial drivers can often make a project more feasible or advantageous for your business. For example, nonfinancial benefits may include infrastructure support such as traffic lights or road enhancements to ensure that your employees can travel safely to and from the office as well as providing delivery and supply vehicles with necessary access (such as roads that accommodate heavy vehicles). These nonfinancial incentives may make the difference in deciding whether or not to proceed with a project. Ultimately, a business needs to consider both financial and nonfinancial benefits in which the jurisdiction can support their investment.
Accordingly, it is imperative that businesses understand the depth and breadth of credits and incentives available in a given jurisdiction—and break the habit of leaving valuable benefits on the table.
Once the purpose of the tax incentive request has been identified, you should consider several questions. How will the tax credit and incentive be monetized for the business? Are there specific locations within the states being considered that offer increased tax credits and incentives? Are there any training tax credits and incentives in the desired area? How can the business negotiate with a jurisdiction to customize any tax credits and incentives? Carefully considering questions like these early on can help you step into a meeting with state or jurisdiction representatives prepared to secure the best incentive package for your company.
Make Sure You Can Use the Benefit
The state or local incentive needs to be in a form your business can use. More specifically, to benefit from certain tax credits and incentives, the specific legal (and tax) structure of your business must allow it to monetize the value. For example, Connecticut offers a number of tax credits to support job growth, but many of those credits are not available to flow-through entities. In Bell Atlantic NYNEX Mobile Inc. v. Commissioner of Revenue Services, the Supreme Court of Connecticut disallowed a partnership to take a credit because the taxpayer, structured as a partnership, did not pay the corporation income tax or any other business tax against which the credit could be claimed.3 Although Bell Atlantic made a capital investment that would have otherwise qualified for the tax credit at issue, its corporate structure was such that the statutory framework of the tax credit did not allow a partnership to take advantage of the benefit.
Depending on their needs and legal structure, companies that qualify for this program must understand how they can realize the value of the tax credit and incentive. Consequently, it is crucial to understand how the legal structure of your business impacts how tax credits and incentives will be monetized.
Location, Location, Location
Many states maintain targeted geographic areas within their borders to offer increased tax credits and incentives for hiring, training, capital investment, and other qualifying business activities. Pennsylvania, for example, provides Keystone Opportunity Zones to encourage growth in underdeveloped and underused areas in the state. Taxpayers in these zones are exempted from certain state and local taxes.4 Similarly, Georgia allows companies in qualifying industries that create jobs in designated distressed counties a tax credit and an incentive that offset the company’s payroll taxes.5 By understanding the opportunities in a location in which the business is looking to expand, build, hire, or train, a business can ensure that decisions about physical location can maximize tax credits and incentives.
Employee Training Is Valuable
It should be clear that training a workforce makes it better and more efficient. Employers must understand what skills and expertise will maximize employee productivity as the business evolves, making choices, for example, about whether to increase efficiency in the current work or to teach workers new skills, such as operating new equipment and software. By identifying how to better train a workforce, employers can capitalize on a wealth of training credits and incentives available in almost every state. Several states offer tax credits and incentives to offset the costs associated with employee training. California’s Employment Training Panel, which is funded through a specific payroll tax, is an example of a training incentive program that provides benefits for training new or existing employees.6 By collaborating with the Employment Training Panel, businesses may receive a fixed amount of funding for each hour employees receive training.7 In addition to directly reimbursing training costs, many states provide programs whereby a community college will develop a specialized training program for a company and provide that training on an ongoing basis. An example of this is the Texas Workforce Commission’s Skills Development Fund, where a community college develops and delivers specialized technical training.8 When fully used, training tax credits and incentives can offset a significant portion of a company’s workforce development costs.
The Numbers Must Work for the Jurisdiction
Once your business has identified and carefully considered relevant opportunities, the next step is negotiating with government officials. In addition to discussing the nature of your company and expansion plans, frequently you must present information to allow the jurisdiction to document that it will receive an adequate return on its investment in providing the incentive. It is often advantageous to develop an incentive analysis with a competing jurisdiction to demonstrate that while another location may provide better benefits, the tax credit and incentives in the location where the business is applying make that the preferable location. These types of analyses provide jurisdictions with concrete support for the incentives offered, especially now as scrutiny over the use of public dollars becomes more common.
Be Prepared for a Public Hearing
Not uncommonly, a company must appear before a state or local agency to receive final approval of their tax credit and incentive. In some jurisdictions, this meeting is merely a formality, whereas in others, the meeting may turn into a substantive hearing on the merits of the incentive application. In North Carolina, companies applying for the One North Carolina Fund tax credit must appear before the North Carolina Economic Investment Committee to obtain final approval.9 During this process, local citizens are provided the opportunity to present opinions in support of or against the company’s incentive request. Companies need to be prepared to respond to the general public’s concerns, including questions that may not be directly related to the incentive requested, such as a position on gun control.
Program Compliance Is Critical
Once a credit or incentive is approved, your business may have continued and periodic obligations as agreed to by both parties, such as compliance and reporting. These obligations vary with the incentives received, but larger-dollar incentives will almost certainly require greater compliance and reporting. It is important to understand compliance requirements, to develop a detailed compliance calendar, and to define a process for gathering required data. Required data may include sales tax invoices or employment records, such as when and how long certain individuals were employed. Nonetheless, this information must be gathered and preserved for submission upon the state’s request. Additionally, it is imperative that the business does not miss a compliance deadline. In many cases, missing a compliance deadline will lead to the jurisdiction recapturing the incentive.
Pitfalls
The most obvious pitfall is missing a filing deadline, but a number of others may ensnare a business throughout this process. Most can be overcome with organization and planning.
The Highest Dollar Amount Is Not Always Best
A business should be proactive to ensure that it does not miss opportunities. When analyzing potential incentives, it is crucial to use many criteria in determining the best opportunity and not just to focus on the incentive that appears to offer the most money. As discussed earlier, your organization must be able to monetize the incentive appropriately to receive the benefit. Just because an incentive appears attractive—such as the opportunity for a refundable credit—that does not mean the incentive will be a meaningful or advantageous solution for the business. For example, a corporate income tax credit that is made available to a partnership may have little actual value when the partnership structure is taken into account.
There Can Be Fees
From the beginning, it is also important to understand any fees that may be incurred throughout the pursuit of an incentive. Many jurisdictions charge a number of fees throughout the life of the incentive, including but not limited to application fees, approval fees, and transfer fees. Failing to pay a required fee promptly can cause an application to be rejected. The GROW NJ program, as an example, requires companies to pay an approval fee of 0.5 percent of the approved amount, with a cap of $500,000.10 A business should review all fees that could be incurred throughout the life of the incentive to accurately evaluate the benefit of the credit. Additionally, many fees are nonrefundable, even if the incentive is not obtained.
Control the Flow of Information
Companies must control the flow and release of information about the project until the tax credit or incentive has been approved. Many states require that a business secure tax credits and incentives before making public announcements, signing leases or purchase contracts, hiring new employees, or acquiring new equipment. In these states, no press releases or internal announcements should be made until the incentive agreement has been signed. Remember, gossip travels quickly within, and beyond, a workforce.
Ultimately, before the application has been approved and the incentive agreement has been signed, the state or locality must not know that the business has decided to invest in their jurisdiction. Additionally, it may be advantageous to be able to argue that the incentive’s approval is a determining factor for the requested benefits.
A Multidisciplinary Team Promotes Efficiency
From understanding how your business will benefit from an incentive to controlling how project information is released, a business should consider developing a cross-disciplinary internal team with all stakeholders, which includes individuals from tax, legal, human resources, and facilities, among others. This cross-disciplinary internal team can ensure that the incentive is approached strategically from all angles, that nothing is neglected due to carelessness, and that there is easy access to all needed information throughout the application process. Additionally, to ensure you do not miss any compliance deadlines, your cross-disciplinary internal team should develop a compliance calendar, and members should be clear about their roles in tracking information and submitting data to the jurisdiction. As you monitor your compliance, if you realize you will not meet your contractual obligation or will exceed your obligation for any reason, it is imperative to be proactive and to communicate with the awarding jurisdiction. In some cases, you can renegotiate or recalculate the incentive.
Robert Calafell is principal, credits and incentives leader, Mo Bell-Jacobs is manager, Washington National Tax, and Millie Philippus is consultant, credits and incentives, all at RSM US LLP.
Endnotes
- See generally PL 115-97, December 22, 2017, “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (formerly titled the Tax Cuts and Jobs Act of 2017), which Congress passed on December 20, 2017, and which President Trump signed on December 22, 2017.
- Due to the tax reform, companies are evaluating unanticipated increases in revenue as a result of favorable provisions like lower rates and expensing/depreciation of assets. While many companies will buy back debt or use it to improve their balance sheets, significant funds will be used to invest in companies’ future growth. Additionally, lower rates encourage not only domestic companies to invest but also foreign direct investment, and the United States’ new corporate tax rate is now in line with the average tax rate among nations in the Organisation for Economic Co-operation and Development (OECD).
- See 869 A2d 611, 273 Conn 240.
- See Pa. Stat. Ann. § 820.301, https://dced.pa.gov/business-assistance/keystone-opportunity-zones/.
- See Ga. Code Ann. § 48-7-40.1.
- See Cal. Unemp. Ins. Cd. § 10200, as well as https://etp.ca.gov/.
- See https://etp.ca.gov/funding-info/reimbursement-rates/.
- See Tex. Lab. Code Ann. § 303.003.
- See N.C. Gen. Stat. § 143B-437.71; see also N.C. Gen. Stat. § 143B-437.55; Accord N.C. Gen. Stat. § 143B-437.54; See generally The North Carolina Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Phase I Matching Funds Program Guidelines, www.nccommerce.com/Portals/6/Documents/OneNC/Guidelines_for_SBIR-STTR_Phase_I_Matching_Funds_Program-Amended_2015.pdf, as well as Job Development Investment Grant, https://edpnc.com/incentives/job-development-investment-grant/.
- See N.J. Admin. Code 19:31-19.5.
