Have you ever had the experience of purchasing a product with a rebate, but you then failed to realize the savings because you did not submit the claim in time? Maybe you’ve clipped a coupon from the Sunday newspaper for a discount at your favorite restaurant but missed the savings by letting it expire?
Smart Business talked to John Corn, director of Habif, Arogeti & Wynne, LLP’s state and local tax services practice, about what happens to companies that initiate major capital expansion projects without taking advantage of available tax credits and cash incentives.
How can companies capitalize on local governments competing for desirable projects?
Localities can use a variety of economic inducements to compete for desirable projects with the intention of influencing business decisions. State and local governments have a long history of enacting favorable growth policies designed to encourage businesses to relocate, grow or stay in their respective areas. For example, it is quite common to find the total value of an incentives package in the range of 15 to 30 percent of the total capital spend for a project.
Desirable projects can include manufacturing facilities, corporate headquarters, distribution centers and technology facilities. Preferred projects are typically environmentally friendly — in excess of a $5 million spend — and create at least 50 or more jobs with an above-average wage and benefits. However, governments tend not to induce retail or service-related businesses, unless they locate or expand in a region that is economically disadvantaged.
What types of incentives are available?
Governments use a variety of incentives, which are generally categorized as being either discretionary or statutory. Discretionary incentives tend to be in the form of funds or services from the state or local government for infrastructure that supports a company’s expansion project. These incentives are commonly negotiated and agreed upon prior to a company’s final decision to relocate or expand at a particular location. Some examples of discretionary incentives are as follows:
- Low-interest financing
- Property tax relief
- Fee waivers
- Utility rate reductions
- Services for site preparation
- Employee hiring/training support
Discretionary incentives are usually formalized with an agreement contingent upon capital spending and hiring commitments, and have clawback provisions if commitments are not achieved. A business should regard discretionary incentives as upfront cash payments that offset start-up costs and that can prove very significant when evaluating the expansion project’s return on investment.
Statutory incentives are tax laws that target certain business activities with the intention of stimulating economic development within a given region. The most common statutory incentives are tax credits, which can be used to offset state income/franchise or withholding taxes.
Sales and use tax exemptions are also popular statutory incentives. Although not an all-inclusive list, tax credits are usually based on the following:
- Certain industry sectors (e.g., manufacturing, distribution, etc.)
- Targeted areas or zones
- Job growth
- Capital expansion
- Research and development expenses
Since tax credits result in permanent tax savings, it is not unusual to find that a number of tax credit policies require particular certifications or preapprovals.
How can companies pursue and secure incentive benefits?
Best business practices dictate that companies include incentives investigation as a milestone in capital expansion planning to effectively secure incentive benefits. Typically, pursuing and securing incentives includes the following steps:
- Identifying and quantifying all available incentives
- Developing and delivering presentations to the governing authorities that
describe the expansion project and its economic benefits to the locality
- Structuring and negotiating the discretionary incentives and finalizing agreements
- Applying for all applicable tax credits
and exemptions and calculating the tax
- Developing and implementing compliance procedures to make sure all incentive benefits are realized and the agreements are met
Whenever your company is preparing to begin a significant capital expansion project, you should always investigate any incentive packages that may be available to offset start-up cost and realize permanent tax savings. By taking this proactive approach and planning accordingly, you will ensure that you don’t leave money on the table.
JOHN CORN is the director of Habif, Arogeti & Wynne, LLP’s state and local tax (SALT) services practice. He provides tax consulting services to a variety of clients on SALT matters with regard to income/franchise tax as well as sales and use tax. He has served clients throughout the U.S. working with companies in various industries, including the manufacturing, technology, distribution, retail, tourism and financial services sectors. Reach him at (770) 353-3156 or firstname.lastname@example.org.John Corn
Director, State and local tax services practice
Habif, Arogeti & Wynne, LLP