Not only are tax incentives offered to reduce or eliminate a portion of corporate franchise taxes, tangible personal property taxes, real property taxes, and sales and use taxes, but numerous programs offer low-interest loans and grants. Often, these can be combined into packages to induce a business to relocate or expand in one area over another. In return, the taxpayer creates or retain a certain number of jobs or invests a certain amount of money by an agreed upon date.
Over the last decade, smart business owners have increasingly used business tax incentives offered by the city of Columbus. The Columbus City Council approved incentive packages in 1992, 1993 and 1994. Similarly, the Village of Urbancrest, just outside Columbus, has granted five incentive packages in the last five years.
One of the more common incentive programs is the Community Reinvestment Area, or CRA. CRAs are areas in which housing facilities or structures of historical significance are located, and new housing construction and repair of existing facilities or structures is discouraged due to the distressed nature of the area. The community may grant up to a 100 percent exemption of the improved real property tax valuation for up to 15 years, depending on the project.
CRAs only grant exemptions from taxes on real property improvements, not on land and personal property, so businesses should consider combining this program with other tax incentives to create a package. The Ohio Job Creation Tax Credit and the warehouse machinery and equipment sales tax exemption are examples of other incentives that can be combined with a real property tax exemption.
However, executives face losing tax incentives if their business does not hold up its end of the bargain. Incentive agreements are typically reviewed each year by a community's tax incentive review council, which consists of people including the mayor, the county auditor, a city council representative and officials from affected school districts.
The council recommends maintaining, reducing or eliminating incentives. It relies on the companies to provide job and financial information that indicates whether the company is living up to its commitments.
Until recently, most companies have met or exceeded their obligations and maintained their incentive packages. However, the economic downturn has led to some businesses failing to meet their obligations -- a local tax incentive review council recently cut a tax abatement by 10 percent each year over 10 years after the company cut its new construction in half.
A review council can also recommend the company pay back incentives it has already used.
A company can also lose incentives due to poorly drafted agreements. One company lost an exemption because the agreement contained a clause stating that no exemption would commence after a specific date. Unfortunately, the property was not used in the business -- and thus not eligible for the exemption -- until after that date.
Businesses must be careful when entering into incentive agreements. Agreements must be carefully scrutinized, and businesses must be realistic about their ability to produce jobs and make investments. Careful drafting and conservative forecasts can keep a business off the hot seat with a local tax incentive review council and ensure that its agreements will withstand scrutiny. Renee C. Khoury is an attorney with the Columbus office of Vorys, Sater, Seymour and Pease LLP, tax group. Reach Khoury at (614) 464-6400.