Change happens. Are you making the most of it? Are you considering relocating your business or hiring employees? What about diving into research and development, or purchasing new, more efficient equipment to improve manufacturing processes?
If you are thinking about these or any other business-related initiatives, tax credits and incentive opportunities could have a significant impact. You may also be eligible for grants, low-interest financing or reduced utility costs, says Shawndel Rose, manager of State and Local Tax, Brown Smith Wallace LLC, St. Louis, Mo.
“Credits and incentives have been around for years, but as the economy changes, so does the nature of these opportunities. The financial position of the state you live in is impacted right along with your business, so why not make use of these tax opportunities while continuing to grow and develop your business,” says Rose.
Smart Business spoke with Rose about how tax credits and incentives work and what businesses can expect this year in light of the economy.
How do tax credits and incentives work for businesses?
Credits and incentives work in a number of ways for businesses. One way is to encourage economic development in the state. For example, many states encourage businesses to invest in new property or machinery and equipment. Relocating operations, expanding current operations and job creation are other focus areas.
Some of the most beneficial credits and incentives are based on maintaining or increasing a business’s work force.
A second way they work is to induce businesses to engage in certain activities, such as research and development and ‘going green.’ Oftentimes, they encourage businesses to relocate operations to a distressed or revitalization area.
Job training to increase employee skills and help develop the state’s work force is another encouraged activity. There are also rewards for hiring employees who may belong to a protected class, such as veterans or those considered difficult to employ.
As you can see, there are a host of opportunities to encourage business growth and to expand and enrich business operations while reducing your tax burden and, ultimately, saving money.
What is the difference between a credit and an incentive?
Credits are statutory and are designed to encourage specific activities. They can be based upon payment of other taxes. For example, if a business pays sales tax or property tax, it could generate a credit to be used to offset an income tax liability.
It’s important to know that some credits require preapproval from the government agency awarding the credit. Credits are typically claimed on a taxpayer’s state or local income, franchise, or net worth tax return and may be carried forward if unused in the current year. Some are even refundable.
Incentives are benefits that are negotiated with state or local economic development, taxation or other government officials as an inducement to locate or expand operations in a specific jurisdiction. Unlike credits, incentives must be negotiated well in advance of a firm commitment.
The financial benefit of the incentive may be reflected in a variety of ways, not necessarily on your state income tax return. Because they are contractual in nature and require each party to perform certain activities, the contract typically contains a recapture provision that requires repayment of the incentive and/or imposes a penalty if the contract requirements are not satisfied.
Incentives offer businesses negotiating power. For example, if a company is planning to build a new facility, it could approach the states of Illinois and Missouri and ask what benefits each can provide. The company can then compare the proposed benefits to determine which state’s package would result in a better financial outcome.
How can credits and incentives benefit businesses?
Cash flow is always a priority for businesses. Tax credits and incentives can help a business reduce or even eliminate certain costs to increase cash flow. Such costs may include human resource activity (i.e., training/screening costs), acquisition, site-preparation and public infrastructure (i.e., rail, sewer, etc.), just to name a few.
Companies may also have an opportunity to reduce telecommunication and utility costs. These decreased costs, as well as cash grants and refundable tax credits, all result in increased cash flow.
In addition, successful negotiation can produce a reduced effective tax rate or preferential tax treatment, such as special apportionment.
What is the credit and incentive environment like today, and what does this mean for businesses?
That depends on the state. Generally, states are struggling financially and many are taking a step back to review credits and incentives to ensure that these tools are producing the intended results. In Missouri, for example, the governor created the Missouri Tax Credit Review Commission to assess the 61 current credit programs operating in Missouri and to make recommendations.
A report distributed in February noted that the commission recommended eliminating or not reauthorizing 28 credits and improving efficiency in another 30 credits. Connecticut and New Jersey are taking similar action.
For businesses, there are still great opportunities to use these tax-advantaged resources, but they should spend time with a tax professional who can provide direction so the company can realize the full benefit of potential credits and incentives that match its strategy.
Shawndel Rose is manager, State and Local Tax for Brown Smith Wallace, St. Louis, Mo. Reach her at firstname.lastname@example.org or (314) 983-1356.