Many businesses fail to take advantage of cost-saving tax credits made available by state and local governments. These credits are established by jurisdictions to incentivize behaviors such as job creation, which helps offset employers’ costs to create new positions while increasing the tax base. Other targeted hiring incentives are designed to encourage businesses to hire individuals in certain categories who may have trouble finding employment — for example, people with disabilities, veterans or those on public assistance.
“Tax credits are also used by state and local governments to encourage businesses to make investments in their jurisdiction, either through job creation, capital investments or to get outside businesses to set up facilities within their borders,” says Monika Diehl, tax director at Clarus Partners.
Smart Business spoke with Diehl about how businesses can identify and take advantage of available tax credits to offset expenses.
What are the basic criteria for receiving tax credits?
Tax credits are typically available when a business makes a meaningful investment in its workforce, for instance by creating 10 new positions or investing in training programs to teach new skills to employees. In some cases, credits are aimed to attract businesses in certain higher paying industries, like technology, for instance, to encourage more of those types of companies to set up shop in a jurisdiction.
Some companies may be engaged in qualifying activities and not be aware that they qualify for a tax credit. And to the extent that a business is planning to make an investment — by hiring employees, buying equipment, relocating or adding another location — there may be opportunities to work with a consultant to get a negotiated incentive package.
What’s the difference between statutory and negotiated credits?
Statutory tax credits are written into the law and can be taken, typically without an advanced application, as companies file their annual tax returns. Businesses must meet certain criteria to qualify for them, which could be based on the type of business, hiring individuals from certain categories, or because they operate in an economically disadvantaged area. Businesses generally must complete a form to calculate and claim their credit, then include the form with their tax filing.
Negotiated incentives are usually a part of a larger project and most often come into play when a business is considering relocating or building a new facility. They create an opportunity to get state and local jurisdictions to compete with each other for the business. Such incentives are rarely the reason to move, but they are an influencing factor in where the company ends up.
These tax credits are negotiated with economic development departments. In most cases, the interest of the government offices will be around how many jobs are created, the pay level of those jobs and the total proposed investment in capital assets. For the companies, the negotiated package might include credit for each new job created, training grants for new employees, low interest financing for capital purchases and more.
What’s the difference between refundable and nonrefundable credits?
Nonrefundable credits reduce a company’s tax liability to zero, but not below. In many cases the remainder, or amount of available credit that couldn’t be applied in a given year, can be carried over and applied to the next year’s tax liability. Refundable tax credits allow companies to reduce their tax liability below zero and get a check back for the difference.
What compliance components are associated with these credits?
After qualifying for some tax credits, there is compliance work that needs to be done. This is usually an annual filing requirement to report on how the company’s growth and investments made during the year compare with what was planned. Companies must be aware of what’s due and when to get their benefit. Missing a deadline could delay receipt of the incentives.
There are many incentives that exist for companies large and small, but they must be sought out. Talk to a consultant to see what opportunities exist to reduce costs.
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