How to Make Those Incentives Count
By Helen Lemmon and Charlie Masterson
When building or expanding a new plant, business incentives from federal, state and local governments provide plenty of opportunities. However, all too often, those opportunities can be lost by mistakes.
Surveys show that executives consider taxes, credits, incentives and abatements key drivers in their decisions regarding the location, expansion, or consolidation of a facility. However, most of them don’t hear of these programs on a regular basis and may not know what’s out there or how to proceed. They don’t realize the number of available programs, which include cash grants, government credits, property and sales tax abatements, training programs, streamlined permitting, zoning assistance and utility rate reductions.
To complicate matters, each program has its own set of prerequisites and regulations. Further, timing is crucial, as many incentives are available only if negotiated before a decision about a plant location is made.
Many companies also fail to claim incentives for which they qualify because they lack the appropriate contacts or don’t have the staff to research the programs and deal with the required paperwork. Sometimes, companies negotiate for tax credits they will never be able to fully use because of poor communication with the tax department. They don’t consider that there will not be sufficient state taxable income to fully use the credit before it expires.
Too many times, companies don’t claim the incentives they have applied for, have been awarded and could use. This failure results primarily because many businesses do not commit adequate resources to manage the often complex, intimidating and burdensome administrative requirements associated with these programs.
Additionally, although various employees and departments within a company may be involved with securing the incentives initially, often no one person or department is responsible for the overall management of the compliance requirements. In other words, no one is in charge of making sure the company competes the requirements to get the incentives. This is a growing problem, as many states are demanding more detailed reporting over a longer period of time.
Consider the following all-too-common scenarios in which a company makes critical mistakes, often without knowing it.
The fictitious Acme Snack Co. wants to locate its new $20 million factory and 100 high-paid, new employees in State A or State B. State A’s economic development officials offer to reimburse 50% of Acme’s “qualified training expenses,” up to $5,000 for each new employee and to grant Acme a state income tax “Jobs Credit” of $1,000 per each new employee for the first five years of operation.
Thinking this is a good deal, Acme accepts the offer, unaware that two similar projects recently received Job Credits of $2,000 per job along with federal and State A infrastructure funding, streamlined permitting and a five-year utility rate reduction.
Acme locates the new snack facility to State A and includes the $500,000 training grant and $500,000 in state income tax credits in the plant’s financial projections. The company signs agreements with State A’s economic development officials. In a media event, State A’s governor issues a glowing press release announcing the new jobs. Construction of the new plant begins, and the company shifts its focus to other strategic matters.
As the new employees are hired, however, no one informs the human resources department of the need for documenting the training activities required by State A’s regulations, which are very specific and particular. As a result, Acme does not file the required quarterly reports of its training activities, which would include instructor salaries, class rosters and trainee evaluation forms.
To make matters worse, Acme’s tax manager leaves for another company, and the new tax manager is unaware of State A’s Jobs Credit agreement. Acme files a federal tax return and numerous returns with the states where it operates, but during the frenzy of the next “busy season,” the new tax manager does not claim the Jobs Credit on the State A return.
Eventually, the company discovers that both the amount of income tax paid to State A and the training expenses associated with the new plant are higher than projected. To find out why, the snack producer contacts State A’s economic development officials. They refer Acme to the compliance officer at State A’s Department of Labor, which administers the training grant, and to a taxing officer from State A’s Department of Revenue, which administers the Jobs Credit.
At this point, the company learns that it no longer is entitled to either incentive because it has missed filings and failed to compile information required to comply with the applicable regulations. In the process, hundreds of thousands of dollars in incentives are lost.
What did Acme do wrong? Initially, the company accepted an incentives package that was substantially less than what was awarded for similar projects because it did not “benchmark” the offers made for similar projects. It also did not realize the $1 million it had negotiated because no one had overall responsibility for managing the compliance requirements for the training grant and Jobs Credit. Acme didn’t have a strong compliance-monitoring program to ensure that the required training data was collected and reported to the state. To top that off, the new tax manager was unaware of the Jobs Credit.
Ironically, many companies hire consultants to identify and negotiate incentives, but then take compliance for granted. Often, the consultant’s work is complete when the incentives are negotiated. However, that’s when the work really begins to actually obtain the promised government funding. After the consultant leaves, the company’s staff is often overwhelmed by a barrage of paperwork and record-keeping requirements.
Identification and negotiation of credits and incentives are only the first steps in the overall process. Specialized compliance expertise and a well-designed compliance monitoring system are essential to make sure that the promised benefits ultimately flow to the bottom line.
Editor’s Note: Helen Lemmon is principal in charge of Ryan & Co.’s U.S. Credits and Incentives Practice, and Charlie Masterson is a manager in that practice. Dallas-based Ryan & Co. is the leading tax services firm in North America, with the largest transaction tax practice in the United States and Canada. For more information, visit www.RyanCo.com.