November 15, 2023

Untapped Potential: Why Companies Overlook Millions in State Incentives

By Barry Halpern, Partner, Tax & Business Services

Untapped Potential: Why Companies Overlook Millions in State Incentives Year-End Tax Guide

Credits and incentives remain an excellent tool for governments to spark economic growth and attract and retain businesses. Incentives can target specific industry sectors or less developed locations (enterprise zones, for example) to spur economic growth and jobs.

Yet, credits and incentives continue to go unclaimed each year. In fact, in the recent Marcum manufacturing survey, over 60% of companies surveyed were not taking advantage of state and local tax credits. Even more surprising is that nearly 80% were not taking advantage of certain federal or state credits. While it is possible that incentives were not available to many of the companies surveyed, I would be hard-pressed to believe that 80% of companies surveyed could not avail themselves of any incentives. While certain incentives require rigorous compliance or an approval and negotiation process on the front end, numerous incentives have no such requirement. Some incentives are available to companies just running business as usual and can be claimed on an original or amended return. Therefore, it appears that at least a handful of these businesses were either not aware of or did not have the ability to pursue valuable incentives. Companies can significantly increase their bottom line by properly taking advantage of incentives.

Credits and incentives are generally either statutory or discretionary, negotiated incentives. Statutory incentives reward companies for activities that governments are trying to attract (e.g., investment, jobs, training, etc.). The requirements are generally contained in legislation, and the incentives are claimed on a filing such as a tax return.

Statutory incentives can include:

  • Investment tax credits
  • Jobs tax credits/Withholding credits.
  • Research and development incentives
  • Training credits
  • Sales tax exemptions
  • Port credits
  • Foreign Trade Zones (“FTZs”)
  • Location-based credits

Investment tax credits incentivize capital investment for targeted purposes. These credits are generally computed as a percentage of capital investment (including buildings and structural upgrades in some states).

2023 Marcum Year-End Tax Guide

Jobs credits generally reward companies for hiring, developing, and retaining employees. Enhanced benefits may be available to companies that hire individuals with barriers to employment. The credit can be computed as a percentage of qualifying wages or increased employment over a base period.

FTZs offer duty and excise tax protection, among other benefits. Furthermore, tax is not assessed until the product enters the U.S. market. This saves companies from paying duty on spoilage or items that are exported. Businesses with substantial imports may want to consider a cost-benefit analysis to decide whether to take advantage of a FTZ and reduce customs costs.

Location-based credits and incentives seek investment in specified distressed areas. Various zones within a state could supply different credits for employment or investment.

Discretionary incentives are generally negotiated ahead of time with economic development agencies. Examples of negotiated incentives include cash grants, reduced cost financing arrangements, accelerated permitting, income and payroll tax credits, sales/use tax exemptions or abatements, property tax abatements/exemptions, and utility reductions.

Incentives can be negotiated locally as well. In states such as Ohio, where there are local income taxes, the local tax credits can be negotiated. Property tax abatement or PILOT payments and sales tax are also examples of localized incentives. Grants can also be negotiated and, many times, require local approval.

Some incentives are hybrid – where there is a supporting statute, but prior application is required. However, unlike dictionary incentives, the incentive is not negotiated with various agencies. Furthermore, a “but for” argument may not be needed. Businesses may have already taken some action towards qualifying activities without disqualifying themselves for the incentives.

Structure and monetization are just as important a consideration as the tax credits and incentives themselves. Certain credits are only available to corporate taxpayers, while others are passed on to owners of flow-through entities. If a credit is non-refundable or transferable, pursuing that credit may not be beneficial. States such as Georgia have robust statutory jobs tax credits. In certain situations, Georgia allows companies to apply excess tax credits against employee withholding taxes, allowing companies to monetize the incentive better.

Whether qualifying for an “as-of-right” credit or obtaining and maintaining discretionary incentives, businesses should carefully review the tax incentives available and consult a professional credits and incentive advisor to assist with the process, avoid any adverse consequences, and identify new planning opportunities. Not having sufficient resources to research and manage a credit program can put businesses at risk of losing out on potentially valuable benefits.

Incentive packages may require strict accountability along with annual (or more frequent) compliance/reporting. Noncompliance could result in clawbacks of previously provided incentives. Businesses may need to renegotiate the terms of commitments with individual jurisdictions to maintain valuable benefits. Some jurisdictions have added requirements such as ESG, green energy, community involvement, and prevailing wages to their incentive programs. Accordingly, taxpayers need to understand all the requirements and consider whether an incentive package is feasible.

The industry also has an impact on incentives. Incentives can specifically target industries such as advanced manufacturing, distribution, film, high-tech, and automotive. However, there are industry-neutral incentives that focus more on the business’s investment in the location and workforce.

With the passage of the Inflation Reduction Act and CHIPS Act, there has been a big push recently by the federal government to drive manufacturing within the U.S., particularly in the high-tech and clean industry. Some states have tailored incentive programs that target larger business investments from these industries and have garnered significant commitments.

States constantly create new incentives or modify and extend programs to obtain specific objectives. For example, post-COVID credits and grants incentivized companies to reopen, keep staff, and get reimbursed for COVID-related expenditures. These incentives tend to be more targeted and shorter-lived, but if successful in accomplishing the intended purpose, the incentives could be extended or made permanent. New Jersey recently rolled out a successful PILOT grant program in 2022 that incentivized businesses to invest in new manufacturing equipment. New Jersey expects the program to be a success in 2023 as well. Illinois revamped some existing incentives and the process by which a company would satisfy the “but for” argument. New York made the investment credit for farmers more lucrative, including making it refundable for the next couple of years. These are just a few examples of states continually updating their incentives to attract investment and jobs.

Activities that indicate incentives may be available include:

  • Opening new facilities or expanding existing facilities.
  • Changing headquarters locations or establishing a new regional headquarters.
  • Significant capital expenditures or leasehold improvements.
  • Workforce expansion and development (training).
  • Investment in high tech/innovation.
  • Greening initiatives (carbon reduction/recycling).
“Businesses involved in these activities or planning on them should carefully examine the potential incentives ahead of time.”

This will help them plan from more targeted discussions and negotiations with economic development agencies on what makes the most financial sense.

Marcum Observation

Credits and incentives are powerful tools used by governments to trigger desired actions. These incentives could benefit companies that engage in or are looking to become involved in certain activities. Using these tools effectively increases overall cash flow. Companies should consider consulting tax credits and incentives professionals to assist with obtaining and negotiating these incentives. There are hundreds of incentives nationally that businesses and owners can consider. Some of these incentives are localized to specific counties or tracts. Therefore, careful planning and scoping should be done before any planned expansions, development, hiring, or capital investment to ensure proper realization.

2023 Marcum Year-End Tax Guide