Taxes and Incentives: Getting the Full Benefit of Government Funding
As states and municipalities face budget shortfalls, companies must commit more resources to securing tax exemptions and financial incentives - but the potential benefits are too large to ignore.
Joseph Calvanico, National Director for Property Tax and Valuation Services, Crowe Horwath and Dan Megathlin, Director, Crowe Horwath (March 2011)
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Growth and development incentives - The increased competition among jurisdictions for desirable companies has resulted in a number of credits and incentives for manufacturers looking to expand operations, hire staff, relocate, or invest in work force development. To gain access to these funds, executives should identify applicable incentives during their organization's strategic planning and work closely with state and local officials to negotiate the most favorable terms.
Work force expansion: In many states, manufacturers can qualify for credits or refunds on their withholding taxes by achieving specific targets for hiring and employee retention.
Relocation: Since the moving costs for relocating operations to another jurisdiction are substantial, some states offer cash grants to purchase new equipment or defray the cost of transportation.
Job training: Many states, in an effort to ensure the competitiveness of their work force, offer grants to companies for the training of current and new employees. For instance, Rhode Island offers a credit against the corporate income tax or the insurance premium tax equal to 50 percent of eligible training investments. Typically, employees must make a certain salary for training programs to qualify for reimbursement or tax credit.
Cost-effective financing: The economic development departments of many states offer loan guarantees to manufacturers looking to invest in or expand their operations. Companies can negotiate interest rates and amortization periods to support their strategic needs.
Challenges in Securing Government Funds
Once a manufacturer has become acquainted with the wide range of exemptions, it still faces several obstacles to qualifying for exemptions.
Monitoring evolving requirements across states - Since each state is in the process of re-evaluating its exemptions to jump-start private investment, regulations differ markedly by state and municipality and are constantly shifting. In addition, the application processes from state to state can vary in duration and complexity. Michigan has a very lengthy application process, for example, while Georgia has reduced the number of steps to make it easier for businesses to qualify. Each additional jurisdiction in which a manufacturer operates compounds the resources needed to keep up with the latest developments.
Identifying exemptions - During the recession, many businesses were forced to cut staff dramatically, and the employees who remain often are stretched incredibly thin. Applying for exemptions requires an understanding of not only the state and local tax codes but also of operations and specific uses of equipment. An exemption for pollution-control equipment, for example, extends beyond devices such as thermal oxidizers to attendant equipment that is necessary for them to function. At one pharmaceutical company, executives didn't realize that a large amount of their equipment could qualify for a pollution-control exemption. When they applied the proper definitions to their operation, these expenditures accounted for 25 percent of their $2.5 million property tax bill.
Integrating incentives and exemptions into strategic planning - Effective tax planning can have a dramatic impact on a company's bottom line. Similarly, while manufacturers can draw on many forms of government assistance through tax filings, others require some foresight and planning. A manufacturer considering a relocation or expansion, for instance, must secure credits and incentives before announcing its plans, since once its intent is publicized, states have little impetus to extend funds. Therefore, exemptions should be a regular component of an organization's annual strategic-planning sessions.
Steps to Qualify for Exemptions
Although securing exemptions requires a significant commitment of time and resources, the potential benefits are too large to ignore. Manufacturers that identify applicable statutes and exemptions, understand processes and requirements, determine their eligibility, and apply for exemptions in the proper jurisdiction can improve cash flow and have more flexibility to pursue ambitious growth initiatives.
How is state-level budget uncertainty regarding taxes affecting site selection?
Site selection by businesses looking to relocate or start a new operation has been impacted by those states that have higher tax burdens as compared to their competitors. More
- Dan Megathlin, Director, Crowe Horwath
Are any states initiating new or expanded incentive programs? If so, which ones?
Many states have been aggressive. More
- Dan Megathlin, Director, Crowe Horwath