A Winning Strategy to Realize Maximum Incentive Benefits
Over half of negotiated economic incentives are never realized. How does this happen? What can you do to ensure success?
What NAICS code is on file with each state where the project may land?
NAICS refers to the North American Industry Classification System that is used by federal statistical agencies in classifying businesses for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy. Companies report a NAICS code on various government forms, most commonly the federal income tax return and HR reports submitted to federal and state agencies.
State incentive programs use NAICS categories to set eligibility. In some cases, the NAICS code on file for a particular facility may be confusing (a distribution center with a small retail store may only be classified as retail) and could be the reason why a project is determined to be ineligible for incentives. The state program manager, upon receipt of a completed application, will match the NAICS code on the application to the NAICS code currently on file with that state's Department of Labor and/or Department of Employment Security (or Unemployment). When these numbers do not match, the state will default to any existing NAICS code on file.
NAICS codes also identify activities within industries (targeted industries) that may qualify for increased benefits. See the NAICS Codes Drilldown Table for industry titles. State statutes will often list eligible NAICS codes or a description of activities that can easily be traced to a NAICS code. Confirming NAICS codes for the project location, in advance, keeps the process moving efficiently.
States prefer a one-to-one relationship for an incentive contract and legal entity. Will more than one legal entity contribute to the project?
A company's incentive negotiations for one project can be as complicated as its legal organizational chart. If more than one legal entity will (1) have operations, (2) have employees, and/or (3) contribute to capital costs of the project at the project site, adding all such legal entities as named parties to incentive contracts will allow for maximum benefits but will create a challenge in managing compliance.
States prefer a one-to-one relationship for an incentive contract and legal entity. Negotiating the inclusion of additional legal entities is important. A blanket applicant such as "XYZ Co. and all subsidiaries" is not always accepted and may result in a denial. It is important to remember that applications are often time-sensitive so getting this right the first time is imperative. A call to the incentive grantor's office is advisable before using a blanket applicant name or before applying the name of more than one legal entity to an application.
Why is this important? States will include all of a legal entity's jobs located in the project state as base jobs. This may also include the jobs of related legal entities. When only one legal entity is a party to the contract, only net new jobs added to the contract location by the contract legal entity may qualify for benefits. However, all base jobs in the state (as identified in the contract) must be maintained.
If successful in expanding the contract to more than one legal entity, net new jobs added by all contract-party legal entities at the project location may qualify for benefits. Absent adding legal entities as parties to the contract, no jobs added by a non-contract-party legal entity may qualify for benefits. An understanding of whether a "company" is a legal entity is vital.
Which jobs are base jobs?
Having a firm grasp on how the state calculates base jobs and how the project team arrived at the base jobs is essential. The number of base jobs can be subject to adjustment if questions arise later that cannot be answered from file notes. It's vital to get this right before contract signing. If the state later increases the number of base jobs, the result is a reduction of anticipated benefits.
Who will be responsible for collecting incentives benefits?
Protecting benefits is as easy as assigning compliance responsibilities (a compliance assignee) when contracts are executed and sharing the data that supports the base jobs and average wage commitments at that time. Because the first compliance report may not be due until the following year (or later), it is not unusual for data that once supported the contract to become lost. Creating a "permanent" file on a shared network and saving all final contract information into that file will be invaluable during compliance season.
Are payroll, HR, and ERP data synced?
Base job count and compliance reports are based on data from one or more of these systems. Data extracted from enterprise resource planning (ERP) systems is not always accurate when it comes to periodic hours worked or hire date. Providing reliable data to the compliance assignee and to the program auditor results in efficiencies and reduces the potential for distrust on the part of the auditor. If any part of the data is incorrect, an auditor will likely view the entire data set as suspect, thereby drawing out the audit review and creating multiple requests for additional information or clarification. This seemingly small issue can double the time spent with auditors. The compliance assignee must confirm that accurate data sets were used for the base job count and are used consistently for all reporting periods.
Will there be remote employees assigned to the project location?
Technology has allowed more workers to perform their responsibilities remotely. This situation is not always recorded in payroll records, resulting in an inflated base job commitment or incorrect qualification of new hires. Further, asking the question does not always produce an accurate response because the person providing the information may not be aware of remote worker status.
Having a firm grasp on how the state calculates base jobs and how the project team arrived at the base jobs is essential. Another "heads up" for the compliance assignee is to identify the withholding state for each employee in the data set. The state will feel no obligation to confirm that employees on the base job report are actually working in the state, but state auditors will confirm this during benefit calculation review. Out-of-state workers will not qualify for benefits. Risk of losing benefits is higher for smaller projects or when the total new job commitment is in jeopardy.
Why is total base compensation important?
States expect to remain whole. Even if base jobs are maintained, total base compensation may fall below the established total base compensation agreed upon in the incentive agreement. Setting expectations is critical.
When a deficit occurs, qualified wages from net new jobs will be assigned to total base compensation and will not produce the expected benefit. In small numbers, this is immaterial, but a significant restructuring or downsizing may (1) impact a deferred income tax asset and negatively impact the company's financial statements and/or (2) result in an underpayment of estimated state income taxes. The compliance assignee should monitor total base compensation throughout the contract term and alert management when benefits are at risk.
Are filing requirements understood?
Each program has specific deadlines and reporting requirements. Projects often involve benefits under multiple programs. A best practice is to obtain from the grantor at the time of contract execution (1) a listing of all filing requirements with a due date for each and (2) actual forms for each filing requirement. (If a program is new, the forms may not be readily available but due dates are known.)
A successful project requires communication and delegation at the appropriate levels and at the appropriate time. It is common knowledge that incentive contract benefits go unrealized by companies simply because compliance falls through the cracks. Handoff of the project to a compliance assignee after contract execution is crucial to realizing benefits. Upon receipt of the filing requirements and forms, the compliance may be delegated with confidence. Bring on the next project!
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