Tax Credits & Incentives: Are You Missing The Boat?
Half of the nearly 3,000 US federal, state and local tax credits and incentives go unclaimed, and it pays to learn how well your company is capturing these opportunities.
May 11 2011 by Fred Stiftel
When a shareholder grabs the microphone at an annual meeting and asks if the company is taking full advantage of the estimated $60 billion available each year in federal, state and local tax credits and incentives, most CEOs quickly pass the question to their CFO, who will typically provide shareholders with some level of assurance that their company is engaged in all of the appropriate programs designed to reduce operating costs and minimize tax liability.
There currently are nearly 3,000 tax credits and incentives programs in the United States, sponsored by federal, state and local governments to drive job creation, employee training, capital investment and new business development. These statutory and negotiated opportunities – including point-of-hire tax credits, to property & sales tax incentives, to utility & infrastructure abatements, to name a few – are available to companies of all sizes, across a broad range of industries.
But a relatively small number of companies, regardless of their size or financial sophistication, are benefitting fully from the tax credit and incentive-related benefits to which they are entitled. Industry estimates suggest that fewer than 25 percent of eligible US businesses participate in the federal government’s Work Opportunity Tax Credit (WOTC) program; and despite an array of lucrative employee tax credit and incentive opportunities offered in all 50 states, only about 10 percent of participating companies appear to be taking advantage of them properly.
When pressed for details, corporate tax, finance and HR department managers often have legitimate, as well as unsubstantiated, opinions on the extent to which their company either can or should pursue tax credits and incentives. The four of most commonly expressed points of view limiting corporate participation include:
They’re Too Complex
There is sufficient basis for companies to be overwhelmed by the range of opportunities, and as a result, to either focus exclusively on one or two specific programs, or to avoid them altogether. In general, the statutory opportunities offered by the federal government are fairly straightforward, and fall into four major categories:
- Workforce Incentives – targeted toward groups who have consistently faced substantial barriers to employment, such as veterans, food stamp recipients and residents of designated communities. The largest of these are the Work Opportunity Tax Credit (WOTC) and Long Term Family Assistance (LTFA) programs, designed to foster employment of individuals from eleven targeted groups.
- Geographic Incentives – to attract job creation and investment in distressed areas, often within Empowerment or Enterprise Zones.
- Investment Incentives – based on investments on qualified machinery and equipment.
- R & D Tax Credits – to foster creation or improvement of various business processes.
The complexity of tax credit and incentive programs occurs primarily on the state and local levels. All 50 states offer a myriad of programs, with credits driven by a company’s investment levels, headcount and business activity at each location. So for companies operating various locations in multiple states, the identification, application process and ongoing management of these programs is no simple task. Broadly, the three major categories of state and local programs include:
- Statutory Programs – or “as-of-right” programs, which in some states require pre-certification of eligibility, as well as location in a specific geographic area.
- Negotiated Incentives – involving job creation, R&D, facilities investment, green initiatives, skills training or site selection. These discretionary programs require negotiation, advance certification, or declaration that the company would not locate to a particular state “but for” these incentives.
- Refundable/Transferable Tax Credits – for companies with net operating losses, or that are unable to use available tax credits, 31 states currently offer programs with opportunities to monetize tax credits through refunds and sales. Many companies are unaware that they may be able to sell or transfer the net operating losses and tax credits they’ve earned.
For most companies, complexity in the range of available federal, state and local tax credits and incentives should serve as an incentive to explore their economic potential, not as a reason to avoid them or limit participation.
They’re Not Worth The Effort
For companies with a large employee base, the economic benefits of diligent pursuit of WOTC-related programs can be well worth the effort: delivering $2,400 to $9,000 in tax credit savings per qualified employee. Even companies that believe they don’t hire the types of people who qualify for tax credits are often pleasantly surprised at the number of employees who do qualify, once they get serious about exploring opportunities. Sometime employees qualify simply based on where they live.
Using only the federal Work Opportunity Tax Credit, a large company that hires 5,000 new employees per year, with 10 percent of those new hires eligible for the program, can realize $4.5 million in tax credits over a 2-year period.
More substantial savings, however, are achieved by companies that are capable of capturing the full range of retroactive, and proactive tax credit and incentive opportunities. A world leader in soft drink manufacturing, for example, combined WOTC credits with state and municipal opportunities that included new jobs tax credits, negotiated training grants, sales & use tax exemptions, property abatements, state income tax exemptions, and enterprise zone property tax exemptions totaling more than $4 million.
Another example of diversified opportunities involved one of the nation’s leading wholesale cash and carry companies, serving grocery retailers and food service operators. This company secured tax credits related to its California and Georgia locations, sales & use tax exemptions for materials and machinery for new warehouse construction, Federal Empowerment Zone, Renewal Community, and Hurricane Relief tax credits worth $5.3 million.
For one location alone, the company also negotiated an incentive package, separate from the state’s offering, resulting in a10-year 100 percent property tax abatement on all improvements. With 10 – 12 new warehouse openings every year, this company carefully approaches front-end site selection in order to evaluate sales and use tax exemptions and state tax credits for these facilities.
With some companies reclaiming as much as 25 percent of their operating costs through government incentives, it’s tough to defend the position that they are not worth the effort.
We’ve Got It Covered
When the CFO who responded to the shareholder’s tax credits and incentives question returns from the company’s annual meeting, his first stop is likely to be the office of the head of taxation or human resources…for assurance that their company actually is benefitting from all relevant opportunities.
“We’ve got it covered” is often the internal assurance provided when a CEO or CFO asks about tax credits and incentives, but there are three major reasons why that response can fall short of the mark:
- Most corporate tax departments, regardless of size, have neither the time nor expertise to monitor all of the potential tax credit programs; particularly if their company operates in multiple states. General Motors Corporation, with a tax department of more than 100 analysts, at one time had overlooked at least $2 million in retroactive Native American federal tax credits.
- Regardless of size, CPA firms are often not set up to review and administer tax credit programs, and their range of services in this discipline is limited by Sarbanes Oxley. Further, given the amount of ongoing administration required to benefit from these programs, it would not be cost-effective for a company to use its external accounting firm for that purpose.
- HR support vendors can provide client companies with tax credit and incentives assistance, but often only as an ancillary service in order to maintain a client relationship that includes more profitable service lines, such as payroll and employee benefit-related processing.
Companies that truly do “have it covered” in terms of tax credit and incentive opportunities are usually those in which the CEO or CFO has made oversight and management of this discipline a priority, has ensured that the necessary internal or external resources are leveraged, and has established a formal tracking and review process to monitor the company’s performance and ROI for this activity.
We Tried Them Before
Tax credit and incentives programs are constantly being changed and expanded in Congress, and there have been significant revisions to the federal WOTC program in past three years. As a result of high unemployment and the need to attract capital investment, many states have changed eligibility requirements and enhanced features of their existing programs or have initiated new opportunities.
For example, in the first few months of 2011, the federal government has been completing H.R. 942, to amend the Internal Revenue Code of 1986 to extend the research credit through 2012 and to increase by 20% and make permanent the alternative simplified research credit. On the state level, Louisiana has announced plans to establish a 40% refundable tax credit for R&D, as well as incentives for digital media and software development activity; South Carolina is creating credits up to $2,400 per individual to increase hiring of the unemployed; and New York’s Excelsior Jobs Program’s tax benefit period has been extended to ten from five years, and its R&D tax credits have been increased.
Conversely, change at the federal and state levels can sometimes serve as a catalyst for corporate strategy, including facilities location or relocation. In California, for example, Governor Brown is currently pushing for elimination of its Enterprise Zone Program, as a means to address the state’s budget deficit. This shift will result in a tax increase of more than $1 billion for California companies operating in the EZ program, and if passed, will likely cause those companies to scramble for alternative locations.
In this constantly shifting landscape, companies can not assume that their analysis of current opportunities will have a long shelf-life. They need to diligently monitor the eligibility requirements and potential benefits of existing programs, in order to keep abreast of new opportunities on the federal, state and local levels – for offensive and defensive purposes.
Three Ways to Increase Corporate Participation
For CEOs who are unsure of whether their company is capturing the tax credits to which it’s entitled, there are number of steps that can clarify the situation and serve to re-focus attention on the relevant opportunities:
1. Maintain a Trigger List:
There are specific conditions and events that serve as key triggers for exploration of tax credit and incentive opportunities. In the human capital category, these triggers involve increases or decreases in employment, turnovers, relocations, employee training or retraining, and shifts from contract-based to permanent employment status. The facilities- and production-related triggers include:
- New site selection and start-up
- New capital investment
- New leases and renewals
- Building acquisitions
- Facility upgrades
- Consolidations and closures
- Mergers and acquisitions
- Shifts in production
- Relocation of equipment
For nearly every strategic issue, CEOs are well-served to condition their senior staff members to respond to the “What are our tax credit and incentive opportunities?” question before they are asked.
2. Establish Program-Related Metrics
To enhance the ROI of a company’s existing tax and incentive programs, it’s important to monitor relevant key metrics. With WOTC programs for example, companies should track both compliance rates and certification rates. Compliance rates reflect the percentage of new hires who are screened for WOTC Program Eligibility, versus the total number of new hires. Compliance also tracks the timeliness of the processing of forms completed by potentially eligible hires. Compliance is critical because it drives the total amount of credits that are given, and the most successful WOTC programs have at least a 90 percent compliance rate.
Compliance rates are greatly affected by how hard the program is pushed from the corner office. Many corporate offices do not ask their HR Departments to complete the necessary forms or to report their WOTC compliance, but the most successful companies require that every new employee complete the necessary forms and be screened for eligibility.
A company’s certification rate compares the number of employees screened as eligible with those who are actually certified by the various state agencies involved in WOTC. In addition to the company’s business and employment profile, this metric is driven by how well the company’s external resource screens and processes all the paperwork that’s necessary for WOTC tax credits. A certification rate of 55 percent is considered best practices.
3. Make All Hiring Managers Accountable
It pays to engage all HR and departmental hiring managers, and to make them accountable for achieving relevant tax credits and incentives. This requires a senior level corporate champion, such as CEO, CFO, Treasurer or VP Tax, and can involve pushing down tax credit-related savings to a department’s or location’s P&L, or even to an individual manager’s performance scorecard – which causes them to take the tax credit issue seriously. As the HR VP of a clothing retailer with a P&L connection to tax credits noted, “It takes a lot of children’s clothes to make a profit of $2,400.” It also pays for companies to acknowledge internally the tax-related contributions of managers who are diligent in capturing opportunities.
In addition to push-back from inside the company, CEOs and senior managers who insist on changing the corporate culture to ensure their company’s full participation in tax credits and incentives can be assured of at least one other beneficial outcome: they will welcome a related question from any shareholder.