5 Steps to Uncovering Savings With State and Local Tax Credits and Incentives
Discover Tax Credits and Financial Incentives for Businesses
State and local governments provide a wide range of tax credits and other financial incentives to encourage investment and job creation. Statutory tax credits can reduce a company's overall tax liability, or provide a cash benefit for refundable or transferable credits. Tax incentives can come in the form of discretionary cash grants, negotiated abatements, unique exemptions and exclusions, and preferential tax rates.
How to Take Advantage
of SALT Credits
Many companies miss out on statutory tax credits they already qualify for – particularly state and local income and franchise tax credits. A lack of in-house expertise, bandwidth, and strategic tax credit planning often prevent companies from capturing all state and local tax (SALT) credits available to them. To take advantage of credits, companies must identify those available in their industries, determine which apply to their businesses, and develop and execute a plan to capture them. Consider the following steps to capitalize on income tax credits and unlock savings:
Tax leaders first need to identify what credits they are already using and then determine which future activities could qualify for tax credits, such as major hiring initiatives or capital expansion plans. If tax leaders discover unused tax credits after this evaluation, they should decide if they have the capacity or knowledge to pursue all possible opportunities.
Companies must determine which credits they want to pursue and the process for obtaining them. They should then collect the information necessary to demonstrate eligibility, which will vary significantly by tax credit. Eligibility is sometimes based on qualifiers, such as location or industry or on specific activities like opening new facilities or hiring plans. Organizations should also evaluate the risk of recapture, which requires a company to pay back the incentive if it fails to comply with the program’s requirements. Companies can then develop executive summaries or matrices of their tax credit plans, which they can follow as they file refund claims and maintain compliance with tax credit requirements.
When companies file incentive applications or amended returns claiming refunds for tax credits, they should document and gather data for submission. The kind of data to be gathered will depend on the credit being pursued but could include information regarding job creation, payroll data, or projected investment. The types of data gathered will also vary depending on the industry in which the company operates.
Companies can work with state tax or revenue auditors to determine if further information needs to be gathered to support refund claims and ask any compliance questions. It is important that companies work closely with state officials to timely resolve any outstanding issues and receive approval.
To avoid noncompliance with credits claimed year over year, tax leaders should install systems that will track and report employment and investment data required for compliance. They should also implement programs that regularly examine and update compliance processes to mitigate the risk of recapture. Companies should ensure they have the technology necessary to support these systems and manage the complex transactions required for compliance.
Using SALT Credits to Improve Tax Posture
SALT credits can play a crucial part in lowering a company’s costs and increasing return on investment. But taking the time to identify appropriate credits can be daunting, and many companies lack the expertise or bandwidth to capitalize on the credits they discover. Third-party advisors can help identify appropriate tax credits, prepare refund claims, and ensure compliance. Tax teams seeking support should consider advisors with experience spanning numerous states and jurisdictions and the resources to manage the compliance calculations for securing credits. Applying for SALT credits — and managing them across locations — is complex. Tax teams with the right support and resources can rely on third parties to manage the application and compliance process and improve a company’s total tax posture.
Consider SALT Incentive Opportunities
When Undertaking New Projects
Any time a company begins a new project, such as opening additional facilities, launching a hiring initiative, or relocating assets or employees, SALT incentives become available. State and local officials often create programs to attract companies to foster economic development. Some incentives are statutory and available to claim immediately, while businesses will need to negotiate the terms of others with government officials. If performed early in the expansion or relocation process, an evaluation of incentives in each jurisdiction can help determine site selection. Consider the following steps to secure SALT incentives and increase tax savings:
Tax leaders should first revisit their tax approaches and any incentives they are already pursuing. Next, they need to identify the scope and budget of any projects, such as expansions, hiring, or research, that are expected to take place over the next few years and could be eligible for SALT incentives. Once that process is complete, companies should evaluate the available incentives by jurisdiction based on planned projects and negotiate any packages with state and local economic development officials.
Once the organization has decided what incentives to pursue, it should collect the information necessary to demonstrate its eligibility. This could include employment data or project plans, schedules, and budgets. If an incentive is negotiated, the company should use this data to develop its business case; if the incentive is statutory, the company should gather the data to document eligibility and compliance.
When a company finds opportunities to negotiate incentives, it should meet with economic development officials in the relevant jurisdiction to discuss the project and potential incentive package. During this stage, an organization will share previously collected project data, build its business case with officials, and negotiate the project’s scope and tax incentive package.
Once companies have negotiated tax incentive terms or claimed statutory incentives, they may need to work with state departments of revenue auditors to determine what further information is needed to prove eligibility and compliance.
After receiving approval for incentive packages, companies should develop processes to gather data required for annual compliance reporting to mitigate the risk of recapture, which is the risk that a company will have to repay any incentive received if it fails to comply with requirements. Tax teams should implement programs that regularly evaluate and update compliance processes for tracking and reporting employment and investment commitments. They also need to ensure they have invested in the technology necessary to routinely extract and report data and handle the complex calculations required for compliance.
Unlocking Savings With SALT Incentives
To avoid missing out on tax savings, companies must keep tax incentives in mind when planning new projects. With so many challenges to keep track of during a new project or change in business, the time and resources necessary to capitalize on SALT incentives can seem daunting. Companies may want third-party assistance to identify tax incentives and negotiate their terms, help ensure compliance, and maintain relationships with state and local officials. Tax teams should seek an organization with tax incentive experience and relationships with officials across multiple jurisdictions. Although applying for SALT incentives is complex, qualifying for them could play a key role in improving a company’s overall tax approach.
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