How to Benefit from Business State and Local Tax Credits & Incentives Programs

HOST: Welcome to the Cherry Bekaert Tax Beat, a conversation about tax that matters. Welcome to this edition of the Cherry Bekaert Tax Beat podcast.

Today's conversation is focused on state credits and incentives. It is always exciting to talk with companies that are expanding operations, investing in new technologies, hiring additional workers, and making adjustments to the supply chain.

This is where our State Credits and Incentives team thrives. They love to bring you value, so we are going to spend some time talking about the wonderful things we can do there.

Joining today's conversation is the leader of our State Credits and Incentives practice, Melinda. Melinda, say hello.

MELINDA: Hello, this is Melinda. I am a director based out of Houston, Texas.

HOST: Also joining us is her colleague, Nick. Say hello, Nick.

NICK KENO: Hey, my name is Nick Keno. I am a senior manager in our State Credits and Incentives group, and I am in Greenville, South Carolina.

HOST: We have two of you today. Joining as always is Sarah McGregor, also sitting in the "center of the universe," Greenville, South Carolina. How is life treating you today, Sarah?

SARAH MCGREGOR: It is good. We refer to it as the Tax Center of Excellence. Now that Nick has joined us here, it proves the point again.

SARAH MCGREGOR: It is all good for the middle of winter. It is nice to have an indoor job sometimes.

HOST: I just got back from skiing, so I very much enjoyed all the snow we are seeing out West. Let’s jump into it.

We regularly hear announcements from economic development agencies and new companies moving into certain localities or moving operations to a new state or city. Sometimes you see two businesses swap locations across a state line in the same city.

In any case, we are talking about expansions and new jobs. Melinda’s team works with those companies, as well as others making moderate growth and investments in workers. Melinda, tell us about State Credits and Incentives.

MELINDA: We have five dedicated full-time professionals throughout the country. We offer three services.

First, our statutory credit review examines your tax return for tax credit opportunities and helps you amend your return to get your refund. Second, we assist with discretionary incentives.

We review your capital expenditures (CAPEX), identify financial and tax incentives, and provide site selection services. We identify potential sites, help you secure Credits and Incentives (C&I) benefits, and provide cost-benefit analyses.

There are more than 2,300 state and local C&I programs available. The federal and state governments provide $95 billion of tax and financial incentives annually.

Our goal is to help companies identify statutory credits and negotiate incentives. These incentives could include cash grants, property tax abatement, sales tax refunds, utility incentives, or above-the-line opportunities.

HOST: That is a number that can get anybody excited. Nick, let's go a little deeper on state credits. Which credits are most common for companies to claim in these situations?

NICK KENO: The most common are statutory credits. These are credits that you qualify for based on fairly bright-line parameters and claim on your income tax return.

The most common style is based on jobs. A Jobs Tax Credit is earned for adding new employees.

Another very common type is a credit for investments in real or personal property. This is usually a percentage of the property you are adding to your company.

Most states have a Jobs Tax Credit. This can range from a few hundred dollars per job to $125,000.

For instance, one job in a certain county in South Carolina can earn that much over a five-year credit window. Those are the most common Jobs Tax Credits and investment tax credits.

HOST: Those are extensive payments. You mentioned these credits can also be claimed on a lookback basis or an amended return.

NICK KENO: Absolutely. Part of what we bring to the table is the ability to go back as long as the statute of limitations is open, which is generally a three-year window, though sometimes one.

We can amend returns for statutory credits like the Jobs Tax Credit or investment tax credit. We work on getting the company a refund for overpaid taxes.

Additionally, we can look back past the statute of limitations in some situations to generate credit carryforwards. Even if they are not receiving an immediate refund, it is a great opportunity to carry those credits into the future.

HOST: So a job added in 2017 or 2018 might still benefit a company on their 2022 tax return?

NICK KENO: Yes, it could benefit them on the 2022 tax return or add to their credit carryforward.

Many states have a 5-to-15-year carryforward. It is always better to claim the credits while you are generating them and then use them over the next decade when you have taxable income.

HOST: Do any states offer refundable credits where you get cash back regardless of tax, or are they all a reduction in tax liability?

NICK KENO: In Georgia, for instance, many clients claim the Jobs Tax Credit. Depending on the county, excess credits that cannot be applied against income taxes may be applied against state withholding or payroll taxes.

This is extremely valuable for companies in a loss position or those that have other credits already offsetting their income taxes.

Income taxes are filed annually, but you can utilize these credits against payroll taxes more quickly. This brings significant present value to the client.

HOST: In other words, a credit against payroll taxes is as good as a cash refund.

NICK KENO: Absolutely.

HOST: Melinda, we continue to see competition across state lines to attract business investment. What is your take on the current trends?

MELINDA: I continue to see headquarters and employees moving from the West—California and Oregon—to the East, including Texas, Tennessee, or Florida. I also see people moving from the Northeast to the Southeast.

Competition remains fierce between states and localities. For example, North Carolina and South Carolina compete with Virginia by offering similar but slightly different incentives.

I see the same trend between Texas, Oklahoma, and Louisiana. While these states offer similar incentives, there are small differences between them.

Pre-pandemic, states focused on real estate, capital investment, and job creation. Post-pandemic, they are looking at job retention and training.

Incentives are now tailored toward job retention, such as training grants to help employees upskill. Remote employment incentives are also very popular now.

Due to labor shortages, there is also increased automation. Incentives related to automating manufacturing processes are another great offering.

HOST: Melinda, these states expect a certain amount of investment or job creation. How does that work?

MELINDA: Usually, before a state provides incentives like cash grants, they require a specific capital investment, job creation, or both.

If you promise to create 25 jobs, they may offer $2,000 per job. These must meet wage requirements for the city, county, or state.

Often, you must offer health insurance and other benefits. These are all included in the incentive agreement.

If the state offers a sales tax refund, they ensure you are purchasing that equipment before providing the refund. Most agreements include a clawback provision.

They want to ensure you stay in operation at that location for the next five to ten years; otherwise, you may have to pay back a portion of the benefits.

HOST: What happened with those clawbacks during COVID? How did companies deal with commitments they made to increase jobs or investments?

MELINDA: During COVID, many companies were unable to meet their requirements. We helped them renegotiate with city and state governments.

If a project was supposed to add 50 jobs over five years, we asked for seven or eight years to make up those numbers.

If an investment was supposed to be $5 million, we asked the state to reduce it or give the company more time to catch up. There is still an opportunity to renegotiate those incentives and contractual expectations.

HOST: Did you find most localities amenable to that renegotiation process?

MELINDA: Almost all were because they would rather let you continue your business than lose the entire project. They were very open to negotiations.

HOST: Nick, it sounds like there are many different things to look at. What is the minimum level a company needs before they should look at this? Are there rules of thumb for entry?

NICK KENO: A general rule of thumb is $5 million of investment and/or 25 new jobs. That is a good threshold to bring to state and county governments to negotiate incentives.

Bright lines change by state and county. In South Carolina, a small business Jobs Tax Credit only requires two net new jobs.

While we like to get involved with bigger projects, there are opportunities no matter the size of the investment.

If you have a three-year plan to invest $5 million or create 25 jobs, start talking to us before you sign any agreements or make the investment.

HOST: Melinda, tell us more about the site selection process and the value it delivers.

MELINDA: In our site selection process, we help negotiate incentives with state and local governments. We also perform analysis on the labor market, transportation, taxes, and the cost of doing business at each site.

This allows a company to compare sites to see which is better. We also look at demographic analysis and community characteristics, which is important for the younger generation.

HOST: Is it possible to create a bidding war between locations?

MELINDA: Yes, that is usually what we do. We take bordering states or cities and ask for proposals.

Even a lot across the street could be in a different county with different incentives. We leverage one location against another.

When Amazon looked for HQ2, they received more than 200 proposals. We do a similar process to help companies identify the perfect location.

HOST: Everything is negotiable, then?

MELINDA: Yes. Usually, they start with a mediocre offer. If you go back and ask for more, or ask for a sales tax benefit if you aren't paying income tax, we can maximize the potential benefits.

HOST: This doesn't just mean moving to a new location. It applies to adding square footage or a new production line, right?

MELINDA: Exactly. Anything that brings state and local revenue—property, sales, or income tax—is something they can share a portion of with you.

HOST: Do localities ever give an incentive just to make someone stay?

MELINDA: Yes, we have done that for grocery stores. If they don't get an incentive, they might lay off employees, which hurts the locality.

SARAH MCGREGOR: That has been true for some investments in South Carolina. Companies may say they like their facility but can easily relocate elsewhere to get continued benefits.

NICK KENO: We see that a lot in South Carolina. There are discretionary incentives, predominantly related to property tax savings like a Fee in Lieu of Tax (FILOT) agreement.

This reduces property taxes, which are a constant regardless of taxable income. We have seen companies work out deals to stay.

MELINDA: I see a lot of that in California. If you say you are moving operations out of the state, they move your application to the top for the California Competes Tax Credit.

NICK KENO: Conversely, in Florida, they don't have to offer much because companies are already willing to relocate to a tax-friendly environment. It is harder to capture opportunities there without big numbers.

HOST: The Tax Cuts and Jobs Act (TCJA) changed the law about state grants, making more of them taxable. Has this slowed companies down?

MELINDA: Companies are still looking for above-the-line benefits to reduce operating costs and increase ROI. It remains a mutual benefit to increase the viability of projects.

HOST: Melinda, the floor is yours for final remarks.

MELINDA: Thank you for having us. Our goal is to help you find additional cash, reduce operating costs, and increase your return on investment. Feel free to reach out with questions.

NICK KENO: Even if you don't hit the $5 million or 25-job mark, some states have special zones that create value for medium-sized businesses. Come see us so we can help you navigate those opportunities.

SARAH MCGREGOR: It is fun to be in the State Credits and Incentives group because you are helping companies that are growing and expanding.

HOST: If you are in that situation, you really need to talk to someone like Melinda and Nick to make sure you aren't leaving cash on the table. This ends our discussion.

A quick disclaimer: we are not providing tax advice. Please consult with your tax advisor, hopefully at Cherry Bekaert, regarding your specific issues.

Check the firm's website at cb.com for the latest guidance. This concludes today's podcast. Please like, share, and subscribe.

Thank you, Nick, Melinda, and our listeners. Let's call it a day and go forth in peace.