United States

Many middle market companies overlook hiring and training incentives

INSIGHT ARTICLE

In the business news, one routinely sees stories of Fortune 500 companies securing huge tax breaks and other incentives for locating or expanding facilities that bring jobs to a local economy. Middle-market business owners who assume these deals are only for corporate giants are wrong – and they are costing themselves money.

Taken together, there are thousands of federal, state and local tax credits and other incentives available to companies that are expanding or training their workforce. Unfortunately, many middle-market companies either don't think about them, or think about them too late. The key to maximizing the potential of these myriad opportunities is an ongoing, strategic commitment to identifying, understanding and pursuing the full range of possible savings available, as well as understanding the numerous ways that those savings opportunities can interact across your operations before you move ahead with your project.

Timing is everything

Consider a typical scenario for a middle-market company: The economy is improving and demand is increasing, and the company decides to expand its production facility and add to its workforce. The company decides on the nature and timing of the expansion, makes an announcement in the local media, and then, maybe, decides to look into available tax credits or incentives.

It's a case of too little, too late.

The fact is that many state and local tax and other incentives are discretionary and used as inducements to convince employers to locate jobs and make investments in a given market. Once a company has announced its intentions, it has lost its leverage. Even in cases where the incentives are statutory and available to everyone, timing is often vital.

Consider the Work Opportunity Tax Credit. This federal credit is available to employers hiring from certain targeted groups. However, to qualify, employees must complete Form 8850 on or before their first day of work, and the employer must file with its state department of labor with 28 days of the employee's start date. Employers that only begin to investigate possible credits once they have made a hiring decision can end up costing themselves significant dollars over time. They may also miss out on credits that are triggered by similar qualifiers (i.e., local hiring credits, enterprise zone credits, etc.)

Statutory versus discretionary credits

So what should companies do? Start by understanding the two basic types of credits available – statutory and discretionary.

Statutory credits:

  • Have clear requirements and are available to all qualifying companies
  • May require pre-approval or prior certification
  • Are claimed on a tax return
  • Can offset federal or state income and franchise tax liabilities
  • May offset sales and use, property or employment taxes

As demonstrated above, however, even in the case of statutory credits, timing can matter. Not only may the employer have to take certain steps before hiring or within a set period of hiring, but some such programs are funded on an annual basis with a finite pool of dollars and paid on a first-come, first-served basis. Companies that are aware of the programs, time their hiring appropriately, and submit their applications quickly are the most likely to benefit.

Discretionary credits, on the other hand:

  • Must be secured or pre-approved in advance of qualifying activities taking place
  • Are allowed by statute, but the benefits may change based on facts
  • Have boundaries that are less clear and benefits that are allocated at the discretion of the controlling government agency
  • Can be customized to a company's specific facts

Because discretionary credits are often used by competing taxing jurisdictions to attract jobs and investments, the earlier a company starts the negotiating process, the more leverage it is likely to have.

Hiring opens the door to a range of incentives

Companies that will be hiring should also understand that adding jobs can mean access not only to credits and incentives specifically targeting hiring, but also to a wide range of other incentives.

If you are making a capital investment that will result in new jobs, that investment may also qualify for preferential treatment that the investment alone would not. For example, if you build or expand a plant or other facility and add jobs as a result, in addition to hiring and training credits, your company could also qualify for a wealth of other incentives.

On the statutory side, such job-creating investments may qualify for:

In terms of discretionary credits, investments that bring new jobs often result in:

  • Economic development credits
  • Property and income tax abatements
  • Forgivable loans
  • Machinery and infrastructure grants
  • Financing options
  • Industrial revenue bonds

Again, jobs are the key. Most taxing jurisdictions limit incentives for investments that do not add new jobs. With the federal government, the states and even many local jurisdictions offering such a wide variety of possible incentives, how can a middle market company keep up? It isn't easy. One of the reasons larger companies seem to benefit more frequently from such programs is because they have the internal tax resources necessary to constantly monitor the evolving credits and incentives landscape. For middle-market companies without such resources, an outside advisor with the breadth of resources necessary to assist with a strategic credits and incentives analysis can be a wise investment.