As COVID-19 brings economic slowdown and uncertainty, businesses in the middle market can utilize federal and state incentive programs as a source of cash flow. Recent federal legislation has been enacted to assist companies with paid sick leave and childcare for their employees. Furthermore, certain states have implemented programs specifically targeting financial relief for the economic strain caused by COVID-19. Finally, middle market companies can implement a strategy of Using Credits and Incentives During an Economic Slowdown to maximize incentives they already have in place, generate cash flow from retroactive benefits, and utilize workforce development programs to train and retain their employees.
Federal COVID-19 Programs
Enacted on March 18, 2020, the Families First Coronavirus Response Act provides employers with fewer than 500 employees certain tax credits against FICA, based on the amount of paid sick leave that is paid to qualifying employees as well as certain qualified health plan expenses the employer incurs with regard to the employees taking the mandatory paid leave. Self-employed individuals who are unable to work because of the COVID-19 emergency will also receive credits against section 1402 Self Employment Contributions Act (SECA) contributions. The amount of the credit varies depending on the nature of the employee and the reason behind the leave.
Employers can also receive a tax credit of up to $10,000 per employee for paid childcare leave for an employee who is unable to work because of the need to care for a child whose school, childcare facility is closed, or whose childcare provider is unavailable due to the Coronavirus.
Specific programs addressing COVID-19
As of the date of this article, 17 states, and some cities, have enacted or created specific COVID-19 related programs, with the majority of these programs targeting small businesses. Each state’s definition of small business varies, but generally it is 500 or fewer employees, with some of these programs effectively targeting businesses in the middle market. To date, these newly created programs have focused on the provision of financing mechanisms to support the impacted business.
A representative summary of a number of states follows, with similar programs in others.
The California Infrastructure and Economic Development Bank (IBANK), a unit within the California Governor’s Office of Business and Economic Development, is offering two programs to support businesses and low-wealth entrepreneurs economically impacted by COVID-19. The Disaster Relief Loan Guarantee Program (DRLGP) offers loan guarantees of up to $1 million for businesses, ranging from one to 750 employees, in declared disaster areas. IBANK is also offering the Jump Start Loan Program providing loans from $500 - $10,000 to low-wealth entrepreneurs in declared disaster areas.
The city of Chicago is establishing the Chicago Small Business Resiliency Fund, which will provide a total of $100 million in emergency cash to businesses affected by COVID-19. Funding will be provided as low-interest loans and applications will open on March 31, 2020. Eligible small businesses are those with fewer than 50 employees, gross revenues of less than $3 million in 2019, and a 25% decrease in revenue due to COVID-19. These low-interest loans will be available for amounts up to $50,000 and terms up to five years. Loan proceeds must be used for working capital, with at least 50%applied toward payroll, along with a commitment to retain workforce of at least 50% of pre-COVID-19 levels.
New York and New York City
New York City has established a COVID-19-specific program for businesses operating in the city with fewer than 100 employees, who have seen a sales decrease of 25% or more, may be eligible for zero interest loans of up to $75,000 to help mitigate losses in profit. Additionally, businesses with fewer than five employees may receive a grant to cover 40% of payroll costs for two months to help retain employees.
While these programs are representative, similar programs exist throughout the United States and additional programs are in the process of being created.
Maximize incentives already in place
The impact of COVID-19 is resulting in widespread economic slowdown, which will ultimately lead to a reduction in state tax revenues. In response to a widespread reduction in revenues, it is not uncommon to see states place a greater scrutiny on statutory and discretionary incentive arrangements that are already in place.
Participating companies enter into a contractual arrangement with the relevant jurisdiction, which can include obligations such as employment and capital investment commitments, reporting requirements, as well as clawback and recapture provisions. Performance obligations are typically tied to capital investment and job creation, both of which have been negatively impacted by COVID-19 for the majority of the middle market. To the extent that agreed upon performance provisions are not met, states may have an ability, depending on contractual terms, to require companies to repay received funds, sometimes with additional penalties.
To mitigate potential clawback, to the extent that a company is facing a situation where it will not meet agreed upon performance milestones, companies should carefully review their incentive agreements to ensure they are meeting all compliance and performance requirements. This review should confirm whether all hiring or investment targets have been met, whether all necessary documentation and compliance has been completed in accordance with the agreement timeline, and whether the taxpayer has any plans for periods of noncompliance. Taxpayers should ensure that they have the appropriate documentation and compliance procedures in place to meet the requirements laid out in their discretionary agreements and secure the incentives.
To the extent that a company finds itself in a position where it is either in or facing default on a contractual requirement of its incentive contract, it may be possible to renegotiate agreed upon requirements. If companies are proactive in their approach to this type of a situation, meaning they affirmatively identify the area(s) of non-compliance and they discuss the situation with the relevant state or local agency in a timely manner, it may be possible for the company to renegotiate performance requirements. Given the wide-scale impact of COVID-19, proactively addressing any such issues will bring the highest likelihood of success.
When reviewing incentive agreements, taxpayers may also find provisions in the agreement that allow for an extension of time to meet performance targets, and taxpayers should be proactive in contacting states if they foresee issues in investing or hiring to the necessary level outlined in the agreement. In the event that there are no extension provisions, or if an extension may not be sufficient to meet targeted levels of investment and hiring, taxpayers should shift focus to renegotiating with taxing and economic development authorities. Particularly in light of the coronavirus pandemic, these authorities may be more willing to modify agreements. States understand that this economic slowdown is occurring for most middle market businesses, and that it is most certainly impacting the ability for these businesses to invest and hire to the extent they had originally planned when seeking incentives.
Generate cash flow from retroactive benefits
In addition to ensuring current incentive agreement obligations are being met, impacted middle-market companies can evaluate their last three years of business activity to ensure all available statutory credits and incentives have been utilized. This review of historical business activity should focus on job growth, capital investment, and technology development/implementation. States often allow taxpayers to retroactively claim benefits related to these types of business activities by amending returns within the open statute of limitations period. This is particularly helpful for taxpayers that have had state income or franchise tax liabilities during this period, as benefits can either be immediately refunded or credited to the taxpayer’s account to reduce future cash outlay for tax liability obligations.
In addition to identifying retroactively available tax credit and incentives that can generate a refund of previously paid state income or franchise taxes, it may be possible to also generate reductions in other above-the-line taxes. An example of this is the Georgia job tax credit. While this program puts a limit on the lookback period to one year from the filing of the last return, taxpayers may look to historical job growth to claim installments for the retention of those jobs. For taxpayers that are located in certain distressed counties, this benefit can be claimed as a reduction in state withholdings.
There are many other state credit and incentive programs that allow taxpayers to take advantage of historical growth in this time of economic stagnation. Taxpayers should review their state business activities and tax liabilities for all years that are still open under each state’s statute of limitations, to ensure that all potential benefits are being captured and realized either as current or future cash flow.
Focus on workforce development
While the COVID-19 related economic slowdown has reduced or in some cases, eliminated workforce growth, companies can instead look to workforce development grants for the training and retaining their current employees. State programs to support workforce development, often in the form of cash reimbursement for training employees. Eligible training may include COVID-19 related items such as training employees to utilize virtual and remote technology, training for new work processes as retraining of existing employees to backfill vacant positions. Additionally, trading for areas such as soft skills, leadership, technology, sales, process improvement, skills-based, safety, and computer skills. Eligibility requirements and benefits vary state-by-state.
As an example, Florida businesses that have been in operation in the state for a minimum of one-year are eligible for the Incumbent Worker Training Program (IWT). Eligible businesses will receive cash reimbursement of up to 50% of their direct training costs, while businesses meeting certain criteria such as being located in an economically distressed area may be eligible for reimbursement up to 75%. Funds may be used to reimburse training conducted on-site or off-site, and eligible training includes business-specific skills, technical or computer skills, soft-skills such as leadership, teamwork, and management, among others.
Similar programs exist in other states, so taxpayers should look to the guidance provided by economic development officials in the states where they are conducting training.
There are multiple action items for middle-market businesses to take to ensure they are maximizing cash flow amidst the economic interruption of the coronavirus pandemic. Taxpayers should review any incentive programs they already have in place, to confirm that all compliance and performance requirements are being met. This will mitigate potential clawback provisions and guarantee that benefits are being efficiently realized. Companies should also perform a careful review of their prior year business activities in each state, as there are often historical benefits that can be claimed. Additionally, workforce development will be a primary focus of both states and companies, as there is a prioritization on retaining employees during the slowdown.
Finally, COVID-19-specific economic assistance programs are being implemented in several states. Taxpayers should proactively look to take advantage of these programs. RSM is closely monitoring all legislative developments at both the federal and state levels, and we can assist your business in identifying and securing the funding necessary to help weather this unprecedented storm. Please consult with your state and local tax adviser for assistance.