States respond to downturns with stricter tax rules; anticipate audits and compliance risks.
Key takeaways
Prioritize job retention and workforce training incentives to preserve value and resilience.
Review past investments for retroactive credits to boost cash flow and uncover missed benefits.
As economic conditions shift, state and local governments often respond with familiar tax policy and enforcement strategies. Business leaders who understand those responses and proactively manage incentive programs can better navigate economic uncertainty and position themselves for long-term success.
Fortunately, in uncertain or challenging economic conditions, businesses can anticipate states’ responses rather easily because there is an established track record. During downturns, many states have attempted to maintain balanced budgets by reducing spending, broadening tax bases, eliminating exemptions or raising tax rates.
Beyond adjusting tax policy, states also tend to increase enforcement of existing tax regulations. This often begins with low-hanging fruit, such as compliance with statutory and discretionary credit and incentive agreements.
Companies under such pressure can preserve value and remain resilient by strategically adapting their tax approach. For example, they may shift from expansion to retention, invest in workforce training rather than hiring and seek eligibility for retroactive benefits.
Compliance and renegotiation
As states increase scrutiny of credit and incentive program compliance, audits may target aggressive tax positions and examine whether businesses have met the terms of their agreements.
Many incentive programs include clawback provisions, allowing states to rescind future benefits, reclaim previously granted credits and impose penalties if businesses fail to meet agreed-upon targets.
For example, job creation incentives often require businesses to expand their workforce. If economic conditions prevent businesses from fulfilling their commitments, states may seek to recover foregone tax revenue.
Taxpayers may prepare for greater oversight by conducting internal reviews of current and past agreements to ensure:
- All required documentation is complete
- Hiring or investment targets have been met
- Contingency plans exist for periods of noncompliance
If meeting agreement terms becomes impossible, businesses may be able to renegotiate. Even if formal renegotiation provisions are absent, many states have discretion to waive or modify requirements.
Proactive communication with taxing authorities is key. Early engagement can lead to more favorable outcomes than defaulting on agreements. This approach helps mitigate risk and supports a broader strategic reorientation in credit and incentive planning.
When expansion isn’t realistic: Shifting from job creation to job retention
During economic slowdowns, expansion may not be feasible—but there are strategic alternatives. Retention can still be rewarded—in various ways.
Many states offer incentives for maintaining current employment levels. One example is the Ohio Job Retention Tax Credit, which provides nonrefundable credits for capital investment projects that support job retention in the state.
Investing in existing employees is another avenue. For example, California’s Employment Training Panel (ETP) program offers funding for training both new and retained workers. Funded by a tax on employers, the ETP allows businesses to customize training plans and receive reimbursement after successful completion and retention.
Training incentives enhance workforce capabilities, of course, and also may position businesses for future growth—which benefits the state in the long run.
Maximizing cash flow through retroactive benefits
In addition to evaluating credits and incentives for job retention and employee training, businesses should also explore retroactive claims for unclaimed credits and incentives. A thorough review of past capital investments, hiring and technology development may reveal missed opportunities.
For example, Georgia’s investment tax credit for manufacturing and telecommunications requires filing a project plan within 30 days of completion. However, taxpayers may petition for written approval to file late. Tennessee’s job tax credit offers similar flexibility.
These programs show that even if deadlines have passed, relief may still be available. Businesses that have recently expanded or invested without claiming benefits should revisit their eligibility.
The upside to proactive communication with taxing authorities
Could it be counterproductive for states to increase enforcement and reduce benefits during downturns?
Perhaps. After all, states must balance budget concerns with broader economic health. Offering more flexibility or expanding discretionary benefits to distressed businesses could actually help buoy local economies by allowing taxpayers more resources to reinvest in their businesses.
This underscores how businesses could benefit from proactively communicating with taxing authorities when extenuating economic circumstances jeopardize compliance with credit and incentive program agreements.
Even in cases in which a state does not have specific provisions for renegotiating the provisions of credits and incentives, it frequently has latitude in waiving some requirements.
The earlier businesses seek assistance, the easier it may be to modify an agreement to include more realistic goals. Businesses should avoid defaulting on these arrangements, as better options may be available from authorities.
This approach can help mitigate the damage of failing to comply, especially when companies do this as part of a broader credits and incentives strategy reorientation.
The big picture: Adapt and optimize
As economic challenges intensify and states tighten their fiscal policies, businesses must respond with agility and foresight. Working with an experienced tax credits and incentives advisor can help businesses navigate complex state programs, uncover hidden opportunities and ensure their incentive strategy aligns with broader business goals.
A twofold strategy can help businesses preserve the value of credits and incentives that companies negotiated and depend on:
- Rigorously comply with existing credit and incentive agreements
- Shift focus toward workforce training and retention, as well as retroactive claims
Beyond tactical adjustments, businesses enduring economic uncertainty and challenges should not lose sight of credits and incentives as a strategic lever for resilience and growth. By proactively engaging with taxing authorities, reassessing incentive portfolios and aligning tax strategies with evolving business realities, companies can emerge stronger and better positioned for future opportunities.
RSM contributors
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Eric LevenhagenSenior Manager
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