Nebraska discusses effects of COVID-19 on tax incentive recapture
TAX ALERT |
In one of the first responses of its kind in the nation, the Nebraska Department of Revenue issued guidance stating that the COVD-19 pandemic and declaration of a national emergency may relieve certain incentives recipients of their obligation to repay benefits for failing to maintain employment and investment levels.
The Nebraska Advantage Act provides that all or a portion of tax incentives previously earned shall be recaptured if the recipient fails to meet or maintain the required levels of employment and investment during the entitlement period. The law contains a force majeure provision that excuses the recipient’s failure to maintain the employment and investment levels under specific circumstances. The law states that recapture is not required if the failure is due to an Act of God or a national emergency. The department expressly stated that President Trump’s declaration of a national emergency is a triggering event for purposes of the force majeure provision.
To avoid recapture, the recipient must show that its failure to maintain the required employment and investment levels was caused by the triggering event. The department noted that the burden is on the recipient to show that the failure was not within its control but was a result of the triggering event. To show that the failure was a direct result of forces beyond its control, the recipient must produce evidence which can include a government order to cease or limit operations or a health directive preventing operations.
The department emphasized that the force majeure provision does not excuse performance on the basis of financial hardship or business decisions within the recipient’s control. The department further stated that a recipient will not be excused from the recapture requirements simply because it is more profitable to do so.
The Nebraska guidance indicates that if a company received incentives under the Nebraska Advantage Act, it is relieved from the recapture provisions if it can show the failure to meet the employment and investment requirements was a direct result of the national emergency declaration.
The COVID-19 pandemic has wreaked havoc on the economy. Most states that grant tax and other economic development incentives have recapture or clawback rules. These rules require businesses that fail to meet employment or investment obligations to pay the state back some or all of the incentives. Most states, however, have force majeure clauses that may excuse repayment. Unfortunately, many companies that have received incentives are likely to fail to meet their obligations. Companies should consult with their tax advisors to determine if they qualify for relief under applicable force majeure provisions.
Middle market relief for businesses impacted by the coronavirus has been accelerating with states establishing targeted relief programs on an almost daily basis. Businesses in every industry should consider State tax planning in response to economic distress. For more information on the coronavirus, please see RSM’s Coronavirus Resource Center which includes related and frequently updated developments and a link to sign up for RSM’s weekly Coronavirus webcast series.