US tax incentives

July 11, 2023

  1. Process

The US tax incentives process includes four main components: Pre-Proposal Planning, Incentives Proposal, Tax Incentive Application and Multiyear Compliance Process.

Pre-Proposal Planning is the process of determining what the company’s expansion looks like.  Will the facility be heavy with capital investment or hire lots of employees?  If so, how much investment and how many employees?  Or will the US expansion by remote in nature and have a virtual office?  The states are looking for a central facility from which the employees and investment will be based.  So if the plan is to have minimal office space and for employees to work remotely from across the US, then there would be little if any tax incentives available.  So, the company should determine “what are the most important drivers for this expansion?”

Incentives Proposal is where the company’s representative connects with the state tax authorities in the state or states that are under consideration for the project.  The states will request fairly extension information from the company about the company’s background and the facts of the project.  This negotiation process can take some time, from 2 weeks to 1 year depending on the project.

Tax Incentives Applications is the process after the acceptance of the Incentives Proposal where the company formally applies for participation in the various tax incentive programs.

Multiyear Compliance Process – some companies believe that the states will handle all of the compliance processes for them and just “send the company a check.”  This is not the case.  These incentive programs can have monthly, quarterly and/or annual compliance reports associated with them.  If you miss a report or a deadline, the incentives programs are in jeopardy of being forfeited.

  • Types of State Tax Incentives

Tax incentives vary widely by state.  Some states have very few incentives and some states have very compelling incentive programs.  The following is a partial list of incentive programs that may be available:

  • State income tax credits
  • Payroll tax rebates or refunds
  • Training grants
  • Sales tax exemptions
  • Property tax abatements
  • Utility cost reduction
  • Forgiveable loans

Depending on the company facts, a combination of these incentives can offset the expansion costs of a project by as much as 30%. 

  • Qualifiers
    • Targeted industries
      • Manufacturing
      • Professional / Financial Services
      • Engineering / Architecture
      • Technology
      • Biomedical / Research
      • Headquarters (regardless of industry)
      • Businesses that generate greater than 50% of their revenue from outside the state
    • Non-Eligible – retail, non-profits- casinos, religious or government organizations
    • High wages
    • New jobs
    • Capital investment, and/or
    • Geographic location
  • Timing – the earlier the better
  • Devils in the Details
    • It’s Never Too Early but Often Too Late
    • Performance Based
    • Knowing what is a true incentive
  • ESG and Tax Incentives

Some tax incentive programs now require hiring a certain percentage of minorities, providing internships, or other charitiable or serviced based activities.

  • Impact of Remote Work

State and local governments want to incent companies that will make investments in their communities, provide job opportunities for its population, pay higher than average wages and are quality members of the community.  With the post-COVID tendency of remote work, this has caused some companies to have a model that doesn’t establish a connection with a particular community, instead having their employees work from home across the US.  In the remote worker scenario, there are often few tax incentive opportunities, and if there are, the benefits aren’t typically worth the effort. 

If you would like more information on tax incentives in the US, please get in touch.