Considering that many companies pay substantial amounts in property taxes, a business may be able to save a considerable amount of tax dollars if proper planning is undertaken when an expansion is on the drawing board.
Consider South Carolina, for example. The state offers a number of ways a company can save on property taxes when expanding.
First, South Carolina offers a five-year abatement from local property taxes. The abatement does not apply to the school portion of property taxes. This incentive can represent a 20 to 50 percent savings on the total property tax rate of the county, depending on the county.
The state estimates that the typical value of these abatements ranges between 30 to 35 percent of the total property tax bill. This abatement is only in effect for five years, as in year six, the property is taxed at the full rate.
| A business may be able to save a considerable amount of tax dollars if proper planning is undertaken when an expansion is on the drawing board. |
The most valuable local incentive that South Carolina offers allows a company to negotiate a fee-in-lieu-of property taxes agreement with a county if certain investment criteria are met.
Until 1997, such agreements required the taxpayer to transfer title to the property to the county, then lease the property back. They also often required the county to issue industrial revenue bonds. Effective June 24, 1997, the Fee in Lieu of Tax Simplification Act eliminated these requirements, allowing taxpayers investing in property to enter into fee arrangements while maintaining ownership of the property.
A taxpayer entering into a fee agreement must invest a minimum of $5 million in the qualified project within five years of the date the agreement is executed. The county may agree in writing to extend the investment period for up to two additional years if the investor does not anticipate completing the project within the five-year period.
If the total investment required is not made within the required period, the fee agreement is terminated and the investor must pay the difference between any fee payments actually made, and the amount of tax that would have been due had no fee agreement existed, plus interest.
The benefit of entering into this type of agreement is that it allows the company to negotiate a lower tax assessment ratio.
It also provides the company with stabilized payments to the local government for the term of the agreement, which can range up to 20 years. This allows the company to realize a potential savings due to the fact that history shows that property tax rates increase an average of 2 percent annually. With the agreement, you are potentially locking in the lower rate. This means it can offer a greater potential for savings than an abatement.
While other states do not offer this fee-in-lieu agreement, you can usually negotiate some sort of agreement that could eliminate or lower property taxes.
An agreement can usually be reached between the expanding company and the county whereby the county actually purchases the property and leases the property back to the company. This allows the property to be exempt from property taxes because the government authority is typically tax exempt.
It allows the company to have full use of the property, with the ability to purchase it for a minimal amount at the end of the leasing agreement. Also, this type of transaction might afford the company a potential way to save on sales and use taxes.
Great thought should be exercised when undergoing an expansion to take maximum advantage of potential tax savings.
Warren B. Lubliner is tax manager of tax incentive programs for Mintax, an East Brunswick, N.J., economic development consulting firm specializing in incentives. Contact him by e-mail at info@mintax.com.
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