Incentive — noun 1. Something that incites to action or greater effort. 2. Motivator.

Incentives are offered by almost every taxing agency in the United States and the world. The objective at every level is to incite action. Economic action.

For businesses, the inducement should lead to expanded activities within a tax jurisdiction that provide for greater tax revenue, more job opportunities for the local work force and better quality of life for the citizens as a whole.

Investment tax credits are enacted to encourage and reward investment. Some are directed at specific business activities such as manufacturing or telecommunications. Others are designed to encourage an individual company to move into a state.
Creating the right variety of incentives and a level of benefit that attains that goal is an inexact science and changes for each company and government agency involved in the process.

Help on the federal level
The federal government has long had on the books general business tax credits, credits for research and development and low-income housing incentives, among others.
One of its most recent incentives. geared toward improving inner cities, as well as rural areas, is the Federal Empowerment Zone Program.

To be included in this program, local community groups, government agencies and businesses need to form a coalition, set goals for the group, and put in writing how the group will accomplish those goals. Proposals and applications are submitted to Washington, D.C., for approval.
There are currently nine urban empowerment zones and a large number of rural zones. Benefits range from job tax credits for each qualified person hired, to expedited processing of applications for required building permits. Any changes to this program, or to most federal incentive
programs, require — literally — an act of Congress.

States offer flexibility
State and local governments can be more flexible than the federal government in working with businesses to develop an incentive package. Some incentives are statutory, such as investment tax credits that are a fixed percentage of qualified investment, or jobs tax credits that are guaranteed dollar amounts for each new employee.

Increasingly, states are bundling a variety of negotiated incentives into the mix. Incentives can include not only credits, but also assistance with infrastructure, utility upgrades or reduced power rates, property tax abatement, job training grants, employee hiring assistance and low-rate loans.

When there is a change in corporate structure, reorganization, expansion or consolidation, corporations should include in their analysis not only the costs that will be incurred, but also the benefits that can be received.

Awareness of tax incentives has been growing steadily over the last several years. The incentive package offered by Alabama in the early 1990s to Mercedes-Benz hit the newspapers, as well as the business community, and woke up most tax professionals to the benefits towns and states receive when a company increases employment and investment.

Professional organizations, as well as consultants, have been spreading the word that incentives can be obtained if the company is making a commitment to a state or local government to expand or locate within their taxing jurisdiction.

In addition, state revenue agencies have steadily improved how they disseminate information on incentives to insure that their state is considered friendly toward business and competitive with neighboring states.

A delicate process
In order to remain competitive, companies are focusing more and more on incentives and the procedures needed to capture them. To be effective, the emphasis on capturing incentives must be placed at the earliest point in the decision-making process.

The best time to negotiate and evaluate available incentives is prior to the finalizing of the list of potential sites.

When a company is preparing to close or consolidate operations to a smaller number of facilities, incentives can play an important role.

In addition, making the choice between two plants, call centers or warehouse locations to determine which will receive the new line, computer upgrades or a second shift can be difficult. Factoring in the available incentives can make one site particularly more attractive than the other, which makes the decision easier.

States and communities are willing to offer incentives if, in the long term (10 years), the benefit to the community will be greater than the current loss of revenue. Once a company has decided to pursue incentives, they need to estimate the value of their expansion to a community.

The company seeking the benefits must be able to clearly identify and quantify those benefits to the community. The firm must put a dollar amount on increased employment, payroll taxes, property tax payments — including increased school taxes, increased sales taxes, as well as a cleaned up brownfield site and increased quality of life due to community beautification projects and landscaping.

Determining available incentives will depend on the size of the project and the resulting community benefit. Many states offer tax credits for increases in qualified investment — each state defines “qualified” a little differently — as well as increases in employment.

These incentives are probably the easiest to identify. Tax credits are usually listed by major tax research services.

A look at a state’s Web site or a call to that state’s department of economic development can generate a significant amount of information. These statutory incentives may be all that is available for a small expansion of “normal” investment levels.

Some states require pre-certification or an application process, and several may not have clear rules or regulations to follow. Most incentives, however, can be determined through additional research of state statutes or follow-up calls, and written requests for information to the departments
of revenue or finance in that particular state.

Don’t just focus on tax credits
Incentives, other than credits, may be of greater benefit to a company, particularly when the firm has a low tax liability. Items such as low-cost financing, tax increment financing, municipal ownership of new property, investments in infrastructure, utility reductions, exemptions from sales and use taxes, or grants for employee training, are just some of the types of incentives available.

The available benefits are limited only by the creativity of the company’s representatives and the government statutes that may restrict some options in a few states. The government agency should be approached to determine what the state is willing to offer the company, but only after the business has evaluated its own value to that state or community.

Dig up the data
Research is the key. If the planned expenditures and employment increases are related to normal growth, improvements, and increased production, the company may best focus on tax credits offered by states and local agencies where the company has current locations.

Questions to be asked are:
• What credits are available?
• Are the credits related to investment, employment or both?
• What level of employment growth is required to qualify?
• Does the type of investment planned qualify for the credit; for example, real property, tangible personal property, machinery and equipment or office equipment?
• Do the employees to be hired qualify — are they full-time, part-time, seasonal, or contract employees?
• Are there any federal credits available for new hires such as the Work Opportunity Tax Credit (WOTC) or Welfare to Work (W2W)?
• Is an application required to secure the incentive?
• Are there any filing deadlines that must be met?

These questions need to be asked in each state where the company has a location. In addition, the questions may need to be addressed again for any facility in an area that has been designated by the state or federal government as an enterprise zone or empowerment zone.

A location may not qualify for statewide incentives, but an individual facility may qualify if it is located within the boundaries of a designated distressed area.

Look before you leap
If the budgeted investment and increased employment levels are significant, additional research and negotiation will be involved to maximize incentives. Again, the investigation process must be initiated early — there is no incentive for a state to offer a benefit to a company that is already committed to a course of action.

The firm’s leverage is compromised if an article appears in a local paper or magazine where an officer of the company announces the company’s plans to move to a particular site or state. Also, signing a lease for a building is a sure indication to the state that no additional inducement is required.

For any significant expenditure or employment increases, the company should determine the available incentive opportunities for at least three locations. If all others factors are equal (facility availability, transportation system, work force availability and cost), an incentive package could tip the scales in a location’s favor.

Finally, prior to accepting any package of incentives, go back to review the original list of objectives and goals. Evaluate the packages as compared to your earlier expectations.

Will the incentives truly benefit the company? An investment tax credit that can offset income tax is of no use to a company in a loss situation.

Also, a jobs tax credit, no matter how valuable, is less important than a reduced utility rate to a heavily automated manufacturer.

Finally, evaluate the deadlines and record-keeping burdens required by each incentive package. Will the company meet the deadline for hiring the required number of workers? What if the project is delayed? Will the incentive still be available?

Get help
An employee or consultant that knows the intricacies of incentives is a must if the value of any incentive package is to be maximized. A significant portion of an incentive may be lost if the person monitoring the investment or employment activity is not aware of the procedures for actually receiving the benefits.

For example, several credits are earned in one period and claimed over a future period of up to 10 years. A single year’s investment in the state of North Carolina can generate a benefit for up to seven years.

After available incentives are identified or negotiated, proper record keeping is a must. Incentives can be lost if applications are not filed in time. Also, credits can be recaptured by the states if the investment or employment increase that generated the credit is reduced below minimal thresholds.

Patricia Herrera is vice president of Mintax, an East Brunswick, N.J.,-based consulting firm specializing in incentives. You can contact the company at (732) 723-9000.