Are You Eligible for the Research & Development Tax Credit?

Our February newsletter featured an article on three ways statutory credits can benefit your business. If you missed it, you can read that article here. This month features the follow-up in our two-part series on statutory tax credits. For this article, we’ve tapped Shelly Carmichael, Senior Manager of Client Services at Maxis Advisors.

Each year more than $50 billion is invested into businesses by economic development agencies across the United States in the form of discretionary incentives. Supplementary to statutory tax credits, these incentives are offered to attract and retain a company, its jobs, and investment in a specific area. They can offset upfront capital expenditures and long-term operational costs by as much as 20 percent or more.

These incentives come in the form of cash or cash-like benefits and have a positive impact on the earnings of the company before interest, depreciation, and amortization (EBITDA). Some of the more common examples include site preparation grants, land and property donations, utility rate reductions, permit fee waivers, cash grants, infrastructure upgrades, railway extensions, and property tax abatements. Many others are available that are project-specific and not publicized on economic development websites.

While economic development agencies and many municipalities actively recruit businesses, many companies are not aware incentives exist or mistakenly believe they don’t qualify. Those that have received incentives most often don’t maximize them due to reasons like lack of awareness of unpublicized programs that are not routinely offered, not understanding how to strategically package and present projects, and negotiating the bottom line too early in the process.

Below are key factors to consider when determining whether you qualify for these incentives, and if so, how to maximize them.

  • Qualifying Business Activities. A company is very likely to qualify for incentives if it will be investing $7 million or more and adding at least 25 jobs over a three to five-year period. Qualifying investments include relocations, greenfield projects, expansions, facility recapitalizations, new equipment purchases, and machinery upgrades.
    Investments and jobs are mutually exclusive. Incentives can be negotiated for investment without jobs and for jobs without investment. However, in general if a company is only adding jobs, a minimum of 100 new jobs is typically needed for discretionary incentive negotiation depending on locations, wages, and industry.
  • Qualifying Industries. The world of discretionary incentives is industry agnostic. All can qualify given the desirability of the industry and positive impact on a community’s economic development goals. Some of the most sought-after industries include automotive, information technology, electronics, plastics, energy, metals, pharmaceutical, aviation, and food and beverage.
    Retail establishments are not ideal for discretionary incentives except for new or improved headquarters, call centers, and distribution centers. This is because location decisions are predominantly driven by market demand versus availability of incentives.
  • The Best Time to Seek Incentives. To have the leverage needed to maximize incentives, negotiations must occur before investments have been made or new jobs have been added. This is because incentives are designed to be the final deciding factor on a company’s choice to invest in an area. This is commonly referred to as a “but for” scenario; “but for” these incentives, a company may have made a different investment decision.
    While most negotiations can be completed in 90 days, the best time to seek incentives is during early budgeting for a project. Having as much time as possible between starting negotiations and any committed activity such as a site groundbreaking or a public announcement is critical to maximizing the benefits.
  • Performance Metrics. Every U.S. state offers discretionary incentives. The navigation process and value of benefits is unique for every county and state depending on agency budgets, development goals, efficiencies, resources, and management.
    All of the incentives are performance-based. This means incentives are not received until a business keeps its capital investment and new job commitments. There are two types of performance – pro rata and full performance. Packages can include one or a combination of both, and understanding them is very important. For example, if a program pledges to pay a company $500,000 pro rata based on a commitment for 200 new jobs, and only 100 jobs are added, the payment would be $250,000. A full performance agreement would not pay any money until all jobs were added.
  • Proof of Performance. Proof of performance reporting is critical to monetizing incentive programs. It requires long-term consistency because incentive benefits and associated reporting can last a decade or more. It is required on a predetermined and agreed upon timeline and format during negotiations. If reporting deadlines are missed, a company can forfeit a portion of or all benefits. These situations are not uncommon due to limited bandwidth, employee turnover, vacations, and lack of interdepartmental collaboration.

Having a highly experienced, dedicated resource for incentive and compliance strategies, strong collaboration between internal departments, efficient data collection systems, bandwidth, and a solid accounting team are keys to successfully navigating the incentives landscape for the long run.

Fortunately for growing companies that don’t have the time or resources to ensure they are not missing out on opportunities, there are external incentive experts that can offer the keys to kingdom.

Shelly Carmichael is Senior Manager of Client Services at Maxis Advisors. Founded in 1996, Maxis Advisors is a boutique firm offering clients the resources and inside knowledge of former economic development officials and negotiated incentive and site selection experts. The company has negotiated incentive packages on projects representing over $9 billion in capital investment and more than 12,500 jobs. Shelly partners with business stakeholders to help them improve ROI on capital investments related to greenfield projects, expansions, or relocations through discretionary incentives and strategic site selections. Contact Shelly at 404-655-7807 or Email.


Subscribe to Kreischer Miller's email newsletter


You may also like: