State-based job creation tax credit programs typically provide a tax credit against the state's income tax liability. That credit may be passed through to the shareholder level in many cases, though it will be reviewed on a case-by-case basis. In other states, credits are sold or brokered if a company cannot utilize the credit. Across the country, job creation tax credits may be refundable, providing excellent value to clients, especially during a new operation or expansion phase where a company may not have tax liability in that state. Each state and each program is different.
It's important to know how tax credits for job creation are calculated. In states like Indiana, Colorado, Ohio, New York and Illinois, job creation tax credits are calculated based on an approved percentage of the total net new wages or wage withholding generated from qualifying jobs. These credit percentages can vary from 10% to 100% and, in many cases, are negotiable based on the quality of the project. High-quality projects create a high number of jobs, high wages, high skill sets and high amounts of investment. Depending on the program parameters, many companies are eligible for these programs with as few as 10 new employees.
Understanding that these programs typically only consider net new employees, a base period calculation notes the total employees before a specific date. After that certifying date, any net new hires and their associated wages or wage withholdings can generate value through the job creation program.
Cyclical hiring and furlough practices, seasonal work, temporary employees or just a replacement of existing positions often do not qualify as "net new." In addition, many states only qualify full-time (typically 32 to 35-plus hours per week), W-2, benefitted (the employer provides health benefits) and resident (working and living in the state offering the incentive) employee positions as qualifying employees. Part-time, contract or temporary employees do not qualify in most states. Evaluating each client's hiring practices alongside growth projects is essential.
Some states do not have an income tax. Therefore, the job creation tax credits may be applied to a similar tax the state does have, be it franchise, excise, business operations, insurance liability, worker's compensation, gross receipts or commercial activities taxes. Each state is different and allows for various tax applications. Clients should always consult a trusted tax professional for further insight on these types of credits and their impact on state, local (and federal) taxes.
Job tax credits as a refund
Providing a tax credit for growing companies is the most common way states offer a job creation incentive. States can control how much they provide in credits on an annual basis and this is often capped by a legislated budget amount. Other states allow for a cash refund of the qualifying wages. States like Kentucky, Missouri, Arkansas and Kansas have options to claim a direct cash refund from the associated state tax department for qualifying positions. Like the tax credit valuation, the refund amount may vary from state to state, and there may be some negotiation on the percentage eligible per job created.
Often, the state's economic development body will receive annual compliance reporting from a client and review the reporting to authorize a certified amount for the refund. Clients then must navigate the state's tax department to receive the refunds. Many forms and deadlines meet the refund payment to flow back to the client in a timely manner. This timeline can vary from a couple of weeks to several months, depending on the volume and backlog of compliance reports and refund requests. Having a dedicated incentives specialist to follow up regularly with authorizing bodies can help with this timeline.
Cash refunds are usually attractive for clients, as getting a check back from the government is always nice, unlike having to write a check to the government. However, cash reimbursements can affect a company's tax return on an annual basis. Clients should always discuss this impact with their CPA advisor to best determine how to plan for refunds or the impact of a refund on yearly tax returns.
Grant funding for job creation
Cash upfront? This is not typical; however, some states are able to issue grants or flat payment amounts upon receipt of all required documentation that notes net new job levels have been met, or investment thresholds have been achieved. Michigan, Pennsylvania, Texas, Georgia, North Carolina, Tennessee and Wisconsin have programs allowing for flat payments to projects to achieve pre-agreed thresholds.
The key is that many of these programs require job threshold commitments for an extended period, say five to 10 years in many circumstances. States want to know that their "investment" in a project has a long-term impact. If a client drops below required thresholds, fails to follow through on reporting, or moves out of the state within the agreement term, these activities may trigger a clawback from the state for violating the agreement terms.
When you step back, job creation incentives are beneficial for growing companies. Depending on the program, these incentives can potentially create between $500 and $2,000 in value (credits or cash) per qualifying job per year. CPAs should consistently review client portfolios for credit and incentive opportunities. By identifying clients with plans to grow, CPAs can quickly align with a trusted credit and incentive expert to maximize the potential benefits for clients.
