New investment in a company is an important, strategic decision that is not made overnight. It usually comes after a series of events that create enough pressure on current operations to demand the need for new investment. This period of tension, prior to the investment taking place, is when credits and incentives should be discussed to maximize savings.
Economic development credits and incentives programs traditionally are applied to two areas: new investment and new jobs. In general, the more of both, the better the incentive options. This is particularly true for discretionary incentive programs. While new jobs and investment often work hand in hand to influence credits and incentives opportunities, we will first focus on net new investment and capital expenditures as a key pillar of realizing valuable incentives.
Why do credits and incentives programs focus on new investment? The short answer is that new investment often creates a more “sticky,” or permanent, business. When companies make a large capital expenditure in a particular location, they are less likely to move to another location, taking those assets with them. Communities value business “permanence” because it supports the economic growth and development of the area.
Growing businesses typically deploy capital investment on new real estate (such as new building construction, expansions and, in some cases, renovation) and/or new tangible personal property (new machinery and equipment). The typical tax tools used to attract these investments include exemptions, reductions or rebates on property taxes and/or sales and use taxes. However, economic credits and incentives programs often offer these enticements only before the investment has been made. If final decisions have already taken place (i.e., machinery has been placed in service or permits have been pulled to start construction on new buildings), there is less opportunity to secure credit and incentive offers. Therefore, CPA advisors must have regular conversations with clients about future investment opportunities to stay in front of these final decisions.
What about clients who are leasing space? The answer gets back to permanency — a client who is leasing space is seen as making less of a commitment to staying in the area than one who purchases or owns a space. Additionally, investment-focused credits and incentives often flow directly to the owner of the property rather than to the tenants. While clients who lease space are not completely shut out of credits and incentives programs, they are less likely to be able to maximize the credits and incentives available to them. However, businesses that require more leased space to accommodate more workers could certainly benefit from job creation programs, so these clients have some leverage.
Asset acquisitions can also be a key investment opportunity for businesses seeking credits and incentives. Many businesses must decide whether to acquire and move these assets or to keep them in their current location. Most communities would prefer to keep those investments where they are (along with the associated jobs) and might use credits and incentives programs to secure them. Asset acquisitions are often complex affairs, so it is important for businesses to bring a credits and incentives expert early to these conversations to help evaluate and shape any acquisition deal.
How much investment is needed? That depends on the specific programs offered by state and local authorities for real estate, personal property (such as equipment and machinery) and asset acquisitions. In most cases, $1 million or more is a solid, minimum starting place to begin these discussions. Growth projects that consider new building construction in combination with new equipment purchases can have tremendous leverage on credits and incentive programs.
With interest rates at all-time lows, economic demand continuing to provide growth potential, and federal programs assisting with cash on hand, many businesses are considering new investment options. Trusted CPA advisors should engage with businesses now to discuss investment considerations for the near and mid-term future. These discussions could identify potential growth projects that could qualify for valuable credits and incentives opportunities.
