SALT Strategies

State Tax Incentives – Dig Deep to Make Sure the Benefit is Worth the Effort

by: Richard L. Feldman, CPA, Senior Manager

MWE Headshots Thumbnail RichardFeldman - State Tax Incentives – Dig Deep to Make Sure the Benefit is Worth the EffortStates are trying to outdo each other these days in trumpeting tax incentives to boost economic development in their areas. Although the benefits can potentially be vast, the hidden costs to applying for, and then complying with these incentives, can (and should) make business owners question whether the benefit is worth the effort.

How do you decide whether these incentives are right for you?

Before applying for any of these credits in your state, it makes good business sense to take a step back and really understand the cost/benefit of each incentive or credit.

Credits and incentives are enacted into law by the state’s legislative body and made to sound very attractive. However qualifying for these credits can be quite rigorous and the application process lengthy. Frequently a taxpayer must prequalify for the incentive with a specific state agency such as Economic Development or Environmental Protection, depending on the credit. The requirements imposed for eligibility can be very demanding. For instance, the New York State Excelsior Jobs Program provides incentives and tax credits for businesses that create jobs and invest in targeted industries such as biotechnology, pharmaceutical, high-tech, clean-technology, green technology, financial services, agriculture and manufacturing. In order to be eligible for the program, a business must fill out a lengthy application showing that it meets specific program criteria, is operating in one of the targeted industries and provide detailed project descriptions including prior and projected financial information.

Once a taxpayer is deemed qualified the task of insuring that taxpayers are eligible for the specific credits is generally handed to the State tax department. Once you qualify and apply for the credit – you face the very real possibility of an audit. In order to comply with an audit, the record keeping burden could be enormous and frequently overwhelming. For instance in order to obtain the jobs credit under the Excelsior Jobs Program, the taxpayer must maintain detailed records of employees to show that that new full time jobs have been created in the state and last for at least six months.

Below are some guidelines for deciding whether an incentive or tax credit makes sense for you and your business.

  1. Make sure you understand all the requirements and prerequisites needed to qualify for the particular credit or incentive you are applying for. Also be aware of any deadlines that must be met.
  2. Calculate the net financial benefit of the incentive, taking into account all professional fees and other costs that are involved. You don’t want to pay more to obtain the incentive than it is actually worth.
  3. Be certain that you have the documentation that can withstand an audit. You certainly don’t want to go through all the trouble of applying for a tax credit and then having it denied.