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State & Local Tax Incentives

State and Local Tax Credits and Incentives was today’s CFO/Controller Roundtable topic. Al Aceves, from Cogent Group, LLC, addressed various credits and incentives. Al Aceves has over 20 years of experience working on incentives from both the government and entrepreneurs’ perspective.

Extracts from the presentation and question/answer period we think you may find useful as you consider your tax options when expanding, relocating, or redeveloping properties or increasing capital expenditures or employment follow:

Why is this important?

State and local tax incentives can be used by companies as a growth strategy to improve profitability, increase cash flow and minimize tax. The incentives have a direct impact on profitability. Some states even have refundable credits (credits in excess of tax liability). Other states, Ohio for example, offer cash for certain investments. Some credits also include financing incentives.

When should a company consider these incentives?

The incentives should be considered before your company expands or relocates an existing facility, redevelops obsolete or contaminated properties, or increases capital expenditures or new employment. The key is to consider the benefits and negotiate the incentives before doing one of the above.

What sectors are of interest to the government?

Emerging sectors such as advanced manufacturing, alternative energy, pharmaceutical, research and development, high technology, and tool and die are sectors obtaining the incentives. Property redevelopment and supply chain development are also sectors obtaining the incentives.

What incentives are available?

View list of available incentives.

Are there additional considerations?

To obtain the incentives there are a multitude of requirements and a process to go through. Many incentives require local participation in addition to the state, which will likely require additional time and negotiations. Often, a three to five year projection is required.

What are the most utilized credits?

• Michigan Economic Growth Authority Tax Credits (often referred to as MEGA credits) - There are many different credits under this umbrella including credits for employment and specific sectors
• Industrial Facilities Tax Exemptions (also referred to as Tax Abatement) - This credit can abate up to 50% of real or personal property taxes
• Brownfield Redevelopment Tax Credits - This credit is available for obsolete or contaminated properties and includes financing options
• Employee Training Grants - These credits provide funding for training employees
• Tool and Die Recovery Zones - This credit provides a waiver of all taxes for a period of years

What is the process to obtain a credit or incentive?

• Credit Recovery - A company is able to receive statutory credits after investment and jobs have been made. The credits are requested by amending previous tax returns or on current tax returns
• Discretionary Incentives - These credits must be negotiated before a project begins. During the planning stage of a project, officials from state, county and local governments should be engaged
• The fees and credits are negotiated and the process may take up to three months
• Compliance - After the discretionary incentives are negotiated and obtained, adherence to the requirements agreed upon must be met or the credit can be lost

Who can help?

• Professional firms – accounting, law, real estate
• Private consultants
• State/local/county government agencies
• Self

What are the consequences if a company does not adhere to the requirements agreed upon?

The credits can be taken away. There have been instances where the government has renegotiated. For example, an extension of time of one year was granted to a company under the MEGA credit to meet the requirements. However, one year of credit was taken away on the back end.

If a company already has one credit, can another be obtained?

Training credits are often obtained after other credits have already been received. Also, some credits can be applied for more than once. Keep in mind; you have the most leverage before a project begins.

If in a negotiation, the requirement was to create 200 new jobs but a company created 300, could we obtain additional credits for the additional 100 jobs?

Generally, the answer is no. However, for this example, if you could bifurcate the additional 100 jobs into a separate project, you could potentially negotiate a credit for that project. During negotiations a company should be somewhat aggressive and agree to create the most amounts of jobs the company thinks they can. This will help maximize the credit opportunities available.

If a company acquires property that had an abatement, does the abatement transfer with the property?

Yes, the abatement can be transferred.

If I purchase property from an affiliated entity out of state or transfer jobs from an affiliated entity from out of state and bring them to Michigan, would the company be eligible for incentives?

Yes. Purchasing property from an affiliated entity and bringing the property to Michigan is considered new property for purposes of the credit. Likewise, when employees from out of state relocate to work in Michigan, it is considered creating new jobs for purposes of the credit.