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The Compliance Phase: Redeeming and Maintaining Incentives
Congratulations! Your company has just completed the site selection process and secured a lucrative negotiated incentives package for your new or expanded facility. The press release declares that the economic development authorities awarded your company lucrative incentives for their location.
Your job is done, right? Sorry!! The journey has just begun!
The Compliance Reporting Phase of the incentives process is just as important as the incentives negotiation phase. Many companies lose out on millions of dollars of incentives because they fail to fulfill the compliance requirements. For example, a study done on the Oklahoma Quality Jobs Program (QJP), found that only 25 percent of companies approved for the Oklahoma Quality Jobs Program completed the required incentive compliance.
Since most incentives are "performance-based", a company can only redeem lucrative abatements, tax credits and grants upon proof that they have actually complied with the requirements of the agreement. Incentives are realized over a period of time, some can be upwards of 5 - 10 years. Incentives compliance can last anywhere from the period of the incentive to twice the amount of time.
The most important aspect of incentive compliance is to start early! The biggest mistake a company can make is to wait until the first annual report is due. The amount of reporting and information gathering takes time and can overwhelm an individual if left until the last minute.
Step 1: Company Contact Person
Immediately after the incentive negotiations are complete, assign an internal incentives specialist, or "champion", to manage the compliance process. Individuals from the tax, human resource or real estate group make great choices for this role. If an outside consultant is hired to manage the compliance, a representative within the company is still needed to help gather information.
Step 2: Read and Review the Signer Agreements
Negotiated incentives are always accompanied by contracts or agreements that spell out the terms of receiving the incentives. Some agreements are hard to read or contain too much "legalese". In those cases, you might ask your legal department to assist. The important part is to gather a list of the basic parameters of the project, which may include:
- Number of new jobs the company has committed to hiring
- Amount of investment commitment
- Project timeline
- Penalties or "Clawbacks" for underperformance
Step 3: Contact Local/State Economic Development Liaison
As soon as possible, speak to the state or local economic development contact person and introduce yourself. Discuss any questions you might have on the agreement. Don't be shy! Your Economic Development contact can be your best friend throughout this process. They also have an investment in the project's success. Request a blank copy of the annual compliance filing and any other required paperwork. Ask for all due dates and deadlines.
Step 4: Find Available Statutory Incentives
Sometimes forgotten in the incentives compliance process are the statutory incentives. Statutory credits and incentives are approved by law, but not widely advertised. Develop a comprehensive list of statutory incentives that may apply to your company based on your industry and location. Begin early! Some programs require the screening of new employees and your HR group will need time to establish that process. Strategies for uncovering available programs include:
- Review state and federal tax returns for available tax credit programs
- Tax research software will have a comprehensive list of tax credits and incentives
- Contact your state/local economic development departments.
- Ask for a tax specialist who can walk you through the programs
- Consider hiring a consulting firm to identify and calculate the incentives
Important Note: Your facility might be located in a special zone that will allow you to claim additional credits. Federal empowerment zones, state enterprise zones, or other special geographic designations all provide for incentive opportunities. Ensure that your location is reviewed for these opportunities.
Step 5: Assemble a Team
Develop a list of items that will be requested for the negotiated and statutory incentives. You may need to coordinate information requests among different departments, functions, and locations. You may also need to develop contacts in at least the following areas:
- Local Facility - Reach out to the Plant Manager or supervisor of the new or expanding facility. If practical, take a tour of the facility to familiarize yourself with the project. Determine who will handle the hiring of new employees. Economic Development officials might want to coordinate an open house or tour.
- Payroll - Find a reliable and helpful payroll contact! Detail the specifics of future payroll requests. A payroll employee will appreciate the extra time to assemble data. Be aware that beyond the customary payroll items, some programs may require unusual items such as:
- State and local withholding taxes
- Gross wages and taxable wages
- Investment Information - The Tax Department usually receives a comprehensive fixed asset report on an annual basis. However, requests can get very detailed and require substantiation such as copies of invoices. Make sure you have a contact within the Real Estate or Purchasing Department with specialized requests.
- Training information - Human Resource Departments are your first step to finding a contact familiar with training programs. See if your company uses a training database. This makes the job easier to access training information if needed.
- Other potential requests:
- Unemployment Insurance (UI) reports - HR Department
- Demographic information (i.e. minority status, veteran, etc.) - HR Department
- E-verify agreements - HR Department
- Tax Clearance Certificates - Tax Department
Step 6: Understand the tax credits/incentives offered
Incentives come in many different forms. It is important to understand how the incentives are redeemed and what to look for:
- Property tax abatements - Abatements can cover real property, personal property or both. Understand the difference. Some property tax abatements are rebates and some are deducted from the assessments or returns. Get to know how the abatements are taken. And, because some benefits can last for years, keep track! Some agreements require a school contribution - "to make the school whole". Understand how the school contribution is calculated.
- Income Tax credits - Most income tax credits are nonrefundable and reduce the company's income tax bill. Most nonrefundable credits have carryforward provisions and can be used in subsequent years. In the event that a refundable credit is received, the credit can be taken even if your company doesn't owe taxes, and the difference is refunded back to you!
- Training Grants - Understand what types of training qualifies for the grant, types of employees (full-time or part-time), and what types of expenses can be included.
Step 7: Create a Reporting Timeline
Finally, you should create a calendar of compliance reporting due dates. The calendar should include a timeline for data collection and review. Leave time for signatures from senior company officers, if required. Ensure that you have listing of income tax filing deadlines. In addition, your tax preparer might want information long before the tax return is due.
- Do remain positive! Many companies are overwhelmed by the amount of paperwork required. Some companies abandon the incentive. It might take time, but, everything is doable
- Do ask for an extension upfront if you know you cannot meet the due date. Some programs have lenient extension policies. It is always a good practice to ask before time runs out.
- Do reach out to the Economic Development (ED) Representative before making any press releases regarding the facility. Never surprise the ED official.
- Do try to negotiate a clawback! Clawbacks are penalties that are assessed when the company fails to reach hiring and investment goals. Reach out to your ED Representative and work out a compromise.
- Do fight for every incentive. Some incentives, like training grants, are difficult to qualify for, so try to work out a solution. For example, some training grants require you to use the community college. But, if your company does not utilize the community college, maybe you can make your internal trainer an adjunct professor.
- Do protect your employee information. When sending payroll or other sensitive information to the government authority always:
- Send in a secure environment
- Use only last 4 digits of the social security number
- Use an alternative employee id number
- Do expect all information provided to be audited and possibly open for public inspection. It is not necessary to send more info than requested.