Tax Credits + Incentives = a Lean Balance Sheet

Aug. 17, 2011
If managing total cost is an essential goal of lean logistics, then the nearly 3,000 U.S. federal, state and local tax credits and incentives are a great place to start.

Increasingly, companies practicing lean logistics are focused less on the individual cost factors such as sourcing, transportation and warehousing, and more on total cost of ownership as a means to achieve significant financial improvement.

To gain competitive advantage, leaders in lean logistics are going beyond traditional manufacturing and supply chain issues, and applying lean and Six Sigma disciplines and tools to the financial arena to address waste and to add value. A starting point for many of those companies seeking improvement in total cost is the nearly 3,000 tax credits and incentives programs in the United States, sponsored by federal, state and local governments to drive job creation, employee training, capital investment and new business development. More than $60 billion in government incentives are awarded annually.

Although these statutory and discretionary tax incentives have been around for decades, many companies either have not explored their potential value, or have only scratched the surface of their application. In fact, a relatively small number of companies, regardless of their size or financial sophistication, are benefitting fully from the tax credit and incentive-related benefits to which they are entitled. Industry estimates suggest that fewer than 25% of eligible U.S. businesses participate in the federal government’s Work Opportunity Tax Credit (WOTC) program; and despite an array of lucrative employee tax credit and incentive opportunities offered in all 50 states, only about 10% of participating companies appear to be taking advantage of them properly.

Build a Lean Balance Sheet

Most companies of any size, location or industry – ranging from industrial, wholesale or retail operations – have an opportunity to draw from the billions of dollars available from government agencies to build a lean balance sheet through reduction of their capital costs, operating expense, and federal & state tax liabilities. These financial benefits can be captured on a real-time basis, or retroactively.

Businesses most likely to benefit are those that are expanding, relocating, or upgrading facilities; experiencing closures, consolidations, or changes in production or processes; and training or retraining their new and existing workforce. Opportunities are also available for increases or decreases in employment, job relocations, and employees going from contract to permanent status.

The most common types of incentives include:

Hiring Credits - Federal and state government incentives are offered to employers, depending on where they do business and their employee demographics. Federal hiring credits include the Work Opportunity Tax Credit Program and Long-Term Family Assistance Program with awards of up to $9,000 per qualified employee. In addition, Federal Empowerment Zone (FEZ) Tax Credit Programs allow a credit of up to $3,000 per eligible employee for employers hiring individuals who live and work in geographically designated urban and rural areas. Even companies that believe they don’t hire the types of people who qualify for tax credits are often pleasantly surprised at the number of employees who do qualify, once they get serious about exploring opportunities.

Using only the federal Work Opportunity Tax Credit, a large company that hires 5,000 new employees per year, with 10% of those new hires eligible for the program, can realize $4.5 million in tax credits over a 2-year period.

State-Specific Point of Hire (POH) Tax Credits are also available in a growing number of states. Examples include California’s new hire credit of up to $34,000 per eligible employee for the life of the program; and the Louisiana Enterprise Zone Tax Credit Program of $2,500 for each new hire in specific designated areas.

Investment Tax Credits - These tax credits are offered by states to corporations that invest in long term assets such as machinery and equipment.

Sales and Use Tax Refunds, Credits & Exemptions - Many states offer Sales and Use Tax Credits, refunds and exemptions based on certain qualified purchases. For example, in addition to the sales and use credits available for locating in economic zones, states will provide the opportunity to receive sales and use tax discounts, exemptions and refunds on certain purchases. For example, Missouri provides exemptions from state and local sales and use taxes of purchases of certain energies, gases, utilities, and chemicals used in manufacturing or processing.

Property Tax Abatements - Exemptions and abatements from taxation on property, both real and personal are offered in most states in certain designated geographic zones.

Customized Training Grants – To maintain and grow the quality of their labor pool, all 50 states offer training grant opportunities for new or existing workers. These opportunities can include income tax credits and wage subsidies of up to 100% of training expenses, or 50% of wages for an employer hiring qualified individuals, while job training is being provided.

Sellable Tax Credits - For companies with Net Operating Losses (NOLs) or for companies that have an unused tax credit inventory, 31 states currently offer programs with opportunities to monetize tax credits through refunds and sales. Many companies are unaware that they may be able to sell or transfer the NOLs and unused tax credits they’ve earned.

Research & Development Tax Credits – Federal and State government agencies offer a wide range of benefits to companies in many industry sectors to incent research and development activity. Pennsylvania, for example, offers a 10% credit on the total amount of qualified R&D expenses.

Negotiated Incentives –These discretionary programs require negotiation, advance certification, or declaration that the company would not locate to a particular state “but for” these incentives. Most often, they involve job creation, R&D, facilities investment, green initiatives, skills training or site selection.

Worth the Effort

There are several reasons why most companies fail to take advantage of tax credits & incentives. Notably, corporate tax, finance and HR department managers often cite the complexity of the qualifications and the paperwork, or will claim that these programs are not worth the effort.

The complexity of tax credit and incentive programs occurs primarily on the state and local levels. All 50 states offer a myriad of programs, with credits driven by a company’s investment levels, headcount and business activity at each location. So for companies operating various locations in multiple states, the identification, application process and ongoing management of these programs is no simple task.

For most companies, complexity in the range of available federal, state and local tax credits and incentives should serve as an incentive to explore their economic potential, not as a reason to avoid them or limit participation. With some companies reclaiming as much as 25% of their operating costs through government incentives, it’s tough to defend the position that they are not worth the effort.

These two examples demonstrate the substantial savings that can be captured by companies willing to explore the full range of retroactive and proactive tax credit and incentive opportunities:

Soft Drink Manufacturer
Total Savings: $4.17 million

A world leader in soft drink manufacturing, combined WOTC credits with state and municipal opportunities that included new jobs tax credits, negotiated training grants, sales & use tax exemptions, property abatements, state income tax exemptions, and enterprise zone property tax exemptions totaling more than $4 million.

Wholesale Distribution Company
Total Savings: $5.3 million

One of the nation’s leading wholesale cash and carry companies, serving grocery retailers and food service operators secured tax credits related to its California and Georgia locations, sales & use tax exemptions for materials and machinery for new warehouse construction, Federal Empowerment Zone, Renewal Community, and Hurricane Relief tax credits worth $5.3 million.

For one of its locations, the company also negotiated an incentive package, separate from the state’s offering, resulting in a10-year 100% property tax abatement on all improvements. With 10-12 new warehouse openings every year, this company carefully approaches front-end site selection in order to evaluate sales and use tax exemptions and state tax credits for these facilities.

Building Lean Financial Capability

For companies seeking to improve total cost of ownership as a lean objective, there are a number of important “Do’s and Don’ts” to keep in mind, including:

Don’t assume you’ve got it covered. Most companies have neither the time nor expertise to monitor all of the potential tax credit programs; particularly if their company operates in multiple states. CPA firms are often not set up to review and administer tax credit programs, and their range of services in this discipline is limited by Sarbanes Oxley. HR support vendors can provide client companies with tax credit and incentives assistance, but often only as an ancillary service to maintain a client relationship that includes more profitable service lines, such as payroll and employee benefit-related processing.

Do make oversight and management of this discipline a priority. Companies that truly do “have it covered” in terms of tax credit and incentive opportunities are usually those in which the CEO or CFO has ensured that all the necessary internal or external resources are leveraged, and has established a formal tracking and review process to monitor the company’s performance and ROI for this activity.

Don’t assume you’ve tried them before. These programs are constantly being changed and expanded in Congress, and there have been significant revisions to the federal WOTC program in past three years. As a result of high unemployment and the need to attract capital investment, many states have changed eligibility requirements and enhanced features of their existing programs or have initiated new opportunities.

Do keep close tabs on appropriate programs. In a shifting landscape, companies can’t assume that their analysis of current opportunities will have a long shelf-life. They need to diligently monitor the eligibility requirements and potential benefits of existing programs, to keep abreast of new opportunities on the federal, state and local levels – not only to capture opportunities, but also to be aware of changes that may reduce or eliminate existing benefits.

Don’t centralize responsibility for these programs. Instead, engage all HR and departmental hiring managers by making them accountable for achieving relevant tax credits and incentives. This requires a senior level corporate champion, such as CEO, CFO, Treasurer or VP Tax, and can involve pushing down tax credit-related savings to a department’s or location’s P&L, or even to an individual manager’s performance scorecard – which causes them to take the tax credit issue seriously.

Do maintain a trigger list. Track the specific conditions and events that serve as key triggers for exploration of tax credit and incentive opportunities. In the human capital category, these triggers involve increases or decreases in employment, turnovers, relocations, employee training or retraining, and shifts from contract-based to permanent employment status. Facilities- and production-related triggers can include: new site selection and start-up, capital investment, new leases and renewals, building acquisitions, facility upgrades, consolidations and closures, mergers and acquisitions or relocation of equipment.

What’s important to remember is that the end-game of lean logistics is elimination of waste and inefficiency, ultimately to improve operational and financial performance. If a company’s financial performance can be enhanced through exploration of tax credits and incentives, and if the magnitude and duration of those benefits match or exceed supply chain improvements, then this discipline should play an important role in a company’s lean logistics strategy.

Fred Stiftel is President and CEO of New Jersey-based Walton Management Services, which has provided companies with independent tax credits and incentives counsel for more than 30 years. He can be contacted at 732-531-7117 or [email protected].

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