Based in Tennessee, Stewart is an expert and consultant on government and economic incentives. Having worked as an engineer, Wall Street tax attorney, fund manager and business owner, Stewart has a unique perspective on how small and mid-market businesses can maximize the use of incentives to help reach their goals. Currently, Stewart is working with FourBridges Capital Advisors to advise businesses on how to best integrate traditional forms of financing with all forms of incentives.
- Incentives (offered by federal, state, city and county governments, and some utilities) are readily available and can be highly effective. However, in many cases, they are underutilized.
- With respect to any business within its taxing jurisdiction, the government effectively acts as a passive partner with a financial interest in the net profits of the business. Through this partnership, the government offers incentives as a way to foster the growth and prosperity of the business, reducing costs or providing it access to cheaper capital, property, infrastructure and job support.
- In the Southeast, just at state and local levels, billions of dollars of incentives are offered each year to businesses of all sizes across most industries. Incentives can play a vital role in a business’s capital structure and should be considered as an alternative or complement to other types of capital.
Q: In general, how available is capital from government incentives for businesses in the Southeast?
A: In the Southeast, the availability of incentives, including both capital and infrastructure-based incentives, is much greater than most businesses realize. Historically, Southern states provide over $35 billion per year (out of about $80 billion offered nationwide) in business incentives in over 1,000 programs. In the past decade, state and local incentives have become a growing trend that is expected to continue as states compete for business.
In addition to state-provided incentives, federal tax incentives utilized by Southern businesses and investors have historically been estimated at several hundred million per year.
Q: What exactly are government incentives?
A: Incentives may take the form of tax credits, deductions, accelerated depreciation, rebates, exemptions and many other reductions of taxpayer obligations. They typically fall into two categories: negotiated (monetary- and infrastructure-based packages that businesses individually negotiate to obtain, typically from state and local governments) and statutory (incentives that by law a business is entitled to if it qualifies and follows the proper rules and procedures). Federal, state, city and county governments, as well as some utilities, offer incentives to businesses that satisfy certain public policy objectives. Examples include well-known programs like new markets credits, jobs and hiring credits, enterprise zone credits, investment and capital credits, R&D credits, green/renewable credits and many others.
Q: Why do governments offer incentives to businesses?
A: Tax incentives are principally utilized as a tool to attract certain businesses and foster their success. Think of it this way: the government is a “passive” partner in any business that it taxes and regulates. And this partnership can cost a big share of profits for a business owner. Depending on the jurisdiction, the government can impose an ongoing liability of over half of a business’s net profits per year (combined at the federal, state, city and county levels) – capital that could have been reinvested into the business’s future growth. Despite this heavy toll, the interests of the government and the business owner are aligned; that is, the government does not typically make money unless the business is profitable, and it receives no benefit if the business fails or moves elsewhere. In short, all taxing authorities have a financial interest in the ongoing prosperity of businesses within their jurisdictions. So, when a government incentive helps a business maintain or grow profitability, it’s a win-win.
Q: Are there particular industries that can obtain incentives more readily or in greater quantity than others?
A: Tax benefits are available to almost all businesses, regardless of industry – but the type and amount of the incentive varies greatly. In recent history, government entities tend to favor manufacturing and distribution, high tech, communications, R&D, renewable energy, back-office services, construction and job-intensive industries. These entities are favored because they try to expand their tax base, encourage economic development, generate investment into infrastructure, promote sustainable energy, provide affordable housing and healthcare and create and sustain jobs.
Q: Which states in the South provide the most incentives?
A: According to the most recent tallies, Texas offered the most with incentives totaling roughly $19 billion per year. Florida offered about $4 billion in incentives per year; Tennessee, about $1.6 billion; Kentucky and Georgia, about $1.4 billion each; and South Carolina, a little under $1 billion. Obviously, these amounts can vary greatly per year.
Q: What are some examples of incentives offered in the Southeast?
A: Perhaps the most familiar type of incentives are tax credits – a dollar-for-dollar reduction in one’s outstanding tax liability – and they’re commonly offered in the South (compare this to tax deductions, which only reduce one’s taxable income and are thus generally less valuable than tax credits.)
For example, Tennessee offers the Jobs Tax Credit, the Rural Opportunity Initiative Enhanced Job Tax Credit, the Jobs Tax Super Credit, the Integrated Supplier and Integrated Customer Tax Credit, the Industrial Machinery Tax Credit, the Headquarters Tax Credit, Sales and Use Tax Credit for Qualified Facility to Supplement Emerging Industry and the Data Center Tax Credit.
Georgia offers the Jobs Tax Credit, the Qualified Jobs Tax Credit, the Mega Project Tax Credit, the Investment Tax Credit, the R&D Tax Credit, the Retraining Tax Credit and Tax Credits for film production.
Examples of federal incentives include SBA & USDA loan-based products, EB-5 investments, captive insurance and certain “permanent” tax credits. Over the last 15 years, a growing number of federal business incentives have been extended on a temporary basis, referred to as “tax extenders.” As an aside, there has been much talk in Congress about doing away with tax extenders in exchange for tax reform in 2015. If a tax reform bill does not get passed by the end of the year, then it is possible these tax extenders will be retroactively renewed again in the final weeks of 2015. Of course, tax extenders represent just a few of the federal incentives offered to businesses, the bulk of which will likely not be affected by tax reform.
Q: Should private equity firms and other investors care about tax incentives?
A: Yes. Even for investors that calculate and earn their returns on a pre-tax basis, or even if a portfolio company is in an NOL position, incentives are a great way to obtain low-cost financing, restructure a portfolio company’s balance sheet, increase ROI, jumpstart a new product line, lower job training costs, make building upgrades, relocate a business to a more favorable state, and many other things. Obtaining cash flow financing for transferable tax credits can also be lucrative.
Q: Are companies hesitant to use incentives? And if so, why?
A: Most businesses realize that tax incentives have become mainstream. The bigger issue is that they’re either unaware of the tax incentives, mistakenly believe that they are inapplicable or don’t seek outside professional counseling. This results in getting bogged down in the implementation and compliance process.
Some typical issues include: not fully understanding the statutory requirements, failing to carefully consider the proper procurement and ultimate impact of negotiated credits, not knowing what the incentives package is really worth, overcommitting in investment or job creation, misunderstanding confidentiality issues (some states disclose the recipients of tax incentives) and poorly managing ongoing compliance requirements. The process can be complicated.
Q: How do you recommend businesses best take advantage of incentives?
A: There can be many complex steps in the process of effectively utilizing incentives, so it’s a good idea to engage an outside consulting firm for guidance. A consultant can help determine eligibility, negotiate the best incentive package, interface and partner with government agencies and analyze the costs and benefits – among many other things.
They can also help you avoid pitfalls, such as not fully understanding requirements, value or other important details or making mistakes with ongoing compliance requirements.
Q: Any final thoughts?
A: I recommend that every business, whether big or small, whether currently profitable or not and regardless of industry, take a serious look at the suitability of incentives. The above summary-level discussion will hopefully stimulate further discussions on this subject, but please don’t rely on it as tax, legal or investment advice. Thanks for reading!
Brought to you by the team at FourBridges.