In today's climate of economic uncertainty and budget shortfalls, some states are finding themselves in a tough position with respect to their incentive programs. On the one hand, lack of funding means that some states simply do not have the ability to fund new programs or in some cases, allocate funds to existing programs. On the other hand, now more than ever, states need to ensure that their incentive programs are working towards their intended purpose — to help attract and retain businesses.

While a number of states, such as Kansas and Kentucky, have recently passed new incentive legislation, this article will instead focus on enhancements being made to existing incentive programs. Specifically, some states are finding it as effective — and more expeditious — to simply retool existing tax credit programs to make them more user-friendly and effective.

Generally speaking, there are three ways in which states are enhancing their tax incentive programs:

1)      Value: Some states are increasing the value of their incentives. For job tax credits and investment tax credits, this means increasing the amount of credit per job or per dollar invested.

2)      Accessibility: Some states are revisiting the definition of a qualifying activity and/or decreasing the eligibility thresholds required to qualify for these credits.

3)      Monetization: Some states are starting to allow companies to better “monetize” tax credits. The ability to utilize tax credits is normally tied to having a sufficient tax liability; however, states are enabling companies to realize the full value of tax credits by making them salable, transferable, or by reducing the limitation on utilization.

In response to the current economic downturn, a number of states have applied each of these concepts to tweak their incentives programs. To illustrate, outlined below is a summary of recent changes in Georgia and Tennessee, which highlight how these states are taking advantage of pre-existing incentive programs already on their books.

Georgia

In May 2008, Georgia made a subtle but significant modification to its Job Tax Credit program. Through a change to the definition of an “Opportunity Zone” under the program, more businesses will now qualify for the enhanced tax credit, which offers a higher credit amount, a lower job creation threshold and the ability to apply unused tax credits against withholding tax liability.

All 159 of the state's counties are ranked into four tiers based on economic distress indicators. The greatest benefits under the Job Tax Credit program were limited to businesses located in a “Tier 1” county or to businesses located in an area designated as an Opportunity Zone.

Any type of facility in one of these areas can qualify for the credit as opposed to just predefined facility types (manufacturing, distribution, processing, etc.) as is the case in most of the state. Additionally, the value of the job credit is equal to $3,500 per job and the minimum job creation threshold is only five jobs (as compared to $500 per job and a minimum of 25 new jobs in the most developed counties). Finally, businesses in these zones can also apply unused tax credits towards their withholding tax liability.

Previously an Opportunity Zone could only be designated in an area comprised of two or more contiguous census block groups with at least 20 percent poverty levels. The 2008 change reduces the requirement to any area within or adjacent to a census block group with at least 15 percent poverty levels. Additionally, passage of a local Urban Redevelopment Plan can trigger an Opportunity Zone designation. Clearly, these softer requirements greatly increase the number of businesses that will end up qualifying for the enhanced tax credits.

To date, only a fraction of all potential Opportunity Zones have been designated. Just 16 municipalities (14 since the law change) have designated a zone. There are still plenty of areas in highly developed counties such as Forsyth and Gwinnett, for example, which would qualify for the enhanced designation. Because the zone must be proactively created by the municipality, research must be done to determine whether zone designation is a possibility.

What does this mean for businesses? If an expanding company has an operation in an area eligible for Opportunity Zone status, it can petition the local municipality to have the area designated an Opportunity Zone. Once approved by the state, the company can then claim the highest tax credit amount — $3,500 per job; and due to another recent change, it now has a very low job creation threshold — two jobs. Furthermore, if the company has a limited tax liability, it can monetize the credit by applying it towards its withholding taxes.

Finally, for a company that previously did not qualify as an eligible business, it now means that it may be able to participate in the Job Tax Credit because all facility types can receive the credit in an Opportunity Zone.

Tennessee

A second example of a state tweaking its incentives to be more business friendly is Tennessee. The 2009 legislative session resulted in a number of pro-business changes to help increase the overall value of the state's tax credit programs and make them more accessible to businesses.

All three trends are on display with the Tennessee Job Creation Tax Credit. Similar to Georgia, the value of the tax credit is based on the county in which the business is located. Based on county, the tax credit was either $2,000 or $4,500 per new job created. Historically, only the most economically distressed counties would qualify for the higher credit amount. However, the state now offers the $4,500 credit for all businesses regardless of the county they are located in.

With respect to the ability of businesses to qualify for the credit, the state has also made some favorable changes. The credit has both a job and investment threshold requirement. The job creation threshold of 25 jobs within a year remains; however, companies may now reach this number based across any 12-month period, rather than having to do so during a fiscal year period. With respect to the $500,000 capital investment threshold required for the credit, companies may now include computer software in the calculation.

Finally, companies may now extract more immediate value from the credit due to a friendlier utilization requirement. Previously the credit was limited to one-third of the franchise or excise tax liability. Now the credit may be used for up to 50 percent of the liability. In conjunction with the Tennessee Investment Tax Credit, a company may now offset up to 100 percent of its current year tax liability.

Other recent changes in Tennessee that are enhancements to existing programs include:

·        Data Center Tax Credit: The amount of time to qualify for the qualified data center tax credit has been extended from five years to seven years.

·        Emerging Industry Tax Credit: The definition of “emerging industry” has been expanded to include clean energy businesses.

·        Green Energy Tax Credits: The definition of qualifying company has been expanded to include “on-campus affiliate.”

·        Capital Investment: For the Industrial Machinery Credit and other incentives, software is now considered in the Capital Investment.

Today's political and incentives climate is as fluid as ever. While the everyday consumer and taxpayer have become increasingly familiar with concepts such as “stimulus package” and “economic recovery,” in some states the passage of brand new incentives legislation is not an easy sell, especially in light of budget shortfalls. Instead, these states continue to look for modifications to existing incentive programs to help include more businesses and to increase the bottom line value of the incentives.

For tax and planning professionals, this means that careful attention must be paid not only to new incentive legislation, but also to subtle or not-so-subtle changes in existing incentive programs. In some cases, companies that previously did not qualify for a tax credit or incentive may now find themselves in a targeted industry or geography. Additionally, companies that find themselves in losses may have other options by which to monetize tax credits. As states continue to react to current economic conditions, you can expect to see more fine-tuning of existing programs to complement brand new incentives legislation. Stay tuned.

Eric Dantzler is a senior manager with Atlas Insight. He can be reached by calling 732-339-8345, e-mailing edantzler@atlasinsight.com or visiting www.atlasinsight.com.