5 Questions to Consider When Negotiating Incentives for Your Growing Business
If your business finds itself expanding, consolidating, or closing facilities, adding equipment, training employees, or adding jobs, negotiating a good economic incentives package can significantly reduce your capital costs on a project.
Here are five questions to keep in mind when negotiating incentives for your project:
- How are the metrics measured for available incentives? Many state and local incentive programs are performance-based, meaning you don’t receive incentives until you have made good on your job or capital investment commitment. It is important to know if the incentives will be based on pro rata performance, or if full performance is required. A program that pledges to pay a company $100,000 pro rata based on its creation of 100 new jobs would pay $50,000 for 50 jobs created. In contrast, a full performance program would not pay the company any money until all 100 jobs are created.
- Should wages for new jobs created be presented as a single mean or segmented by category? Many state and local incentive programs establish a wage benchmark in order for the business to qualify for incentives. For example, a program might require that a company create at least 20 new jobs that exceed the state average wage of $50,000 per year. In this scenario, let’s assume a company plans to add 20 new jobs that exceed the $50,000 threshold, but will also create an additional 80 jobs that pay an average of $40,000. Submitting documentation showing 100 new jobs at an average wage of $42,000 per year may put the company at a disadvantage compared to supplying segmented information that shows support for 20 new jobs at more than $50,000.
- Are available incentives relevant to the needs and tax structure of the business? Many cities and states offer significant tax credits that, on paper, look valuable. On closer inspection, however, they may hold little or no value for the company. For example, knowing whether tax credits are refundable or nonrefundable in conjunction with understanding your company’s tax posture is critical in determining which incentives provide savings to a project.
- Are there opportunities to minimize or eliminate clawback opportunities? When companies negotiate incentive packages, it is often during a time of great promise, with robust forecasts for the business and job growth. It is important to balance such optimism with the reality of economic uncertainty. Consider working with the incentivizing agencies to provide safe harbor provisions that account for these possibilities. Such provisions are easier to incorporate during the upfront negotiation of an incentive package than after the bad news hits.
- Does your company have a compliance process in place to take advantage of the incentives after they are awarded? According to payroll processor ADP, there are 3,000 federal and state incentives available, but 50 percent of these incentives go unclaimed. One big reason: companies don’t complete the annual compliance to receive the incentives. While some businesses get an “F” when it comes to incentive follow-through, the “A” students not only have a compliance program in place, but also institute rigorous best practices to maximize the benefit of incentives. Simple but diligent follow-through can make a critical difference in the amount of incentives ultimately realized.
Bottom line? If you have a business – large, small, or somewhere in between – you need to ask the right questions when pursuing incentives. And success is more likely when you answer these five questions correctly.
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