Q&A talks about business tax credits and incentives with Rebecca Truelove, Ernst & Young tax principal and Northeast credits & business incentives leader, and Felicia Amicucci, Ernst & Young senior associate.
Q: According to a new Ernst & Young study, nearly seven out of 10 executives — 68 percent — expect their companies to pursue moderate to aggressive capital expansion over the next 24 months. As companies accelerate their capital spending, there is a commensurate increase in the likely benefits of exploring tax credits and incentives (C&I) opportunities since capital intensive projects are often the most likely to see improved return from C&I and indirect tax savings. Does the capital expansion not happen without the C&I?
A: The capital expansion has to make sense from a business perspective. Credits and incentives should not be a driving factor in any significant capital expansion. The role C&I plays in the capital investment process is to enhance the decision and strengthen the return on investment (ROI), and to make a good deal better, or a marginal deal happen. C&I may influence how quickly a deal happens; it can be the tipping point in a capital investment evaluation.
Q: One of the key trends the study found is the emergence of a small but significant group of almost 60 companies (8 percent) that consider themselves as being “very active” when it came to capturing C&I. What defines an active company? What are they doing different from other corporations?
A: Companies that consider themselves “very active” in capturing C&I tend to take a more multidisciplinary approach. They are collaborative and have a greater focus and dedication of resources to identifying and securing incentives. These companies typically derive greater benefit across a broader spectrum of incentives — both statutory and discretionary. Generally speaking, these companies are twice as likely to secure benefit from property tax abatements, enterprise zone benefits, and energy and sustainability benefits. These companies recognize the importance of utilizing external resources as appropriate. They believe these resources are critical to the incentives process, providing technical expertise and depth of knowledge. The most active are willing to invest in what they feel adds value to their organization. These corporations are strategic in the incentives they pursue and are willing to invest internally and externally to bring those incentives to fruition as bottom line savings.
Q: It’s interesting the study of Fortune 1,000 tax and finance executives seems to demonstrate the ‘C-suite shows a low level of awareness and involvement in pursuing C&I opportunities. Only 16 percent of survey respondents say their C-suite is very aware of the potential benefits from business incentives.’ Why the low level of knowledge among corporate leadership?
A: In general, knowledge of incentives is on the rise. Corporate leadership in the C-suite is focused on the viability of the business decision. They look at business decisions from an overall strategic perspective and the long-term potential results of those decisions. Their focus is making the right business decision for the organization. They rely on their teams to make the ROI work. Frequently the assumption is that tax, real estate, or some other department within the organization is paying attention to incentives. The C-suite seeks additional knowledge for extraordinary projects, or when they see a similarly situated competitor has received benefits.
Q: Is this lack of awareness behind the fact that most companies don’t have a full-time employee devoted to tax credits and incentives? How can companies justify these positions?
A: Lack of awareness primarily is due to divided responsibility for pursuit and implementation of incentives. Multiple stakeholders with competing interests within the organization have awareness about what affects their disciplines. They typically are not aligned for collaboration with their counterparts across the organization. The companies that are most successful at pursuing incentives have an executive sponsor, someone in the C-suite who prioritizes incentives as an element of ROI. Implementing a holistic approach to the process facilitates coordination among the various stakeholders and ultimately drives a result that achieves the maximum value for the competing priorities of the project.
Q: How far down in corporate size should companies think about devoting employees to tax credits and incentives? Does there come a point when the ROI is not there?
A: The value of hiring an incentives resource is not related to corporate size; rather it is related to the year over year capital and human investment the company is making. If that investment is significant enough, having an employee to coordinate these efforts will drive incentives value for the routine as well as the extraordinary capital investment. The point when the ROI is no longer viable is usually due to lack of significant investment or lack of hiring. However, the business purpose needs to be achieved first. Incentives can’t make a bad business decision better so if the business decision is not viable, the inclusion of incentives in the ROI becomes irrelevant.
Q: Finally, how big is the pool of money for tax credits and incentives? It seems as if government belt tightening would damper this market. Is that the case?
A: There is some belt tightening. Some jurisdictions have modified or eliminated programs (California Enterprise Zone); other cities and states, however, including Connecticut, are expanding programs. It’s important for authorities to understand what is needed for the company to achieve its objectives. Cash grants or tax credits may not be available, but perhaps the company is having trouble with infrastructure or permitting delays. In many instances success can be achieved by government getting creative to help the company reach the ROI they need to justify the project.
