There are thousands of location-specific tax breaks for small businesses. How to make the most of them.
Last week, President Obama announced the first five so-called Promise Zones, in which the government promises to cut red tape so these communities can better access government resources. Such "zones" have a rich history: between federal, state and city programs, there are literally thousands of programs that give small business owners tax breaks for doing business and, often, creating jobs in certain locations.
So it'd be surprising if you weren't eligible for at least one or two of these goodies, right? The trick, of course, is keeping up with them. Some payroll providers offer help, so you should definitely check in there. Your accountant may seem like the obvious source for information on tax incentives, but Chuck Swenson, a professor of accounting at the University of Southern California’s Marshall School of Business, says that many are too busy to keep up with the constantly changing tax programs. Here's what you need to know to get started with your own research.
First, it helps to realize that there are essentially two types of tax incentives. One type contains so-called statutory incentives. These are more straightforward and easier to research, and if you qualify and fill out all the paperwork, you get the tax break.
Other incentives are negotiated. These are the perks that come into play when a company threatens to move its plant, say, to Tennessee from Oregon, and both states try to cut a deal. Those deals tend to depend on the number of jobs the company says it will create and the amount of the investment the company is expected to make.
While negotiated tax breaks are more commonly given to large companies, it’s possible for mid-sized or even small companies to wrangle them, especially at the local level. "If you’ve got a company with 500 jobs in a small city, that’s a lot of clout," says Swenson. "If you have a marquis business, say in technology, with 300 jobs, you might even be able to cut a deal."
As you might suspect, certain businesses are perceived as more desirable than others. "Typically the states are really interested in high-tech manufacturers, and even back-office operations," says Don Warrant, tax director with Buffalo, New York-based CPAs Freed Maxick. Technology companies "definitely qualify" as well, says Sandy Weiner, a tax analyst with Chicago-based CCH Tax & Accounting.
"What they’re not so interested in are retail and professional services. The states don’t see those as wealth-generating businesses," says Warrant. What they want, he says, are companies that sell regionally or globally, and then bring that money back to the state.
Whether you think you might be eligible for a statutory or a negotiated incentive, "I’m a big believer in starting local," says Weiner, who suggests a visit to your city or municipality and working your way up. Here’s what you’re likely to find at each level:
City or municipality
Many cities have special development, or business improvement districts, and will give you a tax break for making improvements--streetlights, greenery, a more attractive building façade--in those areas. To find local business improvement districts, go to your city’s website and look for a heading called "economic development."
Reach out to the economic development coordinator. Those in smaller cities might not have someone in that position, in which case you’d try the finance department.
But even smaller companies can have some luck trying to cut a deal with their towns. Some cities have a business tax, which you can possibly negotiate. You can also try to negotiate the city’s portion of your property tax. But think beyond taxes: Are there permitting issues you can negotiate? Does the city provide job training grants, and might your company be eligible?
If you’re looking to make a large investment, it’s possible that the city will help you with the financing. Get into the tens-of-millions-of-dollars range, and they might help you with industrial revenue bonds, which are bonds offered by a municipality on behalf of a private company.
Most counties are not going to have all that much to negotiate, since the only taxes they control are their shares of sales and property tax. Still, you can try.
Like cities, states and everyone else, the county’s first concern is going to be how many jobs you’re creating. It’ll help your argument if you can talk about "total jobs generated" or "direct and indirect jobs." The direct jobs are the people you add to your company’s payroll. If you create 10 new positions and fill them, you’ve created 10 direct jobs. Simple enough.
Indirect jobs are those that are created when the folks on your payroll spend money: when they buy shoes for their kids, repair the roofs on their houses or go out to eat. Economic development officials assign different multipliers to different industries to help them calculate how many indirect jobs each direct job creates. In his book The New Geography of Jobs, Enrico Moretti, an economics professor at the University of California-Berkeley, even claims that each high-tech job indirectly creates five additional jobs--one reason these companies are so sought-after.
About 40 states have so-called enterprise zones, offering a wide variety of tax breaks. If you want to move your company from New Jersey to New York, for instance, you’ll have more leverage if you’re moving specifically into an Excelsior Zone, which is how New York labels its enterprise zones. Generally, you can be of any size to qualify for enterprise-zone related breaks, although some states specifically exclude retailers and a few exclude services companies. Others offer enhanced benefits for larger companies.
Enterprise zones are notoriously inconsistent in what they offer. At the very least, you’ll probably get a $500 tax credit per year for each new employee you hire. But Pennsylvania and Minnesota have unusually generous programs, says Swenson, encompassing breaks not just for hiring employees but on income tax, sales tax and property tax.
"You’ve also got something like Startup New York," says Warrant. "You could have a very small company, with a handful of employees, that’s essentially going to operate tax-free for ten years. Any startup would want to consider that."
Begin your search at the website of each state’s industrial development agency, as well as each state’s tax site.
In addition to the newly-created Promise Communities, there are two main federal programs that provide tax credits for businesses that operate in certain specific locations. If your business is in an Empowerment Zone, you can get a tax credit of up to $3,000 per year for each person you hire who lives in that zone. Renewal Communities are similar, but the tax credit tops off at about $1,500 a year.
There are also about 400 so-called free trade zones around the country. They’re for countries that import or export heavily, and they’re used mostly by larger companies. Businesses that operate within them can get breaks on various import duties.
Even if you think your business is too small to qualify for tax credits, it’s a good idea to at least find out what’s available. "There’s a lot out there, and most people are just not aware of it," says Weiner. "Most governments understand that small business is the engine that’s driving the work force, and they want to see you succeed."