The Tax Considerations for Opening a New Location
"Picking a new location works best when you have all the necessary parties at the table as early as possible in the review process." - Paul VanHuysen, Tax Director at ADP.
Opening a new location is a major decision that can impact your organization for years to come. Finance leaders play a key role in making the right decision, especially from a cost perspective.
Work With HR
First and foremost, HR and the finance teams should work closely together before, during and after opening a new location. HR should have a good feel of what the organization needs with the new facility in terms of physical space, such as the size requirements, what the building should look like and what the space should feel like, the number of employees that will be at the new location and whether they need to transfer people from other facilities. This information can help give finance leaders a clear scope of the project as they research different areas.
After you've opened the new location, finance and tax must keep HR up to date with the conditions and compliance reporting tied to any negotiated incentives, since HR is responsible for the data that's necessary for meeting many of these requirements.
When you compare tax jurisdictions, state and local income tax rates are an important factor. Some areas are more income tax friendly, such as states that don't have income tax. However, according to ADP tax director Paul VanHuysen, businesses should also consider the entire picture, such as what the organization would owe for property, employment, sales and use, franchise tax and other non-income taxes. It's also important to consider the potential tax incentives in different areas. "An area with higher rates might be the better deal once you factor in the tax incentives for which the firm is eligible," says VanHuysen.
There are two categories of tax incentives — statutory and negotiated. Statutory incentives are available to qualifying businesses in a specific area and are generally not unique to a firm's business. For example, an eligible business that creates 50 jobs in an area could obtain a job creation tax credit at the state or local level.
Negotiated tax incentives are more unique to the business and tailored to a particular situation typically designed to stimulate growth from your state or local government while you are considering where your business should move, while you still haven't announced the news or picked a location yet. "The negotiated incentives typically need to be a driving factor in your move, meaning the business would not have picked an area without the negotiated tax credit," says VanHuysen.
VanHuysen points out that negotiations can often focus on more than just tax credits. State and local governments may offer nontax incentives as well like cash grants, wage subsidies, subsidized land, training grants and discounts on utilities.
Again, finance leaders and HR need to be on the same page — particularly in regard to tax incentives — when seeking places out.
"If HR doesn't understand the requirements for realizing the tax credits, your organization may fall short of the conditions for a valuable benefit and the reporting obligations of the agreements," according to VanHuysen.
Do a Cost-Benefit Analysis
Your organization needs tax research because it's an important part of the decision. But of course it's not the only part of a decision.
When you're looking into an area, you should also consider the prevailing wage rates, existing labor pool (especially if you need skilled labor), local supplier network, infrastructure and numerous other factors. After considering the complete picture, a higher tax jurisdiction could end up being the better choice. However, to make this informed decision your organization needs the appropriate tax information ahead of time in order to model the scenarios appropriately.
Involve all Necessary Parties
"Picking a new location works best when you have all the necessary parties at the table as early as possible in the review process," says VanHuysen. He recommends that representatives from finance, tax, HR, real estate and government relations meet to discuss the potential alternatives. "If there's one department that usually is brought in late, it's tax, and this can have significant financial consequences," he says. "For example, say government relations might negotiate a fantastic tax credit package with a state government, only to find out later from the tax department that it won't help the organization because they have significant carryovers and won't have much of a tax liability to offset in that jurisdiction."
In this case, it would help if government relations knew ahead of time to focus any negotiations on nontax incentives. By bringing in tax early, your organization can make a more informed decision.
By following this advice, you can help set your new location up for success.