Federal, state and local governments offer a variety of tax credits and incentives for businesses that open in certain locations.
When you're picking a location for your business, chances are you're looking for a few key features: the right type of real estate, a solid talent pool of local employees and decent transportation access, to name a few. But is the chance to earn a business tax credit on your list? If not, it should be.
Federal, state and local tax credits may be available for eligible businesses that open in specific areas and, by picking the right location, you can potentially lower your tax bill for years to come.
Paul Vanhuysen, Tax Director at ADP, explains how location-based business tax credits work and ways to get the most out of them.
Types of Location Tax Credits
Federal, state and local governments use location-based tax credits to attract businesses in areas that have historically had trouble creating jobs and attracting employees. For example, the IRS has had a list of "empowerment zones" that are economically distressed areas throughout the country. Businesses that open in these areas could be eligible for a tax credit to help offset a portion of what they pay in employee wages. The federal government has also offered tax credits for businesses that operate on or near Native American tribal lands.
Another situation when the government uses location-based tax credits is to help businesses hit by a natural disaster, like a hurricane or earthquake. The government sets boundaries of a federal disaster area, and businesses within these limits can potentially qualify if their operations were impacted.
"After the 2017 hurricanes, impacted businesses in Puerto Rico, Florida and Texas were eligible for a special tax credit," says Vanhuysen. "If the business kept paying employee wages while they temporarily shut down, or perform limited operations, as a result of the hurricane, the business could claim a tax credit worth up to $2,400 per eligible employee to help offset those wages."
At the state and local level, governments often use location-based tax credits to attract businesses that might not have moved there without the tax credit. Governments also use tax credits when they want to bring in a certain type of business, usually with high average salaries and low turnover. For example, a city government might offer tax credits to manufacturers or tech firms who locate their business within a designated area to help offset their startup and investment costs.
Finding Tax Credits
Figuring out whether you are eligible for a tax credit based on your location is not always obvious. "The boundaries don't necessarily follow tight patterns. There are situations where, if your business is located on one side of the street, you would be eligible. But if you locate on the other side, you might not be," said Vanhuysen.
Tracking all the different tax credits for any given location can be overwhelming. Vanhuysen recommends starting by researching tax credit eligibility requirements from the federal level down to the local level. "You can contact local zone coordinators about these credits because they may be able to provide general boundary and eligibility information. But depending on how many areas you're considering, this could mean contacting many different local departments to gain a complete picture," he says.
Another approach is to work with a third-party service provider or consultant who specializes in location-based tax credits. "ADP uses proprietary interactive mapping technology that tracks the boundaries of location-based tax credits," says Vanhuysen. "A business owner can come to us with their expansion plan, and we can plot where they could locate operations to potentially qualify for different credits based on geography and scope of their project."
Predicting Changes Over Time
What further complicates the matter of location-based tax credits is that boundaries can change over time. Your business might have been eligible for a tax credit one year, but then the next year the boundaries shift so suddenly you lose the tax break. On the other hand, the boundaries could shift in your favor, and suddenly you become eligible for a tax credit you were not previously able to claim.
"It's hard to predict exactly how the geographical boundaries will change over time," says Vanhuysen. "ADP's models and technology try to anticipate how boundaries will change based on historical data, but there's no way to guarantee this will actually happen in the future."
What business owners can do is pay attention to proposed or newly enacted legislation and formal announcements of a boundary shift that could create a new location-based tax credit, or cause a previously ineligible business to become eligible for an existing credit. This will give businesses the opportunity to consider a location where a future tax break appears likely.
Picking a Location
Vanhuysen encourages business owners to include location-based tax credits as part of their decision-making process when selecting a new location. "A tax credit might not be the sole consideration when picking a location," he says. "But if it's a close choice between two similar locations, the tax credits and incentives can sway the business owner to one spot over the other."
He also suggests that if a business is considering a few different areas, they should reach out to local and state governments to see whether they offer discretionary tax or other business incentives. These incentives may not necessarily be in the form of a tax credit. The local/state government might be willing to help in other ways, like a training incentive for your new workforce or similar cost reimbursement program, an investment credit to help pay for new equipment, or building a new road to make your location more accessible.
Governments generally only offer these types of tax incentives if you demonstrate that the incentive influenced your decision to select a particular location.
Remember, when you open a location in a new area, you're bringing jobs and economic growth. That's why so many governments offer generous business tax credits and tax incentives to attract organizations. These opportunities are out there, so keep an eye out as you search for your next location.