Credits and Incentives: Creating a Strategic Advantage

The Credits and Incentives Landscape

 

The complexity and confusion surrounding credits and incentives and tax preparation can be daunting while running a business, regardless of size. Whether you’re a small, midsize or large multinational, the number of variables that must be considered in relation to an entire organization’s tax liabilities pose a complex challenge.

A constantly changing tax landscape can impact your bottom line – most recently resulting from the 2017 Tax Cuts and Jobs Act (TCJA). Add to that a multi-state jurisdictional footprint and international activities and you then have a formula for complexity, confusion and missed opportunities.

Over the last several decades we have witnessed a tirade of progressive fiscal policy that has resulted in an explosion of economic incentives and benefits issued by all levels of governments on a global level. These economic development programs and the assets they produce are too often overlooked in the day-to-day process of managing traditional tax compliance despite the significant and material cash flow derived and/or the reduction of your company’s annual tax bill.

We are referring to credits and incentives (C&I), and you and your company have likely already considered the financial benefits as part of your investment decision-making process and the strategic decision-making process.  These assets are the byproduct of direct investment, job creation and certain enterprise behavior (through the adherence to government policy initiatives and economic development program rules and regulations).

The most typical outcome provides a dollar-for-dollar reduction that can be applied against tax liabilities owed to various levels of government (federal, state, local and international), but other benefits can include cash rebates, refunds, grants, abatements or certain government guarantees designed to promote good corporate citizenship and a win-win scenario.

 

Credits and Incentives: The Inevitability of a Growing Asset Class

 

Historically, many business leaders have thought of credits and incentives as a “nice-to-have” that was usually nothing more than incremental and marginal economic benefits – or an opportunity for local politicians to tout community development campaign promises.

However, as governments around the world have become more and more competitive in their attempts to stimulate their economies, attract the best firms, innovation and job creation to their communities, these incentives have grown to be material in every sense of the word.

For example, while some of our constituents at The OIX manage a small handful of incentives that produce several million dollars of benefits, others are managing several dozens or hundreds of these assets resulting in over $1.0 billion + of economics and direct bottom-line impact, and regardless of magnitude, often a small team consisting of just a few people are making this happen. Think about that for a second; credit and incentive professionals at some of the largest companies in the world are adding potential billions or more to their companies’ bottom line.

As more and more companies come to appreciate the scope and potential materiality of these types of assets, credit and incentive professionals will become more and more valuable to their company’s competitiveness and profitability. It is truly an exciting time to be a tax professional who understands the C&I world. And yes, we said tax planning and execution is exciting!

Of course, C&I assets are not without controversy, as evidenced by the uproar caused, most recently, by Amazon’s HQ2 location selection and the multi-billion-dollar C&I packages they have received. Opponents of C&I often decry these programs as “corporate welfare” and nothing more than handouts. To add to the contention, various economic impact studies have produced wildly different assessments of actual economic impact.

However, many of the anti-C&I studies ignore ancillary benefits – as the analysis is circumspect and ill-equipped to value the trickle-down effect, as well as to measure the long-term permanent infrastructure, quality jobs, and community development befits that these programs foster.

 

But let’s be real here… What choice do governments have when it comes to attracting top tier businesses, innovation, and jobs to their locales? 

 

The government has but one tool in its arsenal to surgically stimulate economic behavior and its outcome to enhance the quality of life within its borders.  Yes, C&I as smart fiscal policy.

 

The Effect of Credit and Incentive Policy

 

The fact is that the balance of power between economics and politics has been shifting over the past 70 years (and really since the Reformation and Renaissance) and while many factors contribute to this shift, the most prevalent is caused by the advent and deployment of real-time, global information infrastructure and information technology that allows businesses to operate on a global level and manage tax credit assets in real-time.

At the same time, the government remains local and geographic in nature and has decreasing ability to dictate economic behavior it seeks from a business. Progressive fiscal policy that results in the most beneficial outcome requires lawmakers to judiciously legislate programs that make sense and provide measurable returns to taxpayer investment.

So, the trend in C&I policy (from industry expanse to huge leaps in dollar amounts and number of programs enacted – most recently, as an example, Opportunity Zone incentives created through the 2017 TCJA) – all point to the inevitability that democratic capitalists governments really don’t have a choice but to find smarter and more efficient ways to incentivize businesses to stimulate growth.  For companies and the recipients of these assets, the need to ensure compliance with the terms and requirements that these packages offer is ever more increasing.

This is acerbated by new regulatory disclosure and reporting mandates governed by FASB Topic 832, set to take effect in 2020.  Said another way, good corporate citizenship and smart political policy goals can co-exist in a mutually beneficial environment provided that there is enough visibility to ensure that all parties are living up to their piece of the bargain. (More on this in a future OIX Blog Post.) 

Unfortunately, historically, this asset has been a “grey” area for many C&I professionals and recipients. But fortunately, through advances in information technology and dedicated asset management solutions to address the sector there also lies the key to maximize the value of C&I programs and their benefits, and of course, we’re talking about The OIX’s tax credit software

 

The Power of Credits and Incentives

 

In our view, credit and incentives are the most powerful and effective policy tools that government has at its disposal to surgically stimulate economic behavior that it deems vital to the growth and economic activity within its borders.

Our goal at The OIX is champion smart C&I incentive policy and their use, and we deliver the technology to ensure that all parties in the ecosystem are doing their part to create the mutually beneficial economic outcomes as intended.

Through this blog, we will make the case that credits and incentives should become a strategic component of every company’s financial planning process – from acquisitions, procurement, divestitures, hiring, capital market activities, facility development, and everything and anything that is considered when running a business in today’s hyper-competitive global arena, where winning and competing on the margins is essential.

This rapidly growing asset class will continue to expand, and the companies that are best prepared to utilize and leverage policy will see higher margins and greater long-term profits.

 

Please feel free to ask us any questions – we would really love to hear from you! You can reach us at info@TheOIX.com.

Business Tax Credits: What Should I Know ?

How to Best Maximize Economic Benefits of Business Tax Credits

 

Ensuring that a business achieves long-term growth takes a lot of careful strategizing. This is especially true when it comes to business tax credits and tax planning, where organizations have the opportunity to carve out substantial savings every year – and potentially even generate additional cash flow.

Especially in recent years, there has been a legislative surge in new tax benefits through economic incentive programs, called opportunity zones, geared to stimulate investment and job creation for small, midsize, and even large global companies.

This extends from the federal, state and local level here in the US, with identical dynamics on a global level throughout international jurisdictions, and now businesses are faced with a complicated and vast collection of opportunities to save – and even make – money with respect to taxable liabilities. The byproduct of this fiscal policy is known as tax credits.

The problem is that, far too often, organizations’ focus on regular management of traditional tax compliance causes them to miss opportunities – meaning tax credits that don’t get claimed, or worse, companies do not go after credits and incentives that they may be eligible for.

 

What is a Business Tax Credit?

 

Tax credits are generated through government-sponsored incentive programs that are designed to influence businesses (and individuals) to behave in a way that is beneficial to their community, local workforce, or environment.

Credits and incentives should not be confused with tax deductions; the latter enables a reduction to total taxable income base (decreasing what can be taxed by the government), whereas the former provides a dollar-for-dollar reduction in tax liability after calculating the total tax bill. If an organization properly demonstrates that they have fulfilled program requirements and the rules and regulations that govern defined benefits, then a tax credit is issued along with guidelines for redemption.

Properly taking advantage of incentive programs and the tax credits they produce isn’t easy. While it may seem simple on its face, real-world understanding and management of tax incentives is quite an undertaking – no matter the size of the company. Legislative and statutory frameworks dictate how business tax credits can be earned, claimed and monetized, and a considerable amount of expertise is required to navigate these waters.

There are seemingly countless types of tax credits available to businesses, and each of them has their own unique list of preconditions, requirements, and qualifications. Not only do companies need to determine which US federal tax incentives are available and how to take advantage of them, but there are also incentive programs offered by all 50 states.

Further, city governments also provide their own tax incentives that are designed to support investment and job creation on a municipal level, endeavor to lure new businesses to relocate and/or encourage the expansion of local operations.  This same dynamic exists on a global level as there are tax incentive programs offered by just about every government around the world.

 

Tax Credit Monetization: What Types of Business Tax Credits are There?

 

There are a myriad of available tax incentive programs that support and encourage innovation and investment across just about every industry.  From pure “jobs” programs – including Enterprise Zone, Work Opportunity Tax Credits (WOTC), Research & Development, among so many others, which as policy programs target and stimulate the most innovative industries and quality jobs – tax credits and incentives are the most effective economic development tool that government has at its fingertips to promote generational prosperity, growth, and permanent infrastructure.

Generally, with respect to tax credit monetization, business tax credits fall into these categories in how they can be redeemed:

 

Non-refundable tax credits

This represents the majority of tax credits. These types of tax credits can be applied against tax liabilities on a dollar-for-dollar basis up to the total amount of tax (federal, state, international) that business owes.

Refundable Tax Credits

Upon filing a tax return (in the jurisdiction), and to the extent that the credit exceeds liabilities, the government issues a cash “refund” to the company.  

Transferable Tax Credits

Statutorily, these credits can be freely transferred/assigned/sold to another taxpayer (who has liabilities in the issuing jurisdiction) at any time, subject to the rules and regulations around the transfer, who then applies for the credit against their liabilities.

Rebates and Grants

These incentives are monetized in the form of cash receivable from the issuing agency, without the need to first file a tax return. The former is redeemed following satisfaction of qualifying guidelines, whereas the latter is received prior to investment.

Tax Abatements

Reduction of or exemption from taxes granted by a government for a specified period, usually to encourage certain activities such as investment in capital equipment, and most commonly offered to offset property tax liabilities.

Bond Guarantees

Corporate debt securities offering a secondary guarantee that interest and principal payments will be made by a governing agency should the issuer default due to reasons such as insolvency or bankruptcy.

 

Statutory, Discretionary and Negotiated Incentive Distinctions

Statutory incentives include economic benefits that are earned by right if a company meets certain thresholds or performs certain activities as defined by legislative policy and which meet qualifying guidelines. Discretionary incentives are similarly legislated but require pre-application and/or pre-approval to qualify and are completely at the governing agency’s discretion, and usually include “but for” requirements – meaning, if not “but for” the incentive the economic investment and job creation would not be undertaken.

 

Carryforward

While some tax credits can only be claimed in the year in which they were earned, others can be “carried forward” to apply against liabilities in future (tax) years.  “Carryforward” provisions typically range from 1 year to as much as 20 years, and in regard to certain incentives, credits can be carried “back” and applied again liabilities in prior years.  Attention should also be paid to amended and re-stated returns as it pertains to credits, their use, and limitations.

 

Compliance

In order to earn certain credits and incentives, companies engaging in economic activity eligible for benefits and liability offsets must adhere to the rules and regulations and follow certain guidelines with respect to (1) how an investment is targeted and maintained, and more important (2) the jobs and permanent infrastructure created as a result. Each incentive program (whether statutory, discretionary or negotiated) will have their own unique compliance requirements.

 

Maximizing the Value and Benefits of Tax Credits and Incentives

 

Owing to the diversity of tax credits and incentives and all forms of government assistance through economic development policy, how can your business maximize their value? How do you leverage, from a balance sheet and cash flow perspective, the economic benefits that may make the difference in how you compete on the margins and win?  

Knowing the ins and outs of each potential tax credit program is crucial, as it can dictate how investments are prioritized, play a significant role in forecasting cash flow and provide the (soft equity) gap that may lead to a “go” or “no go” decision.

Understanding how to get the most out of the system, however, is nearly impossible without the best technology and access to the necessary expertise. The sad truth is that a ton of companies are either overlooking eligible incentives they should be going after, but also are not properly benefiting from the credits they have earned due to the absence of modern-day tax technologies designed to maximize their value.

Collaborating with an experienced technology partner to plan and manage a sound tax management strategy is how top organizations are able to minimize their tax liabilities each year.  Investing in an enterprise solution to manage tax credits is one of the only ways to ensure that companies are navigating the system in the most lucrative way possible each year. It’s all about dumping your tax credit concerns onto someone else’s plate – putting all the hard work into the hands of an established and reliable tax credit company, such as The OIX.

With years of experience slashing clients’ tax liabilities with innovative tax credit and incentive software, The OIX offers a unique and effective solution that takes all the chaos and inefficiency out of the picture. This next-generation platform streamlines the management, reporting, forecasting, analysis, workflow, monetization and compliance processes for tax credits and incentives on a worldwide scale.

By adopting tax credit software solutions through an industry-leading tax credit company like The OIX, you can ensure that your business isn’t missing out on any lucrative tax credits – while also positioning your company for long-term growth.

Welcome to The OIX Tax Credit and Incentive Blog

What is The OIX?

 

So, how is it pronounced? We say it like it is spelled – The OIX (oʊ-aɪ-ɛks). Here at The OIX, you will find a group of tech-go-getters, policy-enthusiasts, economic-development-pioneers, adventure-seekers, as well as the cloud-based technology home of the world-class OIX Tax Credits & Incentives Platform!

We know what you are thinking. Tax Credits? Tax Incentives? These subjects are normally associated with other words like snooze, dry, boring, confusing, etc. And yes, historically the subject of credits & incentives (C&I) could be described as any of those words. However, as this the tax credit and incentive asset class take on an ever-greater role in helping companies profit and succeed in today’s hyper-competitive world, we intend to demonstrate to you that far from being boring, these hidden gems are interesting, compelling in nature and fascinating at their core – and most importantly, financially and operationally material to overall corporate success regardless of size or location.

 

The OIX Community Blog

 

This blog is intended as a two-way conversation with you, our readers, on subjects related to and surrounding C&I. Throughout these conversations we will share educational knowledge (from nuggets to five-course meals) for you to snack on throughout your week, give you some informational bits on the latest news and issues affecting C&I, and lastly and certainly most importantly enlighten you with a variety of perspectives and insights regarding this asset class so you can be in a position to leverage the tax code and help your organization compete and win on the margins by using a Tax Credit Company like ours.

Don’t be alarmed if our conversations start with subjects like opportunity zones, football stadiums, M&A activity, renewable energy. Trust us when we say C&I’s are a game changer for every business that fosters job creation and community investment, across all geographies, and we are here to talk about it with you in gory detail. Even more importantly we would like to learn from you.

 

Our goal: Educate. Inform. Enlighten. So you can: Compete. Profit. Excel.

 

Moving forward we will share with you our perspective on the state-of-the-art technologies, strategies and best practices emerging in the C&I arena. But just as importantly, we will discuss where the industry may be heading. This will include discussions on the future of technology innovation in the C&I world and explore such things as big data, artificial intelligence, and advanced analytics, and the role of blockchain in the coming years. We will bring you interviews and insights from thought leaders across every aspect of the industry to share their ideas with our readers.

By bringing to light these real-life case studies, our goal is to share best practices across the industry. When combined with the deep analysis of government policies and objectives, we will hopefully create insights that will impact our readers’ competitiveness in the marketplace.

But our intentions don’t stop at education and best practices – we aim to assist our clients in their professional goals, as we believe many of tomorrow’s corporate leaders will spring from the ranks of C&I experts and thought leaders who are our customers. As they say, knowledge is power, and our clients have command of a niche knowledge set which, when combined with cutting edge technologies, will give them unprecedented influence and status in their organizations.

As one professional in the apparel retail industry remarked recently: “Six years ago we didn’t have a single tax credit or incentive. Today, we won’t open a store or hire a person without first considering what incentives are available to us. We compete on the margin and these assets can make a huge difference.” This is a common refrain we hear day in and day out and our clients are poised to ride this emerging trend to corporate success and professional growth.

 

From Past to Present

 

The OIX was founded in 2012 as a marketplace platform to enable businesses to transact in C&I assets on a principal-to-principal dynamic (i.e. the buying and selling of tax credits) in order to create more value for everyone in the C&I ecosystem. In particular, The OIX sought to and achieved, vast reductions in the friction between buyers and sellers.

 

The end result: Both buyer and seller got a better deal.

 

Although our marketplace was and is the single most successful and robust trading platform of its kind, our long-term goal had always been to use that technology as a sort of bridge to building an enterprise SaaS solution to help companies manage tax credits over the life cycle of these complex financial instruments. The trading platform was our initial effort to generate revenue while we learned how to address the complex dynamics of managing every kind of C&I from around the world.

We’re happy to say that after years of hard-core R&D and working with clients in real time, in late 2017 we achieved that goal and in early 2018 we pivoted out of trading as a primary business (we still partner with the best brokers in the world who use our system to assist our clients to optimize their tradable C&I assets) and into the de facto standard for enterprise SaaS management of C&I assets.

Our long-term vision was always that as this asset class grew in materiality and complexity, companies of all sizes would need to get control of their business tax credit portfolios and enhance their value to the organization. Today, our technology spans the entire ecosystem of C&I asset management in a unified, secure, collaborative, cloud-based enterprise solution that tackles these three challenges in one eloquent solution:

1)    The  OIX Advisory Solutions – we partner with the best of breed advisory firms of all sizes to deliver an integrated and seamless solution to determine what tax credits and incentives are best for your situation around the globe.

2)     The OIX Credits and Incentives Platform – once you have secured C&I assets for your particular situation, you need to intensively manage those assets through their lifecycle. No other solution comes close to the breadth and depth and ease of use of The OIX platform.

3)     The OIX Brokerage Solutions – and when your C&I assets are maturing, you have the option of instantly connecting with our brokerage partners to optimize the value of tradeable tax credits that you cannot use internally.

 

Head on over to the products page for more information on our Tax Credit Software

 

In conclusion, The OIX is focused on the end-to-end enterprise management of C&I portfolios. Keep a look out for our upcoming blog posts as we dive deeper into The OIX and how we are pioneering the future of tax credits & incentives…

 

Welcome to the party of Tax Credits and Incentives!

 

If you just can’t wait for our next blog to go live, we totally understand! Just move on over to our homepage to find out more about The OIX’s tax credit and incentive management solutions, or visit our Press Page for current and archived media coverage and thought leadership initiatives.

Please feel free to ask us any questions, we would really love to hear from you, you can reach us at info@TheOIX.com