The complexity and confusion surrounding 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 tax 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.
Tax Credits and Incentives: The Inevitability of a Growing Asset Class
Historically, many business leaders have thought of tax 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; tax 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, tax 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 C&I 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 tax 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.