How to Reduce Taxes through Negotiation
Since this is my first post, I’ll make a quick introduction before getting to the content: I love science and learning. In college, I majored in physics and, upon completion, felt I had earned a four-year degree in the Discovery Channel. Whereas I enjoyed the subject matter, I knew I wasn’t going to be an Einstein, so I later pursued an MBA and transitioned into tax consulting.
Prior to joining Alpha Architect, I managed the New York regional tax incentives practice for an international advisory firm. During my time there, I helped Fortune 500 and middle-market companies obtain over $250 million in cash-based incentives at the local, state and federal levels.
My goal is to help business owners create value and reduce taxes across three areas:
- As they grow their business;
- As they sell their business or transition their estate; and
- As they invest.
This post will deal with the first topic — reducing taxes for businesses through negotiation with all levels of government (federal, state, and local).
An Introduction to Tax Negotiations for Businesses Looking to Reduce Taxes
Taxes are often the single largest expense, after payroll, for many businesses. No one understands this better than business owners because they pay these costs directly. Many taxes are due even if a company doesn’t have taxable income. For example, property taxes, payroll taxes, taxes on utilities and others are paid even if a business generates no profits and pays no income tax.
A friend of mine from business school often said the following:
You either open your mouth or you open your pocket-book.
As a business owner, if you’re not negotiating your taxes with state and local authorities, you’re probably overpaying.(1)
Who are your Negotiation Partners?
Federal, state and local governments have economic development offices that are tasked with attracting and retaining businesses. They manage programs that reduce taxes and offer cash incentives in return for job creation and investment that occurs within their jurisdiction. The value of these benefits can exceed 10% to 30% of the cost of a company’s expansion or relocation project, and in the case of New Jersey, can exceed 100% of these costs (see below).
These programs are discretionary, meaning that a company must first request them and then negotiate for the benefits. In some states, these programs are not even publicized, but are held in a reserve fund that a governor can call upon to retain or attract a business.
How to Negotiate Taxes Successfully
To be successful in these negotiations, a company must have the option to grow their business in other jurisdictions. This creates leverage and is often a statutory requirement that must be met before incentives can be offered. Examples include the period before a strategic decision is made that involves a large capital investment, adding new employees, acquiring another business or relocating operations. Companies must begin negotiations before a corporate action is made, otherwise leverage is lost.
What You Can Get in Tax Reductions
There are numerous tax reduction and cash incentives available depending on the jurisdiction. Here’s a list of those found in the United States, many of which can serve as business financing:
- Cash grants, business loans;
- Property tax incentives (e.g. Tax Increment Financing (TIF), Payment in Lieu of Taxes (PILOT), tax abatements, sale-lease-backs);
- Utility rate incentives (e.g. New York Power Authority’s ReCharge New York program or those offered by the Tennessee Valley Authority);
- Infrastructure funding for substations, rail lines, docks, roadways, and site preparation;
- Free land;
- Sales and use tax refunds;
- R&D tax credits;
- Investment tax credits;
- Refundable tax credits;
- Financing for businesses (New Markets Tax Credits and Historic Tax Credits);
- Job creation tax credits (e.g. Grow New Jersey); and
- Assignable tax credits (e.g. Film tax credits and Grow New Jersey)
Of these, property tax and job creation incentives are perhaps the most universal and the Grow New Jersey program is the most lucrative. In fact, it deserves its own special call-out.
Case Study on Reducing Taxes: Grow New Jersey
New Jersey offers companies tax credits, which, if unused, can be sold for cash to other companies. These ‘assignable’ tax credits are effectively cash grants and offered by the New Jersey Economic Development Authority (NJEDA). As a tax consultant, I’ve pursued tax incentives in places such as South Africa, Mexico, Europe, Asia and across the United States. Few governments are offering incentives more lucrative than the NJEDA is right now. If your business is considering an expansion or consolidation on the East Coast of the United States, I encourage you to look into the Grow New Jersey program which has awarded hundreds of millions to companies over the last few years.
$30+ Million Dollar Case Study
A manufacturing client of mine was located in New Jersey. They were a certified HUBZone business and generated significant sales through this program. (The HUBZone program enables businesses, in specific locations, to obtain preferred vendor status with the U.S. Federal government.)
Their HUBZone was being redefined and they needed to move into another one to continue the benefits. This prompted a new site search, gave them leverage and the ability to negotiate their taxes.
The Company searched locations in New Jersey and in Pennsylvania that were HUBZone eligible. In New Jersey, they decided to focus on a site in Camden and to pursue the Grow New Jersey incentive program.
After negotiating and making a successful application, they were awarded over $30 million in tax credits, or $150,000 per employee relocated to Camden, NJ. These tax credits can be used to offset their corporate income tax or sold to another business for $0.90 on every $1.00 of tax credit earned.
Here’s how the program worked in their case. These numbers reflect all Grow New Jersey incentives to be earned over a 10-year period:
$50,000/Employee – Base Award
$50,000/Employee – Capital Investment Bonus ($26.66/SF investment)
$20,000/Employee – Transit Oriented Development Bonus (located near mass transit)
$15,000/Employee – Deep Poverty Pocket Bonus (designated by census tract)
$10,000/Employee – 2007 Revitalization Index > 465 Bonus (designated by location)
$5,000/Employee – Targeted Industry Bonus (awarded for being a manufacturer)
$150,000/Employee – Total Grow New Jersey Award for Each Employee (Over 10 Years)
==>Grand Total >$30,000,000 (200+ Employees Over 10 Years)
This company stands to receive over $30,000,000 in tax credits that can be sold for cash at $3,000,000 per year for the next 10 years. This is in addition to generous property tax breaks and HUBZone benefits, all received from government sources.
Can everyone expect to generate this level of success? Not necessarily, but many business owners would benefit from including tax negotiations as part of their due diligence before an expansion project.
Potential Potholes associated with Tax Reduction Negotiations
Negotiating tax incentives and obtaining tax relief can be very lucrative. However, be sure to ask about program costs and what happens if you fail to meet your job and investment thresholds. In some cases, businesses negotiate these benefits but fail to stay current on reporting and compliance requirements in the years that follow. This negates the entire process.
If you sell a business or form a joint venture, make sure you’re able to transfer the benefits to the new owners. In some cases, an asset sale can work, but in other jurisdictions, a stock sale may be the only way to transfer the benefits when you sell a business. Get clarity on these issues before you move forward.
Are You Leaving Money on The Table?
To qualify for tax reduction incentives, businesses must usually meet job and investment thresholds, operate in certain industries or locate in defined geographic regions. To find out if your business qualifies for incentives, and if they are right for you, check with your local and state economic development offices or feel free contact me and I’ll let you know what’s available in your jurisdiction.
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Definitions of common statistics used in our analysis are available here (towards the bottom)
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|1.||↑||These tax reduction strategies are best suited for non-retail businesses or those divisions of a retail business that are not retail oriented, such as their headquarters, back office, fulfillment or distribution functions.|