States and local taxing authorities are offering businesses huge incentives to stay or move in rather than move on. The taxman's impetus is job creation. If your company is thinking about moving your operations from one tax jurisdiction to another, consider the tax implications of the move first, and ways that you can use the move to improve your tax position.
Tax incentives play a key role in where a company chooses to locate and conduct business. Although online businesses benefit from the confusion around nexus, companies with a physical presence in a particular jurisdiction benefit from managing their tax burden. Tax opportunities could include negotiated tax reductions, credits, or other incentives as a condition of staying put or relocating to one place over another.
High unemployment coupled with tottering state and city budgets are giving businesses this one-off opportunity to negotiate for reduced tax obligations. In May 2011, the U.S. unemployment rate exceeded 9.0 percent, according to the U.S. Bureau of Labor Statistics. An estimated 8 million jobs have been lost during the recession.
State and local authorities are pursuing tax incentives to get people back to work. Employed people buy goods and services, own and rent homes, and keep local economies healthy. Businesses with as few as 50 employees may hold the bargaining power to extract large tax incentives in the form of reduced income, sales, and property taxes or even cash grants from taxing authorities in exchange for providing jobs.
Taxing authorities are particularly motivated to keep current employers in place and entice new employers to their area to establish training centers, manufacturing plants, and service outlets. For example, health insurance provider Cigna agreed to add at least 200 jobs in the next two years in Connecticut to earn a $50 million tax credit from a new Connecticut Department of Economic and Community Development program. Illinois provided Motorola more than $100 million in incentives over 10 years to retain is headquarters in Libertyville --- employing 3,000.
Taxes are a big factor for business executives in deciding where to relocate, expand a business, or start a new business. Before signing your next lease or relocating, take some time to consider credits and deductions that may reduce your company's tax burden and help you determine your company's ideal location from a tax perspective.
1. Select tax-friendly locals based on listed tax rates
- Certain states are more tax-friendly for businesses than others. The five best state tax systems can be found in South Dakota, Texas, Nevada, Wyoming and Washington. None of these states have personal income tax or corporate income tax rates. Among the worst states in the union to do business are California, Maine, Iowa, New York, New Jersey, and Minnesota.
- Certain counties within states are more tax-friendly for business than others. From a sales tax perspective in Colorado, for example, the county portion of the sales tax rates in Arapahoe, Jefferson, and Adams counties are among the lowest in the state.
2. Negotiate tax incentives
If you are serious about moving your operation from one jurisdiction to another, try negotiating with tax authorities where you are and where you might want to be to take advantage of the best tax situation for the location you end up choosing. Tax incentives can be in the form of reductions to income, sales, or property taxes through a reduction in the tax base, tax rate or both. Additionally, a state or local jurisdiction could offer certain types of tax credits as incentives to relocate in their area. For companies that are unable to take credits directly against income tax, some types of credits are allowed to offset employment taxes instead or to even be refundable. Typically, it is best to begin the process of negotiation early. Call us at TaxOps to discuss potential incentives and best negotiation approach before you make a move.
3. Understand targeted revenue pockets
When it comes to state finances, cash-strapped states are digging deeper to find new pockets of revenue to bridge ever-widening budget gaps. Along with the usual targets --- sales, use, and income taxes --- states are reportedly considering tapping into a wider array of potential revenue streams that could include:
- Retirement income
- Unclaimed life insurance policies
- VoIP service taxes
- Gambling and liquor sales
- Estate taxes
- Corporate license plate taxes
- Electric vehicle taxes
- Private aircraft taxes
- Unemployment taxes
4. Be aware of claw-back provisions
Some jurisdictions have been aggressive in including and enforcing claw-back provisions in agreed upon tax incentive packages. These can result in a loss of some or all of the originally agreed upon benefits if the relocating company does not uphold its end of the agreement in terms of investment or jobs created. For more information on best U.S. states and counties to conduct business from a tax perspective, please contact Meredith Thiess at 720-227-0064 or firstname.lastname@example.org.