The second pillar of credit and incentive projects: Timing

Accounting

Robert Burns is credited with the quote, “The best laid plans of mice and men often go awry.” Why is planning for the future so intimidating?

It is likely due to two factors that need to be overcome when planning for the future: uncertainty and lack of control of external inputs (things we can’t control) — both of which make many business owners and advisors uncomfortable. However, predicting the future and planning for the future are two very different things. This distinction is important for CPAs and business advisors to remember when considering economic credits and incentives.

CPAs work with the numbers, facts and what has happened (“knowns”). Projecting into the future involves uncertainty, and CPAs can be averse to considering unknowns. However, by nature, business planning must consider unknowns, so businesses and their trusted advisors must focus on planning for the future rather than on the accuracy of their predictions. Planning should involve consideration of economic credits and incentives, which focus on future savings and future growth goals.

Staying in front of a growth project is key to maximizing credits and incentives for clients. The reason for this is primarily the role of discretion — state and local authorizing bodies often have discretion over how they offer credits and incentives. This involves the length of the offered incentives as well as to what degree the incentive can be realized (0%-100%). If a project has already started to “move forward” (shovels in the ground, permits pulled, conversations with city and county officials), the likelihood of incentives being offered narrows significantly. Why?

Most state laws that address credits and incentives include a “but for” clause: “… but for the offer of incentives, the project would NOT move forward in its planned capacity.” In other words, the incentives being offered by the community are the deciding factor for the client to move forward with the project. Economic credits and incentives conversations must take place in advance of the growth project beginning and with a trusted advisor/expert who can help align any benefits with the client’s best taxing interests.

For example, a CPA meets with a manufacturing client in the late fall, prior to the holiday season, to discuss end-of-year planning. Through the course of the discussion, the business owner mentions the extreme demands on their equipment and their likely need for more machinery. However, the business is currently out of space, and they have started to talk to an industrial realty group about finding a larger location. The owner also is considering purchasing the current building they are leasing and then adding more square footage using an adjacent parcel that is vacant. Finally, the owner mentions that if they move forward with any of these options, they will likely need to increase headcount to staff up the engineering department and production capabilities. Because these are all future options for the client, now is the ideal time to connect with a credits and incentives expert and determine what tax benefits could be negotiated to maximize the client’s future savings on any one of these growth options.

These conversations can occur anytime, but CPAs can ask fact-pattern questions during annual client reviews or end-of-year planning sessions. While it is important to establish what has happened in the year to begin planning for the coming tax season, trusted business advisors and CPAs will ask what is being considered for future growth as well. Job creation, new equipment purchases, acquisitions or even new location or expansion considerations are all key triggers for economic credits and incentives discussions.

By staying in front of these growth initiatives, CPAs bring valuable credits and incentives discussions to the table, giving their clients a significant advantage in realizing their growth plans. Location was our first pillar to consider, and timing is the second. We will continue to look at other key pillars that deliver significant value through discussions of economic credits and incentives.

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