by Ben Worrell, MBAJune 4, 2024

The Bottom Line: How State and Local Incentives Impact Financial Statements

Economic credits and incentives are often overlooked when business advisors plan for future growth. Many other implications for the financial statements are considered before incentives, such as the cost of goods, overhead, and other operating costs. When a business is considering future growth, all factors should be considered to maximize the investment in a new growth opportunity. By understanding how incentives impact financial statements, savvy business owners can be more confident in the future success of a growth or investment project.

Business advisors, such as business attorneys, CPAs, and even private equity groups, thoroughly review a business’ financial statements to best understand the value of a business. There are several different approaches to business valuation, each with its own benefits and shortcomings. For example, some businesses or business advisory groups only consider EBITDA, earnings before interest, taxes, depreciation, and amortization. While this measure may give a glimpse at the business’ cash profits when compared to net income, it does not necessarily take into consideration all pieces of the business puzzle. EBITDA is an important measure for many private equity and investment companies. EBITDA may also be helpful for start-up or tech/R&D companies, seeking to enhance their business’ financial picture. However, this approach does not give a full view of the business which may be asset intensive or that have borrowed heavily to get to their current financial position.

In addition to the above limitations, an EBITDA-only focus does not typically take into account the impact of economic credits and incentives, as most of the savings brought on by incentives impact the tax line directly. By reducing the tax burden through economic credits and incentives, there is a direct, year-over-year impact on the bottom line: net income. The value generated for a business through ongoing tax savings should not be overlooked. This is especially important to businesses with pass-through structures as it can reduce the overall tax burden for ownership, too. Additionally, existing businesses with economic credits and incentives should value those incentives already secured by a prior project if they are looking to sell or be acquired by an outside company.

State and local incentives provide tax savings in a variety of ways, however, most incentive programs generate savings to corporate income taxes and property taxes. Some states can offer cash rebates and grants for qualifying investments or certified training programs. These rebates help offset the expenses associated with operational costs like overhead (training) or the cost of goods and services (sales tax rebates on inventory, machinery, etc.).

Reducing costs is just as important as a tax credit, depending on a company’s tax liability position. Business advisors should consider how incentives reduce operating costs and taxes, thus impacting a company’s bottom line and overall financial picture. By partnering with a qualified incentives expert, businesses can save tens of thousands, if not hundreds of thousands, of dollars for qualifying growth projects.

As a Principal for McGuire Sponsel’s Location Advisory practice, Ben Worrell fosters client relationships by guiding clients through the intricate compliance requirements associated with credits and incentives benefits.

Ben builds confidence in the McGuire Sponsel client relationship by working with clients throughout the duration of their project – not just in a one-off transaction.

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