The unknown science behind tax credits and incentives
The early Greek physicist Archimedes has been attributed with the saying, “Give me a lever long enough, and a fulcrum strong enough, and I shall move the world.” We all have encountered the wonders of science and marveled at the first scientists who were driven to pursue the facts underlying everyday phenomena. Experts take time to work through the mystery and then explain a concept that brings simplicity and clarity.
In the world of accounting, economic credits and incentives have been shrouded in mystery for some time. I have lost track of the number of times CPAs have used those exact words to describe them. In the accounting industry of “knowns,” we tend to shy away from that which is “unknown,” as it is the safer option. However, if CPA firms pursue credits and incentives for their clients, they are reaping significant tax savings opportunities and greatly enhancing the trusted advisor, client CPA relationship.
As in Archimedes’ experiments, a few key factors need to be in place for credits and incentives to achieve the desired outcome. Archimedes’ science and credits and incentives practices both employ an essential tool to achieve optimal results: leverage. The “lever” in the case of credits and incentives is the early-stage planning before a project takes place; in other words, timing is the key to maximizing credits and incentives.
The “fulcrum” with credits and incentives is the business’s growth: new investment and/or new job growth. Adding equipment, expanding a building, renovating a workplace, moving to a new location or acquiring an asset potentially qualifies as a new investment. In most of these cases, additional employees are needed to perform the growth-driven tasks. The combination of new investment and new headcount creates a strong opportunity for credits and incentives tax savings.
To maximize credits and incentives then, one must secure credits and incentives before a growth project takes place. So, to complete our analogy, if you don’t have a growth project, there is no fulcrum and therefore no leverage. If your lever is not long enough (i.e., your timing is too short or the project is underway), your leverage is not sufficient to maximize the result (tax savings).
Let’s look at this model in practice. A CPA performing an annual review with a client asks, “What does the next year look like for you?” The client might state they anticipate continued growth, especially as one key contract looks like it will come through. If it does, the client adds, they will have to expand their plant and workforce to meet the demand. An astute CPA would key in on the growth project and ask further growth questions such as:
- How many people do you hope to hire?
- Do you have cost quotes on the new equipment?
- What are the construction estimates for your expansion plans
- When do you hope to break ground, make the purchases or hire the new employees?
What would the next steps look like? Say the client is considering an expansion as soon as the bank financing is ready (projected in a few months). The client is considering a $1 million expansion to their facility, $3 million in new machinery and equipment and roughly 25 new jobs over two shifts to operate the machines. Along with other admin/business staff added as a result of the expansion, total new hires are north of 30.
With a solid picture of what the project could look like, the CPA or an affiliated tax advisor can now start to dig into the credits and incentives that might be offered at both the state and local levels. These conversations must be done tactfully, making sure no “guarantees” are relayed that indicate the new project is a done deal. In this way, the CPA/advisor enhances the leverage on the tax savings by negotiating the maximum amount of incentives that could be offered. The ultimate mystery behind credits and incentives lies with the discretionary nature of these tax tools. States and local decision-makers often have significant discretion in what they can offer to a company. Having an expert in credits and incentives substantially increases the value of these savings for a client.
Annual reviews with clients that focus on what future growth could look like are ideal ways that CPAs can begin to identify credits and incentives opportunities. In today’s global economy, businesses are always looking for a competitive edge, which often means quick decision-making is needed to capitalize on a business opportunity. Having regular reviews with a client throughout the year provides CPAs with foresight on a client’s growth to maximize leverage and credits and incentives savings.