10 Key Things Tax Professionals Should Know About State and Local Business Incentives - 09-01-25

State and local business tax incentives are powerful tools that can significantly reduce a company’s tax burden and influence business decisions. Every U.S. state offers some form of incentive to attract or retain businesses, from tax credits and exemptions to cash grants and property tax abatements. For experienced tax professionals, understanding these incentives is crucial for effective tax planning and helping clients maximize savings. Listen in as we discuss ten key things to know about state and local business incentives, along with real-world examples and actionable insights. We’ll also wrap up with essential dos and don’ts when advising clients on these programs.

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Transcript

Welcome to the deep dive, your shortcut to being well informed. Today, we're diving into something really crucial for you, our audience of tax professionals, CPAs, EAs, tax lawyers. We're talking about state and local business tax incentives. Understanding these is frankly essential for top tier client advice. We've sifted through a lot of material and pulled out 10 key things you really need to know.

Our goal, to give you a clear, actionable road map for navigating this, well, often complex area. It's fascinating, isn't it? Pretty much every single state in The US has some kind of incentive program. So this isn't some niche topic. It's everywhere in economic development.

We're gonna break down not just what they are, but really why they matter and, crucially, how you can leverage them effectively for your clients. Okay. Sounds great. Let's jump right in. What's the first big takeaway?

Alright. First up, you gotta understand the sheer variety. This isn't a one size fits all situation at all. Exactly. Think of it more like an ecosystem.

You have different types of incentives usually aimed at encouraging specific things, things like, job creation, capital investment, maybe targeting certain industries, or even developing specific locations. So for your clients, just knowing these basic categories is the absolute first step. Okay. So what are those main categories we should be looking out for? Well, the sources point to four main types.

First, you've got your tax credits. These are direct reductions in taxes, income tax, franchise tax, whatever, if you meet certain goals. Think like, Delaware's $500 credit per new job or Florida's big capital investment tax credit. That one can be 5% of capital costs a year for twenty years. Pretty significant.

Wow. Okay. Tax credits. What's next? Then there are tax exemptions or deductions.

These basically forgive certain taxes. A really common one is sales tax exemption on manufacturing equipment or maybe property tax abatements for new buildings. Got it. Exemptions and deductions. Number three.

Grants and rebates. This is direct cash, essentially, or tax refunds. Louisiana's Quality Jobs program is a good example. They can rebate up to 6% of new payroll for, I think, up to ten years. Direct cash, always nice.

And the last one. Financing incentives. This involves things like special financing options, maybe tax exempt bonds, or help with infrastructure costs through mechanisms like, tax increment financing TIF districts. Right. TIFs.

Okay. So knowing these four types is foundational. It really drives home that if you're doing multistate planning for a client, you have to start by figuring out which of these buckets exist, where they operate, or where they might wanna go. Absolutely. That's the starting point.

So moving on from the types, let's talk about jobs. This seems to be a huge driver for these incentives. Right? Every state wants more jobs. Oh, definitely.

Job creation and workforce incentives are probably among the most common and, frankly, most impactful. They often take the form of income tax credits for each jive created or sometimes rebates on the payroll taxes withheld. Either way, it directly cuts the cost of hiring people. Can you give us some concrete examples of what those look like? Sure.

You see straightforward per job tax credits like that Delaware example, $500 per job. New York had the Excelsior program, which was similar. Then there are payroll rebates. Instead of a credit against tax due, the state actually refunds some of the withholding tax. Louisiana's quality jobs program does exactly that up to 6% of new payroll back for a decade.

That's significant cash flow. It really is. And don't forget, training grants or credits. States like Georgia with its quick start program or Texas with the skills development fund, they'll actually help pay for training new workers. They recognize that skills are part of job growth.

Okay. So for our listeners, the tax pros, what's the immediate takeaway here if a client says, we're hiring? We'll think about a manufacturing company maybe comparing states. State a offers a $3,000 credit per job. State b offers nothing.

If they're hiring a 100 people, that's $300,000 in savings right there in state a. That's something you need to flag. So the action item for you is always, always check for job incentives when a client mentions hiring or expanding. Quantify those savings. And critically, make sure they follow the application process perfectly and keep meticulous records because states can and do claw these back if the promises aren't met.

Good point. Documentation and avoiding clawbacks will definitely circle back to that. Okay. Beyond jobs, states also really want big physical investments, don't they? New factories, major equipment upgrades, tech infrastructure.

Precisely. Big capital expenditures often qualify for some very generous incentives. Yeah. States are competing hard for these. So what are the key types of capital investment incentives that you, as a tax adviser, should have on your radar?

Well, you'll see investment tax credits quite often. Florida's capital investment tax credit is a prime example, again, 5% a year for twenty years on qualifying projects. Nebraska, Oklahoma, they have credits too, maybe for renewables or manufacturing equipment. Okay. Investment credits.

What else? Sales and used tax exemptions. This is huge. Over 35 states exempt manufacturing machinery and equipment from sales tax. It avoids double taxing business inputs.

Some states like Arkansas, Kentucky, North Dakota even use this specifically as an incentive for new or expanding facilities. It's not just automatic everywhere for everyone. Interesting distinction. And property taxes. Yes.

Property tax abatements. Local governments do this a lot. They'll agree to reduce property taxes for a set period, maybe ten years for a new or expanded facility. Louisiana's industrial tax exemption program is a big one. It can abate a 100% of local property taxes for up to a decade for manufacturers.

That's massive savings. It really sounds like you need to get involved early on these. Absolutely critical. The key actionable insight here is engage with the economic development folks before any final decisions are made, before leases are signed, before assets are bought, certainly before any public announcement. Why so early?

Because many of these incentives, especially the property tax abatements, are discretionary. They require negotiation and formal application before the project is committed. If your client signs the lease first, they might have just disqualified themselves. For, let's say, $50,000,000 facility, losing a ten year abatement could mean millions down the drain. Timing is everything.

Got it. Gauge early before commitment. Let's shift gears slightly. R and d credits, we all know about the federal credit, but states are in this game too, right, pushing innovation. Oh, absolutely.

It's not just a federal thing. Right now, something like 38 states have their own r and d tax credits. And the good news for you is that many of them piggyback on the federal definition under IRC section 41. So if your client qualifies federally, that's a great start for the state credit. But I imagine there are state specific wrinkles.

Always. That's the catch. While the definition of qualified research expenses might be similar, the credit percentages can vary a lot. Louisiana, for example, offers credits ranging from 8% up to 20% depending on company size and how they handle the federal credit. And importantly, some state r and d credits are refundable.

That's huge. Or they might offer higher rates specifically for small businesses. Refundable is key for startups with no income yet. Exactly. And some states, like Maryland, actually cap the total amount of r and d credits they award each year.

So getting your application in on time is absolutely critical there. You snooze, you lose. So let's say you have a tech start up client. They're doing r and d work in California, Massachusetts. Sure.

You're saying they could potentially claim federal credits plus state credits in both CA and MA? Precisely. That's the use case. You need to look at each state separately. The actionable insight for you is simple.

Integrate state r and d incentive planning into all your tax strategy discussions with innovation focused clients. Track where the r and d activities physically happen. Ensure the documentation is rock solid for each state's rules. You might even advise strategically locating certain r and d projects in states known for particularly generous or crucially refundable r and d programs. That's high level advisory.

That makes perfect sense. Maximize the benefit across all jurisdictions. Okay. So we've covered jobs, capital, r and d, but states often play favorites, don't they, targeting specific industries they really want to attract? They absolutely do.

This is where you can find some really tailored and often very valuable incentive packages. States will often bundle multiple types of incentives together to create a really sweet deal for industries they're trying to grow. Can you give us a quick tour of some common industry targets? Sure. Let's start with manufacturing.

Almost every state with a manufacturing base has a package, usually includes job credits, investment credits, those sales tax exemptions on machinery we talked about, and property tax abatements. Some states like West Virginia and Louisiana even offer corporate income tax credits specifically to offset local property taxes paid on manufacturing equipment. Interesting. What about tech? Data centers seem huge now.

Yeah. High-tech and data centers are a big focus. Maybe a dozen states plus DC have specific incentives. Could be credits for biotech investment or, very importantly, sales tax exemptions on the vast amounts of equipment needed for data centers. Arizona, North Carolina, Texas, they offer these exemptions.

And, honestly, for a massive server farm, that sales tax savings can be a deal breaker, potentially worth millions. I can imagine. Any others that stand out? Well, agriculture and energy, especially renewables, often get state tax credits, like Iowa's production credit or New Mexico's solar market credit. These usually stack on top of federal incentives.

And then there's the famous one, film and entertainment production. It seems like almost every state jumped on this bandwagon 44 states last I checked. Those film credits get a lot of attention. They do because they're often incredibly generous, 20%, 30%, or even more of qualified production expenses. And here's the key difference.

Unlike many business credits, film credits are frequently refundable or transferrable. Meaning, even a production company with no state tax liability can still get cash back or sell the credit. Exactly. Georgia offers up to 30% transferrable credit. New Mexico has refundable film rebates.

Rebates. It makes these states very attractive for productions. Okay. So the big takeaway here really seems to be matching the client's specific industry or project type to these target incentives. Absolutely.

If your client's building a data center, you need to know about Arizona's sales tax exemption. If they're producing a film, you need to factor in Georgia's transferable credit. The actionable insight for you is maintain a running list or resource on these industry specific programs. Knowing these details add significant value to your advisory role when clients are exploring new ventures. Location, location, location.

It's not just for real estate. Right? Where a business physically sets up shop can unlock specific incentives too. That's exactly right. States and local governments use geographic targeting quite effectively.

They designate specific zones to encourage quite effectively. They designate specific zones to encourage development, often in areas that are distressed or places they strategically want to grow. So what are the main types of these location based incentives that tax pros should be aware of for their clients? You'll commonly encounter enterprise zones. These are typically designated distressed areas.

Businesses locating or expanding there can get various incentives. Colorado, for example, offers several credits for investment, for job creations specifically within its enterprise zone. Okay. Enterprise zones. What else?

Opportunity zones or OZs. Now this is primarily a federal program focused on deferring capital gains taxes, but many states conform to the federal rules, and some even add their own state level incentives on top for investments in OZs, maybe state tax credits or property tax breaks. So you get federal and potential state benefits? Potentially, yes. You have to check each state.

Then there are tax increment financing, TIF districts. These are very local. Basically, the increase in tax revenue generated by a new development in the TIF district is used to help pay for that development's costs, often covering upfront infrastructure needs like roads or sewers. Some states, like Kentucky and New Mexico, even allow the state sales tax generated in the TIF to be diverted back to the project. That's powerful.

Any other special zones? Yeah. You see unique state programs too, like New York's startup NY, which created tax free zones around universities, or Virginia has defense production zones that varies state by state. So the implication is if a client is flexible about exactly where they build that new office or plant, understanding these zones could lead to significant savings. It absolutely could.

The actionable insight here is always map your client's potential locations against these designated incentive zones. If they have site selection flexibility, you can guide them towards zones offering the best package tax advantages. Just be mindful. Operating in these zones often comes with extra compliance burdens, like, maybe, annual certifications to prove you still qualify. Right.

More paperwork, but potentially worth it. Now this next point seems really important, especially for newer businesses or those maybe not turning a profit yet. Not all tax credits are the same in terms of actually getting value from them. Right? That's a critical distinction.

Some credits can literally be turned into cash even if your client owes zero state tax. This is a potential game changer. A game changer how? Because for a start up or maybe a company in a cyclical industry having a down year, a tax credit they can't use against liability might seem worthless. But if it's refundable or transferable, well, that changes everything.

Okay. Break that down for us. Yeah. Refundable versus transferable. Sure.

Refundable credits are straightforward. If the credit amount is more than the tax your client owes, the state cuts them a check for the difference. New Mexico's film credit is often cited. If you have a $1,000,000 credit and zero tax liability, you get a $1,000,000 refund from the state, pure cash. Wow.

Okay. And transferable? Transferable credits mean the company that earned the credit can sell it to another company that does have tax liability in that state. Over 30 states allow this for certain credits. New Jersey's technology business tax certificate transfer program is a good example.

Tech or biotech companies with losses can sell their unused net operating losses, NOLs and r and d credits. Know them for cash. Yes. Usually at a discount, maybe the buyer pays 80 or 90¢ on the dollar, but it's immediate cash for the seller. George's film credit is also transferable.

So even if a credit isn't refundable or transferable, there's still value, right, through carry forwards? Correct. If it's not refundable or transferable, credits usually have a carry forward period. They can be used against future tax liabilities for a set number of years, maybe five years, ten years. California's r and d credit actually carries forward indefinitely until used, knowing that carry forward period is vital for long term tax planning.

So let's take that New Jersey biotech startup example. They have a $200,000 r and d credit, but no profits, no tax liability. Because it's transferable, they could potentially sell that credit for, say, a $160,000 cash. That's non dilutive funding right there. Exactly.

That's huge for a start up. So the actionable insight for you is always determine the usability of a credit. Don't just find the credit. Figure out if and how your client can actually benefit. A nonrefundable, non transferable credit with a short carry forward might be effectively worthless if the client anticipates losses for years.

And if credits are transferable, you can help clients navigate that market finding brokers using state exchange programs if they exist. You could even help other clients buy these credits at a discount to lower their tax bills. Lots of strategic potential there. Very interesting. It adds a whole other layer to planning.

Okay. Another key distinction you mentioned earlier, some incentives are basically automatic if you qualify, written right into the law, while others require negotiation. Can you expand on that? Statutory versus negotiated. Yes.

This is a fundamental difference in how you approach securing incentives. You absolutely have to know if you're dealing with something that's statutory, meaning it's by right if you meet the criteria or if it's discretionary, meaning it requires specific government approval often involving negotiation. Can you clarify that difference for our listeners and why it matters? Sure. Statutory incentives or by right incentives are predictable.

They're embedded in the state tax code. Think r and d credits, many standard job or investment credits, sales tax exemptions on manufacturing equipment. If your client meets the specific requirements laid out in the law or regulations, they are entitled to claim the benefit. The main challenge for you as the adviser is ensuring they meet all the criteria and follow all the procedural steps, correctly filing the right forms on time, etcetera. Okay.

So that's statutory. What about negotiated? Negotiated incentives are different. These are typically reserved for larger high impact projects. They often involve things like bespoke grant agreements, significant property tax abatements over many years, or maybe commitments for specific infrastructure improvements to support the project.

These aren't just claimed on a tax return. They result from a formal agreement negotiated directly with state or local economic development authorities. Think about the highly publicized bidding wars for major facilities, like Amazon's h q two search. Those involved intensely negotiated customized packages. Alright.

Those were huge deals. Exactly. These require formal applications, significant interaction with government officials, and discretionary approval based on the project's perceived benefits to the jurisdiction, jobs created, investment amount, wages, etcetera. So this implies that for a major project, simply comparing the statutory tax rates between states might not tell the whole story. You might actually get a better overall financial deal in a state with slightly higher rates if they offer a really attractive negotiated package.

Absolutely. That's a key strategic point. The actionable insight here is don't just look at the tax code when a client is making a significant location or expansion decision. You need to proactively reach out to the relevant state and local economic development agencies. You can play a critical role in helping your clients prepare the detailed project plans, economic impact studies, and tax projections that these agencies need to evaluate a potential negotiated deal.

And timing is key here too. Right? Like, with the capital investments. Critically important. These negotiated deals almost always require approval before the project officially commences.

Advise your clients strongly against starting construction, signing major contracts, or making significant hires before getting that incentive agreement locked down. Acting prematurely can kill the deal. Okay. So understand the difference and engage early for negotiated deals. Alright.

Securing the incentive is one thing, but keeping it seems like a whole other challenge. You mentioned clawbacks earlier. Let's talk about compliance, documentation, the nitty gritty of actually holding on to these benefits. This is absolutely where the rubber meets the road and where meticulous work from you and your client is crucial. Getting the incentive approved is great, but companies must adhere to ongoing requirements.

If they don't, they risk not just losing future benefits, but potentially having to pay back what they've received, sometimes with interest and penalties. Ouch. Okay. So what are the biggest compliance traps practitioners need to help their clients avoid? There are several key areas.

First, application and filing deadlines. Seems basic, but many incentives have very specific forms that must be filed by strict deadlines, sometimes even before the tax year begins or ends. Delaware's r and d credit, for instance, needs preapproval by September 15 of the tax year itself. Miss a deadline, you might forfeit the entire credit for that year. Okay.

Deadlines are critical. What else? Documenting performance. This is huge. States expect rigorous proof that the company delivered on its promises.

For job credits, that means detailed payroll records clearly showing the new qualifying positions, wages, maybe residency requirements. For investment credits, it's invoices, proof of payment, proof the equipment was placed in service in that state. States audit these things. You need bulletproof records. Makes sense.

And the dreaded clawbacks. Yes. Clawbacks and recapture provisions. This is probably the most critical piece to understand before signing any incentive agreement. Most agreements, especially negotiator ones, have specific clauses detailing what happens if the company fails to meet its commitments.

Maybe they don't create the number of jobs they promised by the deadline, or maybe they shut down the facility or move operations out of state sooner than agreed. Nebraska's big incentive program, for example, can recapture a portion of the credit for each year of noncompliance or the entire credit if employment drops too low. Ohio often requires full payback if operations cease or move. So you really need to read the fine print? You absolutely must read the fine print.

How long does the business have to maintain the jobs or investment? What specific reports are required annually? What are the interest rates and penalties if benefits are recaptured? It all needs to be understood upfront. Are states getting stricter on enforcement?

There's definitely a trend towards more transparency and accountability, partly driven by things like GSB statement 77, which requires governments to disclose tax abatement amounts. This puts more pressure on them to actually enforce the deals they make. Okay. So putting this all together, what does it mean for how you should manage this as part of your client service, like, on an ongoing basis? It means incentive compliance needs to be a scheduled recurring item on your client's annual tax calendar.

Don't just file the return. Check the incentive status. Proactively monitor progress towards meeting the targets. If a client is falling behind on job creation for their North Carolina grant, for example, you need to alert them before the state finds out and potentially reduces the grant. Advise clients strongly against playing fast and loose with the numbers.

States have audit teams, and they will clawback benefits if there's misrepresentation, often with hefty interest and penalties. So anticipate problems. Yes. And even model potential clawback scenarios during the planning phase. Help the client understand the financial consequences if things don't go exactly as planned.

What's the worst case risk? They need to know that. Right. Managing expectations and risks. Crucial.

Okay. Our final point brings it all together. It's about moving beyond just finding individual credits and really integrating this whole incentive land, Haggai, into your clients' overall strategic tax planning. Exactly. For you, as their trusted adviser, this is where you elevate your service.

It's not just about knowing the programs exist. It's about strategically weaving incentive considerations into the fabric of their major business decisions right from the start. So how can tax professionals proactively do that? What does that look like in practice? Well, several ways.

First, insight selection and expansion planning. Don't just compare statutory tax rates. Provide a holistic analysis that factors in the net impact of available incentive packages. Sometimes, a state with a slightly higher baseline tax rate might actually be more attractive financially once a generous incentive package is included. This requires you working closely with the client's real estate or operations teams early in the process.

Okay. Site selection. What else? For clients with multistate operations, make sure they're maximizing opportunities in every state where they operate. If they have r and d happening in three different states, are they claiming all three available state r and d credits, not just the federal one?

You need that comprehensive view. Good point. Don't leave money on the table. Right. Then there's transaction structuring.

How a merger, acquisition, or even internal restructuring is set up can sometimes impact incentive eligibility. For instance, if a pass through entity can't directly use a certain credit, could you structure a partnership or leasing arrangement with a related c corp that can use the benefit? Creative structuring guided by you can unlock value. Sophisticated planning. It is.

And finally, always remember the state tax impact on federal taxes. It's easy to forget, but reducing state taxes via credits or deductions generally means a smaller federal deduction for state taxes paid. This results in slightly higher federal taxable income. You need to incorporate this interplay, this net effect into your overall analysis of an incentive's value. It's not just the state savings in isolation.

That makes sense. It's the total picture. This really does sound like an area where a proactive tax adviser can make a huge difference for their clients. It absolutely is. The actionable insight here is be proactive, be strategic, be creative.

Don't just wait for clients to ask you about incentives. Build periodic incentive reviews into your regular service offerings. Cultivate relationships with state and local economic development officials so you stay current on new programs or changes. When a new opportunity arises or an existing program is set to expire, be the one to inform your clients quickly. You are positioned to be the critical partner in identifying, securing, and maximizing these often substantial savings.

Excellent points. Be that proactive partner. Before we wrap up, the source material also had a really handy list of do's and don'ts, sort of quick takeaways for advising clients in this area. Yes. Those are really practical and good reminders for navigating this successfully.

Okay. Let's run through the do's quickly. First, do your homework early. Research incentives before the big decisions are made. Crucial.

Next, do verify eligibility criteria. Really read the fine print. Make sure the client's activities genuinely qualify. Don't assume. Right.

Then do maintain documentation. Keep meticulous organized records for everything, expenses, jobs, timelines. Be ready for an audit. Absolutely. Also, do coordinate with stakeholders.

Talk to the client's internal teams, finance, operations, legal, and liaise effectively with the state and local officials. Collaboration is key. And finally, do stay current. These laws and programs change constantly. What was true last year might not be true this year.

Timely knowledge is power. Couldn't agree more. More. Now for the don'ts things to actively avoid. Okay.

Hit us with the don'ts. First, don't assume incentives are uniform. What works in Texas probably doesn't exist in New York or vice versa. Every state is unique. Good one.

Next. Don't chase incentives without broader analysis. Incentives should complement a solid business strategy and not drive it entirely. Core operational needs, market access, talent pool, those usually come first. Don't let the tax tail wag the business dog.

Wise advice. What else? Don't miss deadlines or compliance steps. Simple procedural mistakes can completely nullify a benefit you worked hard to get. Pay attention to the details.

Credit. Also, don't overstate or misrepresent. Be truthful and accurate in applications and compliance reporting. Integrity is paramount. Trying to game the system is a recipe for clawbacks, interest, penalties, and reputational damage.

Absolutely. And the last, don't. Don't forget the long term. Always factor in how long the commitments last. What happens if the business needs to pivot or leave the state sooner than planned?

Understand the implications of incentive expiration or those clawback provisions. Plan for the entire life cycle. Excellent summary. Do the homework, be meticulous, be honest, think long term, and don't assume anything. Well, that was a really thorough deep dive into state and local business incentives.

It's clear that for you, our listeners, the tax professionals mastering this isn't just about finding deductions. It's really about stepping up as a strategic partner, helping guide your clients through some very complex decisions that directly impact their bottom line, their growth, and even their sustainability. It really is. And thinking about all this, it raises an important question, doesn't it? Given how quickly these programs change and how competitive states are, how might you, as an adviser, proactively use tools like legislative tracking services or maybe even specialized partnerships to not just react to new incentive opportunities, but actually anticipate them for your clients.

How do you stay ahead of the curve? That's a fantastic question. Something definitely worth mulling over. How to move from reactive to truly proactive advisory in this space. Thank you for joining us on the Deep Dive today.

We hope this exploration gives you the tools and insights to unlock significant value for your clients. Until next time, keep digging for those insights.