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Hidden State-Tax Breaks Can Add Up for Small Cos.

Keeping abreast of the latest state-tax credits is a full-time job. But it can pay off for small and even larger firms at tax time.
Kathleen Hoffelder, CFO.com | US
May 23, 2012

As CFOs look to cut costs in all aspects of their operations, one often-overlooked area for savings is the hidden state-tax incentives available where they do business, not just where they're headquartered.   

Take the benefits that can be found in designated areas that cater to disadvantaged youth and the unemployed. If a firm is headquartered in New York, for instance, but has a distribution center in California, it is eligible for tax incentives under the Enterprise Zone tax-credit programs in California, says Brian DeVido, national director of business development at tax consultancy Walton Management.

"It's the most lucrative state program out there," says DeVido. If any business has a location in one of 42 targeted areas in California that are designated as state enterprise zones, they can apply, he notes.

The city of Anaheim, California, was one of the latest areas to be designated for the program this past February. Employers in the city are eligible to receive $37,440 in tax credits per hire for up to five years. The program was designed to alleviate some of the unemployment in the state and give employers incentives to hire people who currently receive government assistance.

But if companies aren't based in California, they may not be aware that they qualify for both ongoing, and in some cases retroactive, tax-savings programs, says DeVido.  

Half the battle in receiving such tax credits is simply knowing what programs exist in what states. "Oftentimes the states don't have the budgets to aggressively market these programs and educate companies that are either headquartered in these states or just have operations" there, says DeVido. "The challenge becomes connecting the availability of these programs with folks in the C-suite."

The programs — when they are used — are popular. Although California Gov. Jerry Brown attempted to eliminate the Enterprise Zone tax incentive for the state last year, harsh criticism over the cancellation kept the program intact.

New York is another state that offers similar tax incentives. Late last year, Gov. Andrew Cuomo signed the New York Youth Works Tax Credit bill, which has $25 million in total tax credits up for grabs for New York businesses that hire unemployed and disadvantaged young people age 16–24. The designated New York areas include New York City, Albany, Brookhaven, Buffalo, Hempstead, Mount Vernon, New Rochelle, Rochester, Schenectady, Syracuse, Utica, and Yonkers. Companies can also seek out monetary support for job training, worth $62 million in total, once they hire from this targeted group. 

"We found a number of our clients, even those headquartered in New York, were not necessarily aware of this program when it first came out," says DeVido. The bottom line impact from some of these tax programs can be substantial in some cases, he notes, where it can completely net out a firm's state-tax liability or be significant for a publicly traded firm if it can shave about $100,000 or so off its taxes.   

"There are a lot of tax-incentive dollars available to companies," adds Jeff Saviano, tax partner at Ernst & Young.  Having the proper attention from management on the topic as well as keeping abreast of state trends is important, he says.

Other states, such as Texas and Utah, offer a similar Enterprise Zone tax-credit program, with the latter offering the program since 1988. Firms doing business in Denver, Colorado, for example, are eligible for up to nine state-tax credits, which range from new business or existing business expansion credits to a 3% investment-tax credit for making purchases of property used exclusively in the Enterprise Zone for at least one year.   

But though some states offer a variety of tax credits, they can still be ranked among the most unfriendly tax states overall when it comes to the entire business-tax environment, according to a study earlier this year by The Tax Foundation, a nonprofit research and public education organization.

The foundation's 2012 State Business Tax Climate Index ranked states such as California and New York among the lowest for overall tax benefits for firms, while Wyoming, South Dakota, and Nevada were at the top. (A key part of their high rankings, however, was having no corporate or individual income taxes.) Alaska, Florida, and New Hampshire filled out the next ranks of the index due to their favorable individual income-tax rate, corporate-tax level, and sales-tax rate, respectively.

The findings are important, since many firms often do not know how competitive the state in which they are headquartered is on tax incentives versus other states in which they have operations. Small tax breaks taken on a single level may not look that big, but taken together they can add up to savings for firms, adds E&Y's Saviano.

Comparing and contrasting how a state ranks in all tax areas has become a high priority for firms lately. "Where the states have cut taxes, we're seeing those states' economies rebounding," says Saviano. "As the states are competing with each other and foreign nations for jobs, they want their states to be the most attractive."




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