Tax Tips for Manufacturers & Distributors: How State and Local Incentives Can Subsidize Your Growth Initiatives
Whether your manufacturing or distribution company is planning to expand, add more employees or bring in new technologies, growth takes investment. What companies may not be aware of is a benefit that could help offset those growth-related expenses – state tax incentives.
Tax incentives benefit both your company and the state. When manufacturing and distribution companies expand, they make investments in expensive equipment. And because they have a lot of equipment, they tend to stay in the same physical location for a long time, providing sustained economic activity for the state. They also bring in a range of high-quality jobs for state residents, including jobs for suppliers and distribution/logistics. State and local tax incentives could subsidize growth for your business by providing a range of benefits, including payroll and withholding rebates, income tax credits, property tax abatements, training grants for net new hires, and sales and use tax exemptions.
Activities That Could Trigger State & Local Tax Incentives
Most states offer tax incentives to companies to encourage domestic growth. These opportunities help businesses that are already located in the state and also help the state attract new growth-oriented companies.
Each state has its own incentives, programs and targets. Generally, incentives tend to benefit companies that are:
- Expanding a current facility or opening a new facility
- Adding net new employees
- Making a significant capital investment in buildings or new equipment
- Incorporating a new technology that changes the way the company does business
Some states may also have specific industries of focus. Manufacturing and distribution companies are almost universally incentivized because of the benefits outlined above.
States typically offer two types of tax incentives – headcount incentives and capital investment incentives. Some states offer both, while others offer only one. And some states require a large capital investment to qualify for the headcount benefits.
It’s important to understand that the term “headcount” refers only to “net new hires” — not to people hired to replace employees who have left. The size of the incentive will depend on the number of net new hires you plan to add to your workforce but may include:
- Payroll/withholding rebates
- Income tax credits
- Training grants for net new hires
Training grants can be particularly lucrative because they take the form of cash reimbursements and can be used to offset the cost of training new employees or training existing employees on new technology. States may also have programs that allow qualified companies to retain the withholding or payroll taxes for net new hires. These incentives create positive cash flow.
If your company has isolated which of its locations will be bringing on the new employees or has the location down to a small number of contenders, it should investigate its headcount incentives. Many of these incentives, such as training grants, must be applied for and accepted before (or as) the new employees starts.
Capital investment incentives vary from state to state. There are three typical capital investment incentives:
- Income tax credits
- Property tax abatements
- Sales and use tax exemptions
Capital investment incentives may be particularly attractive because some manufacturers that have been operating in other countries may be moving parts of their operations back to the U.S. in response to recent tariff activity.
If you are looking to make significant capital investments, you should consider the available property tax abatements and exemptions before you make your final decision because that may affect where your business decides to put its investments to use.
Avoid Disqualifying Issues
The application process has many requirements and deadlines to meet. Your company should designate a key employee to focus on handling the paperwork and addressing any follow-up requests or questions promptly. It’s also a good idea to designate a second contact who’s knowledgeable about the application process — someone who could take over if the designated employee leaves or is unable to complete it.
If the short application window closes before the application goes through, your business will miss the chance to qualify. Incomplete paperwork will also disqualify your company. And if there are errors in the application, the business will not only be disqualified but may also have to repay any benefits previously allowed.
Finally, you’ll need to pay close attention to all company communications about your plans; some state and local tax incentives may be invalidated by public announcements about the company’s decision to add new jobs or locations.
State tax benefits could help offset the costs of hiring new employees, purchasing new equipment, and acquiring the up-to-date technology you need to be competitive in your market. But time is of the essence. If your business is planning to make new hires or capital investments, it’s important to investigate the state and local tax incentive options early.
As soon as a company decides what headcount or equipment will be added, it should evaluate its state and local tax incentives options. Many tax incentives have a short application window for benefits, and the negotiations between companies and the state over incentives can take several months.
Once the negotiations are completed, the business will receive a “package” of benefits, which may need to be finalized before new employees are hired or new equipment purchased.
Should you have questions on this topic, as in situations where multiple jurisdictions could be considered, don’t hesitate to contact Chris Baltimore, national director of CBIZ State Incentives & Training Grants practice. You can reach him directly at firstname.lastname@example.org or 816.945.5273.