Job Creation Tax Credits
ob creation tax credits are commonly used by states as an economic development incentive to encourage employment opportunities in industry sectors government entities are interested in expanding. Employers receive these funds based on creating and filling job openings.
In return, the state and/or local government expects it will receive income taxes from the employees and local spending that will offset or exceed the cost of the tax credits to the employer.
EXAMPLES OF JOB CREATION TAX CREDITS
New Employment Credits
New employment credits for new jobs are one of the more common forms of job creation tax credits available in most states. New jobs tax credits are often granted against gross adjusted income tax, insurance premiums, corporate taxes, or financial institutions taxes in order to spur job creation. Jobs that are relocated from one site to another site under the same employer or within the same vicinity are usually not eligible, but rather new net jobs corporate wide within a single state or city.
The amount of the credit can be determined by the impact of the jobs on the taxing location. This can include factoring in capital investment associated with the net job increase, the incremental payroll attributed, and the cost to the state.
Need-Based Assistance Credits
Certain job creation tax credits are tied to the employment of persons who are receiving temporary state aid for a dependent child or children. Some programs offer tax credits in the form of a credit to the employer’s income tax liability by a percentage of the wages paid to those employees who are receiving temporary public assistance. Other states’ programs provide a credit to employers who provide child care, job training, transportation to and from work, or even basic medical or dental care to those employees on public assistance. Other types of credits, or even direct reimbursements, can be available to companies who choose to create jobs using dislocated workers, veterans, seniors, and those reentering the workforce after a period of incarceration.
Unemployment tax credits are another need-based credit available in some states. These job creation tax credits are specifically tied to employment of those persons who have been classified as unemployed recently. Typically, a qualifying new hire will have been unemployed for the 60-90 days immediately preceding gainful full-time employment. There is usually a minimal amount of time that the employee must remain working in the position in order for the company to receive the tax benefit.
Small Business Employer Credits
Small employer incentives typically have a lower capital investment and a lower number of net new jobs to be created in order to qualify for the incentive. The incentive could be based on a minimum wage level set by agreement and include an income tax credit for each new employee. The amount of the credit may be tied to the wage level, tied to the total number of employees working for the business or even the length of full-time employment of the new employee.
Additionally, there are states that have job creation tax credits that are based on specific industries like those businesses associated with the aerospace industry or job credits that are tied to large scale developments, jobs tied to only high-wage positions, or even jobs that are tied to specifically to redevelopment projects. The incentives can change regularly and are monitored closely by site selection consultants for availability, qualifications, and compliance requirements.
Compliance of job creation tax credits is specific to the credit and the state issuing the credit. In most cases, an annual report documenting the new jobs created and retained is required in order to receive the credits. These reports will often require either name or job title, an employee identifier, address and city of employee (if dependent on credits specific to employment zones), dates of hire and termination, the actual wages and withholdings, and any other requirements that may be necessary for the processing of the tax credits. Many states require the annual reports within the first 45 to 90 days of the calendar year, but others may be required based upon the company’s tax filing due dates.
In some states, certain types of incentives are of-right, meaning they are available to companies that meet certain thresholds of job creation and complete the necessary forms to file along with their tax documents. However, a majority of tax credits are by way of agreements executed between the company and the state/local government. Included in those agreements are provisions for potential clawbacks, or repayment, if the company fails to meet its agreed upon job creation goals. Clawbacks may require full repayment of any credits received, or may be prorated based on a predetermined percentage that corresponds with the level of job creation attained. Clawbacks are included in agreements as a way to protect the tax payers that contribute to the economic development incentives.
It is very important for companies who enter into these tax credit agreements to be familiar with the sections that reference performance and clawback requirements. Rather than being surprised by demands for repayment, it is always best to be proactive in communicating with the state or local government regarding the situation within the company, especially if it is just a temporary setback.
Job creation tax credits can provide significant benefit to new employee acquisition costs during a period of corporate growth. Negotiating a strong incentives package requires an understanding of the strategy for a specific location as well as historical knowledge. Working together with a site selection firm can minimize the risk of repayments by collaborating with the company and the governmental unit to negotiate the best possible outcome for both parties. Additionally, navigating the complexities involved in compliance is critically important. Having an economic development partner can help the company maneuver its way through the various requirements of annual compliance, thus allowing the company to continue to focus its efforts on day to day company operations.
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