Tax Compliance for State and Local Credits and Incentives

 

State and local tax (SALT) credits and incentives can play an important role in a company’s tax strategy. But before tax leaders apply for any such programs, they need to be sure they understand all relevant compliance requirements and have a reliable, well-developed tax compliance structure in place.

Complying with SALT credits and incentives requirements can be complex and time-consuming. Companies must gather, organize, and report large amounts of information, which may include employment data, details about capital investments, training plans, and more. Data requirements and deadlines vary across locations and by credit and incentive type, so companies applying for programs in multiple jurisdictions face even more reporting complexity.

To stay on top of those requirements, companies often seek the support of knowledgeable third parties to help them capture more tax savings and avoid underutilization of, and noncompliance with, credits and incentives programs.

Here is what companies can expect as they work to build a reliable credits and incentives compliance framework.

Roadblocks to Compliance

Data Tracking and Calculations

As SALT credit and incentive requirements evolve, so must the processes companies rely on to maintain and monitor their reporting data. Proving tax compliance may involve intricate calculations and requires careful data tracking.

Tax professionals also must work with other departments, such as payroll and human resources, to ensure all necessary information is collected and updated regularly. For example, some SALT credits and incentives require companies to determine how many jobs they created in the past year. Calculating that can be difficult because of staffing fluctuations and the extent to which part-time jobs factor into overall job creation numbers when states allow for full-time-equivalent jobs. Companies may also need to report payroll data to prove they comply with program wage requirements. Determining whether a project meets those requirements necessitates tax professionals understand which employment roles are covered and which are excluded and to have detailed knowledge of the credit or incentive the company is pursuing.

Understanding Eligible Activities

Before applying for a SALT credit or incentive, companies need to know what projects are eligible. There are many kinds of tax credits and incentives, including for activities such as producing a particular type of alternative energy equipment, as well as creating jobs and introducing specific kinds of on-the-job training in a given region. Companies often enlist an experienced third party to help them evaluate whether performing the activities necessary for eligibility is worth the investment.

For example, companies hoping to leverage credits and incentives to offset tax liabilities with capital investments will need to determine if those purchases are eligible. Factors such as investment in real or personal property and the area where the investment will be used affect whether the activity is eligible. A third party can help companies plan for capital-intensive projects and make the most of available credits and incentives.

Maintaining Continuity in the Face of Turnover

Turnover in tax and payroll departments can compound compliance challenges by creating gaps in knowledge and skills. That can lead to improper data collection, poor coordination across teams, and missed reporting deadlines. Those challenges can be even more severe if a company lacks thorough compliance processes, adequate technology, or in-house expertise.

The Risks of Noncompliance

Tax teams should know the risks of noncompliance before applying for credits or incentives because failing to meet requirements or properly report on them can be costly.

The most common risk tax teams encounter is underutilization. Tax teams sometimes overlook or underutilize credits because they are unaware of or do not understand the programs, which can lead to missed opportunities to offset tax liabilities.

While underutilization is the most common risk, one of the costliest is triggering a clawback. Late or missed compliance reporting could result in government agencies recapturing some or all of the credit or incentive’s financial benefit to the company. Occasionally, companies might also have to pay noncompliance penalties or fees on top of the clawback.

Companies should also know which credits and incentives mandate audits and should plan to ensure they pass. Much like other aspects of the reporting process, preparing for an audit often requires collecting and organizing data from multiple departments. Failing an audit not only jeopardizes a company’s tax credit and incentive benefits but can also lead to hefty fines or penalties.

If a company repeatedly falls into noncompliance, either by improperly reporting data or failing to meet filing deadlines, it could suffer reputational damage with government authorities. Chronic noncompliance could preclude companies from applying for new credits or incentives, thereby denying them future chances to capture tax savings.

How a Third Party Can Help

Prepare to Claim SALT Credits and Incentives

Third parties can explain the scope of the commitment a company is making before it claims a credit or incentive and help it prepare for the reporting requirements of those long-term agreements. Some companies might be unsure whether a credit or incentive will deliver ample ROI, and third-party advisors can determine what opportunities align with a company’s business and tax plans.

Implement Proper Compliance Processes

Third parties can help improve the efficiency and accuracy of a company’s tax compliance process. With the knowledge and support of those advisors, companies can implement processes that support proper recordkeeping practices, track reporting deadlines, establish in-house ownership of reporting tasks, and facilitate interdepartmental collaboration.

Assist With New Technology

Companies may be able to avoid the costs and logistics of adopting new technology by using a third party’s technology to improve their own compliance processes. Tax teams can provide data to third parties that will use their own systems to run the complex calculations needed to prove compliance.

Leverage Relationships

Third-party advisors often bring years of experience to the table. An experienced advisor can help companies build rapport with regulatory authorities by leveraging their own longstanding relationships with government officials.

Mitigate Turnover Challenges

Employee turnover can leave gaps in understanding SALT credits and incentives. Third parties can bridge those gaps by teaching new team members about compliance requirements. Some companies might be able to outsource their entire compliance processes to third parties, allowing their in-house tax teams to focus on other strategic tasks.

The Importance of SALT Compliance

SALT credits and incentives can provide major benefits to a company’s tax strategy, but they often require complex, long-term agreements and introduce stringent reporting standards. With intricate formulas and varied data requirements, reporting obligations can be difficult for most tax teams to meet, especially when employee turnover is factored in.

To alleviate some of those pressures and make the most of their tax savings, companies often choose to work with third parties. Armed with extensive experience and innovative technology, the right third party can help tax teams access more credits and incentives and increase the accuracy and efficiency of their reporting processes.

Written by Tim Schram. Copyright © 2024 BDO USA, P.C. All rights reserved. www.bdo.com