Looking in the Rear-View Mirror: Retroactive Credits

John Skowronski

January 11, 2021 – The first article in this series, “The 360 Degrees of Economic Development Incentives,” addressed the three perspectives to Economic Development Incentives (retroactive, current and prospective). In this article, let’s dive deeper into the retroactive credits.

Even after spending decades in the tax credit space, I am still surprised at how many companies leave money on the table by not taking advantage of the savings opportunities that are right there on the tax return. Some are complicated, some are simple, and some of them appear simple but are actually more complex than they might seem.

Some credits are very complicated but very lucrative:

For example, a credit like the Georgia Jobs Tax Credit is relatively complicated, with many different nuances and steps involved to ensure the maximum benefit is claimed and then monetized. With annual headcounts shifting, and with growth occurring in multiple locations at varying wage rates, knowing how to cobble together “buckets” of employees to ensure the most savings requires complicated models and extensive analyses. The good news for companies is that there is no negotiation or precertification required, and although refunds can only be claimed retroactively for one year, the benefits associated with job growth from even earlier years can still be taken. With so many variables at work, reviewing the calculation and modeling different scenarios can pay off with big savings, even if a company has claimed this credit in the past.

Some credits may look simple and/or immaterial but could have hidden opportunities:

A credit like the Idaho Investment Tax Credit — at 3% of new investment — is one that looks very simple on the surface. At 3%, it is relatively generous, and most personal property qualifies. Some people dismiss the credit thinking that their operations in Idaho are small or perhaps do not even exist, but that is no reason to ignore the credit. It is not hard for companies to have an income tax filing obligation with Idaho. Considering a three-factor formula with double-weighted sales, some companies have decent liability even without much in the way of operations in Idaho due to the double weighting of sales. What companies often miss is that their over-the-road vehicle purchases (over 8,000 pounds) can qualify for a credit in Idaho even if they are purchased and primarily located somewhere else. Since Idaho allows for an apportioned credit, nationwide vehicle purchases multiplied by the apportioned miles of the entire fleet, times three percent, can yield a credit that is very much worth calculating. Given Idaho’s unitary filing methodology, even a captive transport company can help, and getting the mileage apportionment from its return makes the calculation even easier. With a three-year statute of limitations, companies doing business in Idaho should definitely explore claiming this credit.

Some credits are extremely obscure so just knowing about them is critical:

One of the most obscure incentives that I have ever come across is in Tennessee and transcends my two favorite tax-related disciplines of both tax credits and property tax. To receive a property tax abatement in Tennessee, companies must enter a sale-lease-back agreement with a governmental agency, and then the agency’s exemption is conveyed to the property. The municipality takes a payment in lieu of tax (PILOT) which is generally considered to be “rent” under the terms of most agreements. This is where it gets interesting.

Since Tennessee “cannot have its cake and eat it too,” the property is not owned property to the taxpayer and should rightfully be treated as rented property. This does not impact apportionment much, if at all, but it can have a huge impact on the franchise tax when the taxpayer is paying on their net book value (NBV) of assets. If the assets covered by the PILOT rightfully belong at the bottom of the schedule with other rented assets, then their value needs to be reflected by “grossing up” rent, and there lies the million-dollar (or in some cases, multi-million dollar) question: “What is rent?” As mentioned, the PILOT payment is likely rent. Sometimes there is a base rent in the agreement, but that is usually only $100 or so. If there are bonds or notes involved, then any debt service could be considered rent. Nevertheless, when removing the NBV of brand-new assets from the calculation and replacing them with grossed-up rent, there is invariably a significant savings to be had. In all my years of reviewing companies for this opportunity, most taxpayers simply report the NBV and, in turn, dramatically overstate their franchise tax base. Tennessee will allow a correction during the open statute of limitations but, depending upon the age of the PILOT agreements, making the correction might not be advantageous in the long-run, due to the net book value (NBV) eventually going below the grossed-up rent amount. The election exists at Tenn. Ann. Code 67-4-2108(b) and needs to be made on a currently filed tax return or corrected on a tax return that is still open under the statute of limitation, so timing is critical and the savings can be big.. For companies that treat their franchise tax as a P&L item, it is even bigger. I could write an entire post on Tennessee and its many hidden areas of opportunity, but I will save that for another post.

It pays to look back, every three years.

The bottom line is – it pays to look back. In most cases, there is no cost to do a review, and whatever savings is produced is essentially found money. In many cases, the same opportunities that were missed can keep providing savings going forward, so the cost-benefit of doing a review can be many times the investment. Every company should consider a retroactive review at least every three years.

John Skowronski is TCC’s Vice President of Incentives. For over 30 years, he has worked in State and Local Tax and almost exclusively in Tax Credits and Incentives during that time. He is a frequent speaker and author and has taught many in this specialized area.

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