Note: Running Fridays in FromGregsHead.com, is a continuing series of tips brought to you by Greg Price. These run Saturday mornings during the BusinessMaker’s Radio Show on KPRC 950AM. Audio files can be found on the PKF Texas – Entrepreneur’s Playbook® page of the PKF Texas website.
I run across many business owners who don’t fully realize or understand the impact that state and local tax credits can have on their business.
Incentives are everywhere and have the potential to make an enormous difference in the profitability of a company. For example, almost every state that imposes a sales tax has an exemption from sales tax for machinery and equipment used directly in the manufacturing process. This is an enormous incentive that many businesses do not understand or overlook.
Many states will exempt certain types of property from ad valorem property taxes. In Texas, for example, pollution control equipment qualifies for an exemption from property tax. These incentives are available to businesses without any special action on their part, and carry huge potential; even a small incentive can have a large impact on the business.
A business that qualifies for $10,000 of incentives does not just have an extra $10,000; it has the net profit of $10,000 which, on a business with a 5 percent net profit margin, represents a sale of $200,000. How hard would a business work for a $200,000 sale? If the incentive is larger, the net sale impact is larger.
A company should know when it has the right facts to make a significant investment in understanding its incentive profile. Typically, a company should review potential credits and incentives whenever there is a potential for significant capital investment (a new investment greater than $1 million), or meaningful job creation (the new hiring of 25 or more employees). Companies with significant headcount and training costs also should consider credits and incentives.
Credits and incentives are available to a greater or lesser degree to every company. Executive leadership and tax advisors should evaluate the potential for these incentives for the enterprise. Where necessary, include consultants who focus on credits and incentives. Always be mindful of the potential for incentives when significant capital investment or job creation may occur.