Sometimes, state, federal, and local tax incentives are the perfect finishing touch in motivating a company to start up a business or to choose to relocate to another area.
Image source: Flickr CC user Horia Varian
Some people believe that only nonprofit businesses can get tax breaks and that for-profit businesses are on their when they decide to relocate; in California, that’s no longer the case. In fact, most tax incentives and credits are aimed at attracting for-profit businesses. The assumption here is that attracting “high-value” businesses attracts jobs and future tax revenue.
Last year, California scrapped its marquee tax incentive program, the Enterprise Zones program. This agenda offered a generous tax break for businesses located in more than 40 geographical areas, including Oakland, which were considered economically distressed. However, the program was controversial, and its critics claimed that it was doing little to attract jobs.
No tax incentives, No business, No jobs, No tax revenue
The Enterprise Zones program may be no more, but California’s business tax breaks endure. The Brown Administration has initiated a grab bag of potential goodies for incoming businesses. While some fiscal conservatives may oppose tax breaks for corporations, such incentives are important for a couple of reasons. First, a business often needs to show that it has secured federal, state, and county-level tax incentives to make their venture attractive to potential lenders and investors. Without a deferment of property or income taxes over a number of years, a business simply can’t get a construction loan or the necessary funding out in the markets. Even with those breaks, it is sometimes a great challenge to raise the money to embark on a project.
The other major reason that governments offer tax incentives to for-profit businesses is that if they don’t, companies often will go where they are available — in other words, to another state or county. So, wherever new businesses go, coveted jobs and future tax revenue follow.
Inside California’s New Tax Incentive Program
Although it was tough to lose a major program at the beginning of 2014, Gov. Jerry Brown’s answer to the Enterprise Zones program is still attractive. The marquee program is now called “California Competes.” The new program is more flexible, allowing all businesses in every part of the state to apply for tens of thousands of dollars in tax savings. California Competes was originally conceived as a tool to both bring in new companies and to retain companies threatening to leave the state.
With a cap at $200 million over the next couple of years, the program places the bar fairly high for interested companies. Businesses must undergo a thorough, two-pronged application process and are competition with other businesses within the state is stiff. However, one of the nice features of the program is that a quarter of the money allocated has been set aside for small businesses.
In the most recent round of approvals this January, the state granted $31 million in tax breaks to 56 companies. These companies ran the spectrum, although the largest beneficiaries tended to be those involved in high-tech manufacturing. For example, according to a state report, Niagra Bottling received a $2.7 million tax break on a $194 million investment that created 409 full-time jobs. In San Francisco, the cloud-based data company, Neustar, received a break of $1.5 million for creating 264 jobs. Breaks were sometimes offered to companies that made little or no investment, but that promised jobs.
But this is just one of many perks available to California businesses. Recently, the federal government offered generous incentives for business owners to build and design energy-efficient buildings. Last year, for example, one program offered a tax deduction up to $1.80 per square foot to companies that were able to reduce their energy use by 50 percent. However, these federal programs are often a moving target. Congress sometimes waits until the end of a fiscal year and extends breaks retroactively for the tax year. Several of the energy-efficiency incentives expired last year, so it is unclear which ones will be available.
Federal and Local Tax Breaks and Grants Offer More Options
Aside from federal and state tax credits, many counties (and most major cities) offer programs for small businesses, such as revolving loan funds with lower interest, or grants to perform faÃ§ade or interior improvements. The state’s economic development wing, GO-Biz, and many local governments also provide free technical assistance to help a business to get established in an area.
So, governments are prepared to roll out the welcome wagon, but business owners also have to take initiative. It is easy for companies to become overwhelmed at the prospect of researching the available breaks and applying for them. One way to do this is to employ a trickle-down method, starting with the federal programs and working down through the state and local programs. This is also an area where a commercial real estate consultant can help. An experienced consultant will know about the major tax incentive programs, and can help a company complete the application process or hook a business up with free technical assistance while helping with their property search.
If you are seeking tax breaks or other government benefits to help your business clear its first hurdles, you don’t have to go it alone. You can get a thorough analysis of the market with all the available options from a consultant whose community values align with your own. Contact DCG Real Estate today to learn more.