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The impact of COVID-19 on employer tax credits and incentives

Addressing challenges of today while adapting for tomorrow

COVID-19 hit employer tax credit programs hard. After more than a year of stay-at-home orders and economic turmoil, hiring and growth milestones in many state and local programs are all but impossible to meet. Addressing COVID-affected programs now is critical, but it’s not enough. A simultaneous shift in approach can improve how tax credits and incentives are handled in the future.

All of a sudden, everything changed

From bankable revenue to benefits in doubt.

The economic impacts and stay-at-home orders of COVID-19 put employer tax credits and incentives programs for many organizations in jeopardy. Ongoing requirements previously agreed to as part of federal, state, or local programs about a certain number of new hires or a sustainable construction project were suddenly unachievable. The financial perks organizations would get in exchange for their investment in the respective jurisdiction were suddenly inaccessible.

Their tax teams didn’t see it coming. Or was it their real estate teams? Talent, maybe?

Yes, just determining who in the organization has responsibility for credits and incentives was one of the first challenges faced by many organizations in response to the impact of COVID-19. In many cases, oversight was distributed based on the nature of the programs, which were siloed and managed in different ways. Once the question of oversight is untangled, there’s that whole matter of “What do we do now?” and then “Let’s make sure this never happens again.”

COVID-19 and employer tax credits: Where to go from here

These challenges are particularly applicable to state and local programs. While federal programs are typically available to organizations that achieve certain statutory requirements, state and local incentives are often individually negotiated programs. In many, benefits are received when the company meets the milestones. In others, benefits are offered on the front end in anticipation of the company meeting the requirements. Force majeure or other similar clauses may have been included in the agreement between the company and the jurisdiction; however, the company’s legal counsel should be consulted to vet whether the pandemic is considered among the “act of God” events covered by such terms.

Organizations need to understand the impact of not meeting agreed-upon milestones in their state and local programs, then act proactively today and in the future to avoid being penalized for unforeseen crises such as COVID-19.

It can be a lot to manage. And there’s a lot at stake. So let’s take it step by step.

So what’s the state of federal tax credits and incentives?

Unlike many state and local programs, federal tax credits and incentives are generally statutory by nature and widely available to businesses who meet certain criteria when tax time rolls around.

The federal government has enacted initiatives to address the pandemic’s impact, such as the Employee Retention Credit under the CARES Act. The Employee Retention Credit is a fully refundable tax credit for eligible employers equal to 50% of qualified wages in 2020 and 70% of qualified wages in 2021 that eligible employers pay their employees after March 12, 2020, and before December 31, 2021. Each employee could have $10,000 in qualified wages in 2020 and $10,000 per quarter in qualified wages in 2021. That means employers could potentially obtain $5,000 per employee in credits in 2020 and $28,000 per employee in credits in 2021.

As the economy recovers and more companies hire new employees, the long-standing federal Work Opportunity Tax Credit (WOTC) program is another initiative companies can pursue. WOTC can help companies benefit from income tax credits based on the hiring of veterans, individuals who have been unemployed for a specific amount of time, and individuals who have received qualifying public assistance that meets specific criteria.

Unexpected shouldn’t mean unprepared

COVID-19 derailed many organizations’ state and local tax credits and incentives programs. But keeping them on track shouldn’t end with the end of the pandemic. Unforeseen events will likely continue to surprise companies. Even relatively small events may put at risk vital benefits that organizations considered part of current or future revenue.

Renegotiating problematic incentive programs today is akin to patching a leak. It needs to be done, and it might hold for a while, but it’s no guarantee the same problem won’t turn up in the future.

Coming through the pandemic with a centralized and efficient tax credits and incentives program can put your organization on strong footing. By identifying your COVID-19-affected agreements, renegotiating them when possible, and improving oversight going forward, your incentives program can better handle whatever the future brings.

Keeping those benefits bankable is a process. Are you ready to take the first step?

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