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

Large organizations that operate in multiple states and cities can have a thick portfolio of incentive programs. Keeping them on track depends on cross-functional communication and collaboration.

The nature of tax credits and incentives programs varies. So do organizational approaches to managing them. As a result, these programs may be overseen by anyone from tax to facilities to talent. Combine this decentralization with the individualized nature of state and local programs—with their differing timelines, percentage-of-completion clauses, and clawback provisions—and you have a potentially challenging management situation.

One of the first steps to making sure your overall incentives program remains good for your bottom line is to identify parts that might not be breaking even. It is critical to set up a cross-functional team tasked with centralizing management of all your programs. This dedicated task force can help you more efficiently flag COVID-19-affected employer tax credits and incentives programs featuring milestones you may struggle to meet. For one program, it could be that a hiring freeze didn’t allow you to add the number of new employees required under the terms of the incentive. For another, revenue shortfalls and stay-at-home mandates might have made efficiency improvements at your facility untenable.

Prioritizing problem areas requires an understanding of their potential business impact. By centralizing oversight of your incentives program, you can effectively calculate what not meeting them might mean. Have you already received dollars that will be clawed back, or is it solely future benefits that are at stake? How have those benefits been accounted for in future budgets, and what would not receiving them mean? Being able to answer questions like these lays the groundwork for the actions you may take next.

After you identify your COVID-19-affected employer tax credits and incentives, you can try to address them through renegotiation. Prepare your case by examining the factors beyond your control that explain your inability to meet the required milestones. If you’re a retailer, your state’s or city’s indoor shopping limits might have made the growth necessary for meeting the terms of the incentive agreement unrealistic. Or maybe you're a manufacturer, and a key part of your supply chain suffered as a result of a particularly bad COVID-19 outbreak that significantly reduced revenue.

Once your case is prepared, make it. Identify and get in touch with the key individuals at the state or local authority where your problem programs reside. As you seek changes to the program's terms, keep in mind that the original arrangement was likely mutually beneficial. You may have been getting incentives, while the local community was getting its citizens new job opportunities or improved infrastructure. The investments made in local communities often provide more value to the community than having the community claw back, or not pay, the incentive dollars. It will most likely be in the community's best interest to renegotiate the program's terms.

It may be in the authority's interest to continue the program, even if it now has a longer timeline (like extending a three-year window to five years) or revised expectations (like dropping the required number of new hires by 20%).

Timing is critical to fruitful renegotiation. Have the foresight to initiate these conversations well before key milestone dates in your program. Doing so can provide the time needed to work out key details comfortably.

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.

After renegotiating problematic programs, it’s important to document key takeaways that could support more efficient incentives processes down the road. Here are some actions you can take to future-proof your credits and incentives organization:

• Keep a cross-functional team to identify problem programs in place. It will be critical to centralizing tax credits and incentives from various departments and monitoring potentially hard-to-meet milestones going forward.

• Track potential negative business impacts of not meeting milestones. Those impacts should be accounted for in future budgets and capital plans to avoid being pushed into panic mode by clawbacks or unconveyed dollars.

• Discuss with counsel the potential to incorporate language addressing unforeseen events (like the COVID-19 pandemic) into program language in the future, perhaps including language that would trigger renegotiation or timeline extension in the event of a massive, economy-disrupting event. Your new cross-functional tax credits and incentives team can keep track of best practices and standardize them across your organization.