The 3 Most Important Economic Incentive Factors: Headcount, Wages, and Capital Investment
by Kelley Rendziperis, on Sep 21, 2022 9:43:10 AM
As we approach the fourth quarter of 2022, it is important for companies to be prepared for annual economic incentive reporting. In this blog, Site Selection Group will focus on three primary components related to economic incentive considerations: headcount, wages, and capital investment.
Job creation or retention is a requirement for nearly all economic incentive programs. Whether it is the basis of cash grants, job tax credits, investment tax credits or property and sales tax benefits, job creation is typically required for companies to garner incentives. In some instances, this may simply be five to 10 jobs for qualification purposes, and in others it may be 50, 75 or more. State and local economic incentive programs vary on the type and kind of permissible headcount. Thus, it is important to understand which employees qualify for incentives for reporting purposes. A few examples of eligible employees from well-established programs throughout the U.S. include:
Economic incentive programs define full-time employees in many ways. As a rule, most of them will require that an employee be a resident of the respective state, be a permanent employee of the company and not a temporary or contractor worker, work a certain number of hours per week, and pay a minimum wage. The hour requirement can vary from 30 hours per week, 36 hours per week, or be stated as 2,080 hours per year. It is important to understand how holidays and sick pay factor into these definitions for hourly employees. While most programs do not allow contract workers, they can sometimes be included but will still exclude independent contractors, seasonal or temporary employees.
The use of “FTE” can be quite confusing. Some people use this term loosely as “full-time employee” while others mean it as “full-time equivalent.” Obviously, this is a big difference. Some definitions of full-time equivalents are: (i) one or more employees, whether individual or combined with other employees, whose assigned work location is at project location within the company’s human resource system(s) of record(s), is paid a total of 2,080 hours annually and issued an IRS W-2 form by the company; (ii) the quotient obtained by dividing the total number of hours for which employees were compensated for employment in the project by 2,080; (iii) at least 80% of new jobs will be filled by employees working 30 or more hours per week
Length of service
Perhaps one of the trickier requirements for some incentive programs is that a position be in existence for a certain amount of time and/or refilled within a certain time frame. Some tax credits are measured on a monthly headcount average, some at a specific date like December 31 and others once a position has been in existence for 12 months or a certain number of weeks. These added requirements are difficult to track in compliance process.
Part of the definition of an eligible employee may include that the individual spends most of their time at the project location, i.e., more than 50%. This requirement can affect employees who travel such as truck drivers, field operators and sales personnel.
Typically, if health benefits are required, the company is committed to paying at least 50% of an employee’s premium, some states require a higher amount. In addition, some programs may have further requirements such as specific benefits for substance abuse treatment, mental health care, vision/dental coverage.
Over the past couple years, we have seen definitions expanded to include remote employees. A few examples include (i) any remote employees that are residents of the state, (ii) specifically identifying certain jurisdictions within a metropolitan statistical area of which employees are residents, and (iii) employees who are residents of the state and whose services are supervised from the employer's project location and performed primarily from a residence of the employee located in the state.
Understanding the statutory and/or contractual definition of which employees qualify for benefits is critical to accurately complying. In addition, opportunities may exist to include additional employees depending on how these items are defined, as well as provide opportunities for amendments as necessary.
Wages are another crucial factor in determining incentives. Most tax credit programs tie wage requirements to annual county average wages and then require that employees meet or exceed the county wage by a certain percentage. Eligible wages are usually defined as gross wages as reported on Box 1 of Form W-2 and do not include benefits. However, we have been able to fold benefits into the overall wage threshold when companies decide to pay a health care stipend in lieu of an employee partaking in benefits offered by the company.
There are two primary considerations when thinking about capital investment and its meaning. One consideration is how capital investment is defined for purposes of meeting minimum project commitments. Understanding if capital investments will be measured based on cost, assessed values, taxable values or fair market values makes a big difference. Since a company has little control over assessed, taxable and market values, we recommend tying minimum requirements to total overall capital investment. Even with this measurement defined, it needs to be clearly articulated which costs will be included and should include soft costs, such as engineering fees, legal fees, transportation costs, installation costs, etc.
The second consideration is what kind of investments will benefit from an incentive. For example, property tax abatements typically will exclude land, supplies and inventory. In addition, it is important to clearly define whether benefits are applied to real and/or personal property and how those are bifurcated in a particular jurisdiction. It should be clear whether transferred assets are included in abatements as well and at what amount, i.e., depreciated book value. These are also important factors when determining whether certain assets qualify for investment tax credits.
Defined terms are perhaps the most important aspect of any economic incentive program. Definitions will be included in negotiated economic development agreements and may also be included as part of the legislative granting authority, such as statutes and administrative rules.
In addition to the three components described above, other definitions may include project location, qualified legal entity, eligible training types, length and duration of benefits, period to include jobs and or investment, frequency of incentive requests, etc. As mentioned above, the proper adherence to statutory or contractual definitions may serve to expand benefits. Moreover, all these considerations should be carefully contemplated early in the negotiation process to avoid claw-back provisions or default later.
For additional information or to discuss your economic incentive compliance needs, please contact me at email@example.com.