By Sierra Enlow
Kentucky has a wealth of economic development credits and incentives to attract and support businesses as they add jobs, purchase new property, improve processes or look to expand. Business owners contemplating expansion often fail to take advantage of the many state-offered programs because they misunderstand how they work and how they benefit both the company and the community.
Economic development credits and incentives pay off for companies investing and creating jobs in the commonwealth, which means many growth-oriented businesses have expansion projects that may be incentivized. However, businesses cannot realize these incentives unless they apply.
Having worked on both the public and private side of economic development, I’ve seen a number of misconceptions that consistently cause businesses to slow walk their expansion projects. Knowing the truth will improve business planning and help to create considerable job growth across the entire state.
Misconception 1: Incentives only exist to attract new companies.
While economic development incentives are often designed to bring new businesses into the state, many credits and incentives encourage existing businesses to hire and invest within the commonwealth.
One of our state’s standout programs is Kentucky Business Investment (KBI). KBI is a payroll wage incentive. As companies create new jobs in the state, those with a KBI incentive get to keep a portion of the payroll tax generated by these new employees.
Similarly, the Kentucky Enterprise Initiative Act (KEIA) provides a refund of Kentucky sales and use taxes for construction materials used in supported projects. This benefit is designed to encourage investment in new facilities – even expansion of an existing business.
Incentives in Kentucky have a “but/for” clause, meaning but for these incentives, the project would not be able to move forward. Historically, incentive legislation included this clause to attract competitive new business to the Commonwealth. In today’s economy, many businesses have the option of investing in different locations inside and outside of Kentucky, which makes a lot of projects competitive. This also means if an existing business is considering expanding but has a cost or financing gap that would hold back the investment or job creation, incentives can work to close that gap.
Misconception 2: Incentives take money from existing government services.
Kentucky’s biggest incentives programs, KBI and KEIA, are both performance-based incentives, meaning companies will not receive the benefit until the promised expansion takes place.
Local communities often set wage thresholds for incentives to encourage wage-increasing business expansions that drive up the living wage. As a result, projects that create opportunities for area residents and net increases in revenues for communities are most likely to benefit.
The value of economic development incentive programs lies in their expansion of the economy. Expansion and attraction projects create new revenue for communities in the form property taxes – particularly the portion that goes to schools – insurance premium taxes, occupational taxes and increased local spending. Public incentives represent a very small investment in accelerating net-new financial revenue for a community.
Contrary to the common misconception, businesses that receive these benefits do not take money away from libraries, schools or other existing governmental services. In fact, over time, they generally drive additional tax revenue.
Misconception 3: Incentives are available only to businesses making large-scale change.
This is probably the most common misconception among business owners. In Kentucky, like most states across the country, projects of various sizes may benefit from incentives. For instance, a business is eligible for KBI if it is adding as few as 10 jobs, and an eligible company may apply for KEIA with a minimum investment of $500,000.
When applying for incentives, the size of the project is often less important than ensuring you apply before the project gets started. Kentucky’s incentives application process is designed for the preliminary stage of business growth – the state process includes time to modify and change projected employment and investment numbers.
Additionally, Kentucky offers a unique incentive to support small businesses with less than 50 resident employees. The Kentucky Small Business Tax Credit looks retroactively, up to 24 months, at employee growth and investment. This program has a maximum value of $25,000 per year for every Kentucky small business, including retail, which creates at least one new job.
Misconception 4: Incentives are not worth the time and effort.
Our final misconception is often the most costly. Kentucky’s incentives provide significant value to competitive business expansions and can be secured without much consternation.
Communities offer incentives to provide long-term value to the tax base. An incentive agreement between a community and a business commonly ranges between five and 10 years. It takes planning to ensure businesses receive value from these programs and fulfill their commitments to invest and create jobs.
Considering the value available to business owners, no credit or incentive should be overlooked.
Incorporating economic development incentives into your business planning requires foresight. It helps to understand the long-term vision of your business and how those incentives will benefit you over time, rather than seeing them as a one-time transaction. Pair state incentives with available local and federal incentives, and many businesses will realize significant value.
If you’re working hard to grow your business, train your employees and create opportunities for your community, tapping into credits and incentives is a great way to derive added benefit from the business plans and projects you’re developing.
Sierra Enlow is a consultant for McGuire Sponsel, a national advisory firm assisting CPA firms and businesses on specialty tax solutions and economic development credits and incentives.