Incentives being offered by governments in order to encourage private sector development and economic activity is nothing new. Just think about the extensive use of land grants in the early development of the United States.
Modern-day incentives have evolved to match the complexity of the private sector activity they are intended to spur and the intense competition between states and communities for the next “big win.” As recent headlines show, all of this activity has brought significant attention to government incentives and generated a new level of scrutiny over their use. As a result, both governments offering incentives and private entities accepting incentives must be prepared to meet the increasing demand for transparency and accountability.
Why it Matters
Recently, the topic of transparency in the use of public incentives has been taken up by both the Government Accounting Standards Board (GASB) and the Financial Accounting Standards Board (FASB).
GASB, the entity that establishes accounting and financial reporting standards for U.S. state and local governments, issued Statement No. 77 in response. The statement requires the growing number of governments offering tax abatement to disclose certain details related to the incentive in their financial statements.
FASB, the entity that establishes financial accounting and reporting standards for public and private companies and not-for-profit organizations, has proposed an Accounting Standards Update referred to under Topic 832. The proposal would require businesses to make certain disclosures related to government assistance received in their annual financial statements. FASB continues to deliberate and has not yet determined the timing of the release of the final update.
It is important for any company pursuing government incentives to understand the details of these new standards, as well as the trend they are associated with. Increased transparency and accountability are likely to be a growing part of the government incentives discussion moving forward.
Tips for Utilizing Government Incentives
Keep it in Perspective
During the site selection process, companies must utilize a comprehensive approach. Incentives should be part of the location search, but they should not be the driving force. Incentives cannot typically transform a bad location into a good one. They can, however, be the deciding factor between two good location options.
Understand the Net Value
Many companies who feel they have secured a high-value incentive proposal are disappointed by the benefits actually realized. For example, they may have state tax credits that are worthless to the business as they do not have a state income tax liability. Or perhaps they secure a training grant, but the cost of compliance nearly matches the benefit received.
Keep Track of Compliance
Too often, companies miss out on incentives earned due to their failure to meet reporting requirements. Understanding the compliance requirements associated with each incentive program and then following through with data tracking and reporting deadlines is essential.
If it is Too Good to be True…
You know the rest. Some governments offer increased incentives for investment in areas with certain challenges. This can be great news for your company if the challenges are acceptable, but you must clearly understand what those challenges are.
Structured correctly, government incentives have the ability to provide tremendous value for the business and produce a substantial economic impact for the community. However, it is not a typical transaction and the rules are evolving. Developing an incentives plan as part of a comprehensive site selection strategy is necessary to secure the best outcome for your business.
For more information about forming a site selection strategy, including available incentives, contact your MarksNelson professional.