Managing incentive compliance.

• Author: Baetsen, Dawn

A recent North Carolina Department of Commerce press report states that over 80% of qualifying credits were not realized by taxpayers. North Carolina is not an exception--many states report similar percentages for unclaimed incentives and tax credits. Almost all states offer lucrative incentives to entice capital investment and to create jobs. Despite this, state authorities cannot guarantee that taxpayers will realize incentives to the fullest extent committed. Incentive legislation usually requires strict accountability from both business and the government, which can be difficult to attain. Further, administering government agencies audit the eligibility of awarded incentives and may deny benefits on minor technicalities.

Businesses usually have every intention of optimizing incentives and adhering to the rules for obtaining incentive benefits. However, even though a business may qualify for a tax credit, it may find that its tax liability is insufficient to use a credit fully, for example. Or, after receiving an incentive, it may discover that it did not follow the formal process for realizing the benefit. Once incentives are awarded, many companies lack the resources to establish and sustain a system to manage compliance requirements during the incentive's life cycle. An effective, sustainable compliance program can make a significant difference in the value of the benefits actually realized. A successful program improves the rate of return on incentives and the company's bottom line, whether the program is internal or outsourced.

How Incentive Packages Work

Incentive package awards are based on the capital to be invested, the jobs to be created or the estimated wage and payroll to be increased. Packages can include anything from tax credits to cash grants or reimbursements. Businesses that seek incentives must be prepared to meet project investment and job creation goals and to complete the project timely. Firms that manage the compliance process throughout the life of the incentives package typically receive the greatest benefits.

Fully realizing an incentive package's benefits can take up to 25 years. Benefits are paid once a company meets the requirements of each individual incentive program. However, besides meeting the basic requirements, the company is responsible for reporting the status of incentive projects and performing the due diligence required to obtain the various incentives awarded. Complying with all Federal, state...