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Blake Christian

Huge Tax Breaks for Franchisors and Franchisees

What are they and how can you get them?

October 23, 2008
by Blake Christian, CPA/MBT

Franchisors and franchisees of any size, operating in virtually any state, will generally be surprised to find that they are overlooking significant federal and state tax breaks that can generate annual tax savings in the tens of thousands for small businesses and millions of dollars for larger chains. There are over 8,500 federal and state tax incentive zones throughout the U.S., resulting in more than 20 percent of businesses having one or more stores or facilities falling into a state or federal zone.

Since these tax benefits are generally only available in certain portions of a state, city or county, information about the program specifics is not readily understood by the companies or their financial advisors. Therefore, it is not surprising that over 90 percent of businesses that are eligible for these tax breaks claim little or none of the tax credits.

These tax breaks come in the form of hiring credits, equipment credits, sales tax credits or exemptions, property tax reductions, Tax Holidays, etc. Collectively, these tax incentive programs are referred to as Location Based Incentive Credits (LBIC).

More specifically, there are 42 states with Enterprise Zone (EZ) programs, which offer some or all of the aforementioned tax breaks. In addition, there are thousands of federally designated zones that allow for hiring credits, and other tax incentives.

Businesses that take advantage of these LBIC programs are more competitive, since they typically have lower cost of labor, lower capital equipment costs, lower tax rates, better cash flow and higher
business valuations.

Franchisors can create significant value for their business, as well as their franchisees' businesses by assisting in identifying company-owned and franchised stores and facilities that fall within these LBICs. LBIC programs have their roots in 1980's England, when government leaders designed economic development programs containing tax incentives for operating in economically depressed towns/regions. The common denominator under these LBICs is to "incentivize" employers to locate or expand their operations in business districts that are surrounded by residential areas whose households are living at or near the poverty level. By having the private sector hire these residents, who are often receiving government assistance before receiving job offers, legislators anticipate that the private sector employers will ultimately hire and train these new employees with the long-range goal of keeping them off the government rolls.

U.S. federal and state government agencies picked up on this concept and began designing similar programs throughout the U.S. The most significant benefit available under the majority of each of these LBIC programs involves a hiring credit for hiring local residents or other economically challenged employees. The hiring credits vary by tax program, but the ranges of annual credits per "qualified" employee are summarized below:

  Annual Hiring Credits
State EZ Programs $500 to $13,000
per employee
Federal Empowerment
Zone Programs
$3,000 per employee
Federal Renewal
Community Programs
$1,500 per employee
Federal Rural Renewal County (WOTC) Program $2,400 per employee
Federal Indian Tribal Lands $4,000 per employee

In addition to the aforementioned federal and state income tax savings, there are a variety of existing and possibly enhanced, tax incentives available to business owners.

Property Tax Relief

In addition to potential property tax exemptions or rate reductions for operating in certain jurisdictions or being in a designated industry, 43 states also have some form of "tax increment financing" (TIF) program, which generally allow taxpayers to either obtain subsidized funding for a project in a Redevelopment Area (RDA), or receive a lower tax base in return for revitalizing an economically depressed area. To obtain these benefits, a taxpayer must generally negotiate with the RDA prior to beginning the construction or rehab phase. State and/or federal rehabilitation credits and low-income housing credits may also be available on such projects.

Sales/Use Tax Exemptions

State sales/use tax statutes are sprinkled with exemptions and credits for certain state jurisdictions or targeted/specialized industries.

Certain cities and counties are also open to negotiate sales "Tax Holidays" for new businesses, whereby the city or other jurisdiction will either exempt taxable sales or rebate all or a portion of sales tax collected from
the taxpayer.

Other Benefits

It is fairly common for the federal, state and local agencies to also offer other resources to companies operating in these economically challenged areas. Free business counseling, employee training/screening, low-interest loans or outright grants are often offered in these regions — although some research may be required on the part of the company.

States and cities are also highly competitive in their efforts to attract corporate headquarters to their city or state. Many states and cities will negotiate with and offer a variety of customized incentive packages to businesses that will bring in larger groups of employees, building projects or other economic development to a region. These negotiated incentive packages can involve multiple years and millions of dollars for
larger companies.

Conclusion

Companies that take the extra time to evaluate the available LBIC benefits available for their various facilities will often gain immediate tax savings and significant refunds for prior years under many programs.

The permanent tax savings and cost reductions available under these programs can offer long-term competitive advantages in a challenging marketplace. A thorough review of your current company or client facilities and available program benefits can yield positive results. And if you have no facilities in a state or federal incentive zone, when you are considering a move or expansion, you have 8,500 jurisdictions across the country that can generate tax breaks.

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Blake Christian, CPA, MBT is a Tax Partner in the Long Beach office of HCVT LLP and is Co-Founder of National Tax Credit Group. For For additional information, please refer to www.hcvt.com. To try out the Zone-matching capabilities, visit http://www.ntcgtax.com/offers/aicpa.html. This link is available on a free trial basis for AICPA Corporate Taxation Insider readers.