A Guide to State Tax Incentives

For many businesses, the majority of their tax planning often revolves around federal tax strategies plus tax incentives and credits in their home state. This narrow focus can cause you to overlook lucrative state tax incentives offered in all the different states where your business operates – not just your home state.

This adds complexity to your tax strategy, but it’s a case where the financial benefits often justify the extra work. This strategy can go even further to reduce your overall tax burden and boost profitability by ensuring your business takes advantage of all the tax opportunities available to it. 

Perhaps because of the complexity, it can be difficult to know where to start. In this article, we’ll share a series of steps your business can follow to more effectively identify and capitalize on the wide range of state tax incentives available to it.

Step 1: Map Out Your Business Operations

If you want to leverage state and local tax incentives, the first step is to develop a comprehensive profile of your business activities across all states where you operate. This includes:

• Your industry and niche
• Investments
• Hiring and job creation
• Research and development (R&D)
• Sales footprint
• Property holdings
• Other expansion initiatives

Specifically, you want to know not only which activities you’re engaged in but also which locations are impacted by those activities, as they can open you up to state-specific tax opportunities. 

A common misconception is that businesses can only take advantage of tax opportunities in their home state—e.g., where the headquarters are located. But that’s not the case. By operating under this mistaken assumption, companies with multi-state operations may be leaving money on the table by overlooking valuable tax incentives.

Avoid this mistake by working with tax advisors who are familiar not only with your industry, but also the tax laws in each state where your business operates.

Step 2: Align Your Goals with State Tax Incentives

Once you have a clear picture of your business landscape, the next step is to research the specific tax credits and incentives available in the states where you do business. 

These opportunities vary by state, but common tax incentive categories include:

• Job creation and hiring credits
• Investment tax credits for targeted industries
• R&D incentives
• Refundable tax credits
• Employee retraining programs
• Sales and use tax exemptions
• Favorable apportionment approaches

To maximize your tax savings, proactively align your business goals and expansion plans with the states offering the most favorable incentives.

The key is to thoroughly evaluate your short and long-term objectives and then map them against the available incentives in each state. 

For example, if your business is planning significant R&D investments in the coming years, explore which states offer R&D incentives. Many states offer lucrative credits to attract innovation and high-tech industries, so placing your research and development teams in one of those states could be beneficial. 

Similarly, if you’re anticipating a major workforce expansion or planning to open a new location, you might prioritize states with generous hiring and job creation incentives. By aligning your operational strategy with state tax incentive programs, you can maximize the financial benefits while achieving your business goals.

Integrate state tax incentive planning into your overall business strategy from the very beginning. Regularly review your operations, investments, and workforce needs and identify potential credits that might make an impact on these decisions. Of course, the tax credits offered by a state shouldn’t be the only driver of strategy, but they certainly should be an important variable that your leadership team considers in their decision-making process.  

For the greatest impact, involve an expert tax advisor in these conversations. Our familiarity with state tax laws can help guide your growth strategy.

Step 3: Leverage External Resources & Expertise  

While the benefits of state tax incentives are significant, many businesses struggle to capitalize on them.

In fact, many business leaders aren’t aware of tax incentives outside their primary state of operation. If they rely on locally-focused CPAs who lack the specialized knowledge or resources to track incentives across a variety of jurisdictions, they will likely miss out on valuable tax savings.

This is where working with a firm like Smith + Howard proves its value. Our firm serves clients that operate in states across the country and our expert advisors keep their fingers on the pulse of federal and state legislative changes that could impact our clients. 

By bolstering your in-house team with external resources and expertise, you can build sharper strategies and target more lucrative tax opportunities everywhere you do business.

Major Categories of State Tax Incentives

While state tax incentive programs vary, some common categories include:

Job Creation and Hiring Credits: Many states offer generous credits to companies that create new jobs and hire locally. For example, Georgia and South Carolina’s Job Tax Credit provides annual tax credits for new job creation over five years.

Investment Tax Credits: These incentives are designed to attract businesses to invest in specific industries or sectors within a state. Tennessee’s Industrial Machinery Tax Credit, for instance, offers an investment tax credit of 1% to 10% for the purchase, installation, and repair of industrial machinery from a qualified Tennessee manufacturer.  

Research and Development (R&D) Credits: Numerous states provide R&D tax credits for qualified research expenditures to foster innovation and attract high-tech industries. These credits can be a boon for companies investing heavily in product development or technological advancements.

Retraining Credits: As workforce needs evolve, some states incentivize companies to invest in retraining and upskilling their employees through dedicated tax credit programs. For example, Georgia offers a retraining tax credit that can offset up to 50% of a company’s Georgia income tax liability.

Sales and Use Tax Exemptions: Certain states exempt businesses from paying sales or use taxes on specific purchases or transactions, such as manufacturing equipment or materials used in production processes. Arkansas, Kentucky, and North Dakota are among the states offering these exemptions to reduce operational costs.

Favorable Apportionment Approaches: Apportionment formulas vary by state, which creates an opportunity to take sales, payroll, and property by state into account to develop favorable apportionment approaches that align with operational and strategic goals to generate tax savings.

In some instances, state tax incentives can be combined to create even greater savings. Consider the example of the Georgia Port Tax Credit, which qualifying businesses can use in conjunction with the Georgia Job Tax Credit or Investment Tax Credit to realize significant tax savings. 

Maximize Your Tax Opportunities with Smith + Howard

State tax incentives can provide a significant opportunity to help your business grow—and overlooking them can put you at a disadvantage. By taking a proactive, strategic approach to tax planning that accounts for state-level incentives, you can potentially reduce your tax burden, boost profitability, and gain a competitive edge.  And an expert tax advisor from Smith + Howard can help you identify the best opportunities and build a strategy to achieve them.
To learn more about how state tax incentives can benefit your business, contact Smith + Howard today to schedule a consultation.