Businesses who take advantage of government financial incentives to expand or build new facilities could face new tax liability under important Internal Revenue Service document issued 10 years ago, but just now coming into its own.
However, that should not have much of an impact on the push by Chicago and other U.S. cities and states to land Amazon's HQ2, according to a leading tax expert, attorney and former director of South Carolina's Revenue Department.
"It will not, since the tax liability is identical in each state," said Burnet Rhett Maybank III, a member of Nexsen Pruett in Columbia, S.C.
Burnet Maybank
Last month, Maybank co-authored a report titled "Federal Income Tax Consequences of State Economic Development Incentive After Passage of Tax Cuts and Jobs Act," discussing the IRS' position on the federal tax treatment of certain state and local tax incentives, as spelled out in the IRS' May 2008 Coordinated Issue Paper. The paper pays particular attention to state and local tax incentives, also known as "location incentives."
Maybank's paper suggests these incentives, which include abatements, credits, tax rate reductions and exemptions used by state and municipal governments to attract companies to their geographical areas, also may saddle the unwary with federal income tax liability.
The threat of additional tax liability is a real threat to expanding or relocating businesses, Maybank said.
"It’s definitely real and CPA firms will make large companies report even if the IRS never audits," he said. "It's not hard for the IRS to identify grant recipients."
While that risk does not vary from state to state, as it is "a federal audit issue," Maybank said the liability will take some businesses by surprise.
"The vast majority of businesses - even sophisticated ones - are not aware of the tax liability," he said. "One that is aware may ask for additional grant dollars to pay the liability."
Across the country, cities and states, including Chicago and Illinois, are locked in a race to persuade Amazon to locate its second headquarters, and potentially tens of thousands of well-paying jobs, within their borders.
Governmental tax incentives, land grants and other development assistance are typically key elements of such jurisdictional sales pitches.
Amazon announced in September that almost 240 proposals from across North America had been sent in for its HQ2 project. Chicago is widely seen to be among the finalists with a shot at landing the HQ2 project, but the city faces stiff competition from such locations as Montgomery County, Md.; Newark, N.J.; Philadelphia; and Columbus, Ohio.
The threat of additional tax liability for businesses seeking development assistance probably ought to encourage local governments to find other ways besides refundable tax credits or development grants to sweeten the pot, but they probably won't, Maybank said.
"That would be nice," he said. "But most local governments are not aware of the issue."