“Bill”, tax manager at “XYZ, Inc.”, was facing quite a problem. His company had just purchased a business which had a Nebraska Advantage project. The owners of his company were planning on receiving Nebraska Advantage incentives for that project. Those incentives were factored into the price his company had paid. But, because his company had moved a number of employees between the project site and the company’s other locations, the Nebraska Department of Revenue was claiming that the project no longer met the new employment threshold. In addition, during an audit, the Department determined that the prior company’s contract with its building contractor did not contain certain language that was required to receive Nebraska Advantage incentives for the investment at that building. The Department was also claiming many of the incentives which had already been earned at the project could not be received because the Department was not properly notified of the project transfer.
The worst part of explaining all of these issues to his CEO was that they could have been avoided. ¹
The Goal Of The Nebraska Advantage Program
Individuals and companies all face the same fundamental question at one time or another: where do we want to live and do business? This is not a question that is easily answered. Business leaders and site selection consultants will tell you that there is tremendous competition among states to attract and retain businesses. One of the key factors that businesses have in locating their operations is the cost that they will incur to operate in a given state.
As Nebraskans, we want to see our communities grow and prosper. So, we want Nebraska to be the answer to the fundamental question of where to live and do business. We want Nebraska to have good jobs for our families, our children and our loved ones: today and into the future.
The Nebraska Advantage Act, and its predecessor the Employment and Investment Growth Act (commonly known as LB 775), were designed and written to provide strength and stability for families and growth for companies and communities. The Nebraska Advantage Act meets these goals by incenting companies to locate and expand in Nebraska, which creates important jobs for Nebraska’s residents. The Nebraska Advantage Act effectively reduces the cost of a business to operate in Nebraska and thus makes Nebraska more attractive.
Nebraska Advantage Filing Process
The process for receiving Nebraska Advantage Act incentives begins with the filing of a Nebraska Advantage Application. The application effectively becomes part of the legal contract which governs the project. So, there are legal, business and tax implications which must be reviewed and understood before an application is filed. Filing a Nebraska Application is much more than just filling in the application form.
Nebraska Advantage Planning Actions
The Nebraska Advantage Act contains significant incentives that can change a company’s project location decision. But, like many other programs, Nebraska Advantage benefits can be less than optimal, or can be lost altogether, if the Nebraska Advantage project is not properly planned for. We have highlighted below a number of planning opportunities and pitfalls that can arise with Nebraska Advantage projects – to help you and your clients identify, plan for and hopefully avoid any problems.
- Qualified Business
One of the basic principles of the Nebraska Advantage Act, which is true of most incentive programs, is that incentives should only be granted to companies that can readily locate their operations elsewhere. These are the business projects for which there is competition among states. To put this principle into practice, the Nebraska Advantage Act requires that projects must be for one or more “qualified business” activities.
For some applications, it is not clear that the company is engaged in a qualified business activity. Alternatively, the Department may only agree that some of the company’s activities or locations qualify.
- Selection Of The Best Tier
The Nebraska Advantage Act has different levels of benefits available to companies, based upon the amounts of new investment and jobs that those companies will commit to. As expected, more benefits are available for higher commitments of investment and jobs.
Many companies are unsure, when they begin an expansion, of the exact amount of new employment and investment that they will generate. So, there is a question regarding the Nebraska Advantage tier that they should apply for.
In many cases, a company can amend its application down to a lower tier of benefits. For example, a company that initially commits to invest $12 million and create 100 new full-time equivalent jobs (Tier 4 under the Nebraska Advantage Act) can amend its application down to a $3 million and 30 job threshold (Tier 2). This amendment can be done even after the expansion has been completed. In those cases, a company should generally apply under the highest tier that the company could reasonably reach, particularly because an application cannot be amended up to a higher level of benefits.
But, certain projects cannot be amended down. For example, no projects can be amended to Tier 1 – the lowest employment and investment thresholds. There are also restrictions governing the amendment of Tier 6 projects.
So, before an application is filed, a company should be aware of its opportunities for project amendment and make an informed decision regarding the best tier for its specific project.
- Project Timing
New property is eligible only if it is acquired after the application date and before the end of the entitlement period. The Nebraska Advantage Act has a set time period for a company to reach the minimum employment and investment thresholds for an Advantage project.
In light of these provisions, it is important that project applications are filed at the right time – the time that will allow companies to receive the optimal amount of benefits or that will allow companies to qualify based on their expected employment and investment growth.
- Project Entities
The Nebraska Advantage Act contains certain requirements for eligible entities. While most businesses meet these rules, applicants must still ensure that the requirements are met.
- Project Locations
Many companies wish to grow at more than one location. One key advantage to including multiple locations in one project is that the investment and employment thresholds do not need to be met for each location. There can also be advantages where employees may move between a company’s Nebraska locations.
The scope of the project needs to be determined up front to optimize results. For example, some companies may wish to have a statewide project and include all locations within Nebraska. Other companies may know that they will be reducing employment at a particular location and wish to exclude that location from the project. Every applicant company should have a strategy for including, or not including, locations within its project before an application is filed.
The Nebraska Advantage Act allows projects with multiple locations – as long as the project locations are “interdependent.”
The Department has specified that two locations qualify as interdependent if there is a material flow of information or products between locations. In addition, a corporate headquarters is deemed interdependent with any other location controlled by that headquarters. But, if a project includes a headquarters and two other locations, those two other locations must be shown to be interdependent for both to be included in the same project.
- Eligible Property
Property must meet certain project use tests and be located at a project location to qualify for Nebraska Advantage incentives. This can be a significant issue for property which, by its nature, is utilized at multiple locations (either by the company or its customers).
- Software As Eligible Asset
To constitute qualified property for Nebraska incentive purposes, the company must have specific terms in its agreement with the software provider and the company must have received a nonexclusive license for use of the software. The software must be “used” at the project, which can be an issue for companies that have software which is also utilized at non-project locations.
- Construction Contract Terms
When real estate construction is part of a project (and it is often very significant), certain contract requirements need to be met to earn the full amount of Nebraska Advantage incentives. These requirements apply to: a) the purchasing agent appointment; b) the general contractor certification; and c) language in the construction contract relating to tax obligations. These requirements apply for build-to-suit leases as well.
Specific, detailed documentation also needs to be kept in order to obtain the available sales tax incentives on real property construction.
- Project Transfer
Both a sale of project assets and the entity which owns a project can have an impact on eligibility to continue earning and receiving project incentives. Properly planned notification of the Department is critical to allow both the buyer and seller to receive the incentives they planned for. Therefore, when a project itself, or the entity which owns the project, will be transferred, the Nebraska Advantage issues must be considered and properly handled.
- Employees That Travel Or Deliver
Under the Nebraska Advantage Act, new employees must be employed “at the project” to make them eligible for employment incentives and to meet the new employment thresholds. The Department has been administratively contending that this rule means that employees must physically perform their duties at a project site. The Department has stated, within a revenue ruling, that it will treat employees who spend 80% or more of their working hours at a project site as being 100% employed “at the project.” For other employees, who spend more than 20% of their working hours away from a physical project location, the Department often attempts to exclude a part of their working hours in the calculation of new full-time equivalent employees at the project.
Awareness of these positions can help a business achieve the right Nebraska Advantage incentives and employment count.
- Transferring Employees
The Nebraska Advantage Act is intended to incent new investment and jobs. So, when existing employees are transferred to a project site, those employees generally do not count toward adding new employment. Administratively, this occurs by the Department adding those existing employees to the number of employees at the project during its “base year.”
This practice can have significant and negative effects on a project’s employment count, particularly when employees regularly move between project and non-project locations or when employees only spend part of their time at a project location. In these situations, a company’s awareness and planning for employee transfers can have a significant impact on qualification for incentives and the amount of incentives that company will receive.
This article is a brief summary of some of the planning areas. Working with a company’s team and outside advisors to design a project, we use a specific 45 point planning checklist to identify and address each of the areas that need attention before and during a Nebraska Advantage project.
To discuss the above topics, please contact any member of the McGrath North Tax and Estate Planning Group.
To visit with either of us, we can be reached at the direct numbers below.
Nick Niemann – 402.633.1489
Matt Ottemann – 402.633.9571
1 This is for illustrative purposes only. It is based on a compilation of actual situations and not identifiable to any particular client.
Protocol For State Tax And Incentive Matters
The accompanying article details a number of project planning considerations. These must be viewed in the context of how the company’s business actually works. In every state tax or incentive matter, all business and tax advisors want to have the best possible understanding of the actual business of the company. This helps in planning for expansion projects as well as defending the company if a matter of interpretation arises.
I have found that the internationally acclaimed Business Model Canvas is the best diagnostic system to use for doing this. Since its creation in 2004 by Dr. Alexander Osterwalder, I have been using this to create a clear visual understanding of the nine building blocks of a company’s Business Model and then applying this to plan and resolve state tax and incentive matters.
I have taught this system to business leaders and tax advisors from throughout the U.S. If you would like to know more about this for state tax and incentive matters, please give me a call.
Principal Features Of The Nebraska Advantage Act
• Performance based incentive program
• 6 tiers, each with distinct employment and investment thresholds to qualify:
Tier 1: $1 million investment and 10 new FTE jobs
Tier 2: $3 million investment and 30 new FTE jobs
Tier 2 Large Data Center: $203 million investment and 30 new FTE jobs
Tier 3: 30 new FTE jobs
Tier 4: $12 million investment and 100 new FTE jobs
Tier 5: $36 million investment
Tier 5 Renewable Energy: $20 million investment
Tier 6: $10 million investment and 75 new, high-wage FTE jobs or $106 million investment and 50 new, high-wage FTE jobs
• Each tier has a specific blend of Nebraska income, sales and/or property tax benefits.
• A Nebraska Advantage Application must be filed before receiving any incentives.
• The applicant company and the State will sign a project contract, which defines the project and incentives and commits the State to providing incentives for the defined project.
• A company will need to annually report its employment and investment at the project, as well as the incentive benefits it plans to earn and use.
• Before a company can use its incentives, it must complete a qualification audit to verify that it has met the minimum investment and employment thresholds.
• An applicant company must ensure it maintains the records needed to complete the qualification audit.