How Tax Incentives Work for Industrial Companies Investing in the US

Tax Incentives for Companies Investing in the US

Tax incentives are policy tools that governments use to encourage or discourage certain economic activities. In the US, tax incentives for industrial companies can take various forms, such as credits, deductions, rebates, exemptions, or preferential rates. These incentives can be offered at the federal, state, or local level, depending on the jurisdiction and the type of tax involved.

The main goal of tax incentives for industrial companies is to attract new investments, create jobs, foster innovation, and enhance competitiveness in specific sectors or regions. However, tax incentives also have costs and trade-offs, such as reducing tax revenues, distorting resource allocation, creating administrative complexity, and potentially favoring some businesses over others.

In this blog post, we will provide an overview of how tax incentives for industrial companies work at different levels of government in the US, as well as the main types of incentives and the most successful states and cities attracting new investments through these incentives.

Federal Tax Incentives

At the federal level, the US tax code provides several tax incentives for industrial companies, especially in the manufacturing and renewable energy sectors. Some of the most common federal tax incentives are:

- Foreign tax credit: This credit allows US corporations to reduce their income tax liability by the amount of foreign income taxes paid or accrued on their foreign-source income. This credit aims to prevent double taxation and encourage international trade and investment.

- General business credit: This credit is a combination of various credits that provide special incentives for certain economic objectives, such as research and development, low-income housing, renewable electricity production, orphan drugs, etc. These credits are subject to a limitation based on the taxpayer's income tax liability and can be carried back or forward to other tax years.

- Bonus depreciation: This provision allows businesses to deduct a larger percentage of the cost of certain qualified property in the year it is placed in service, rather than depreciating it over several years. This provision aims to stimulate capital investment and economic growth.

- Section 199A deduction: This deduction allows certain pass-through entities (such as partnerships, S corporations, sole proprietorships, etc.) to deduct up to 20% of their qualified business income from certain trades or businesses, including manufacturing. This deduction aims to reduce the tax burden on small businesses and promote entrepreneurship.

State and Local Tax Incentives

At the state and local level, tax incentives for industrial companies vary widely by jurisdiction and type of tax. Some of the most common state and local tax incentives are:

- Property tax abatements: These are reductions or exemptions of property taxes for a certain period of time or based on certain criteria. Property taxes are levied by local governments on the value of real estate and personal property used for business purposes. Property tax abatements aim to lower the cost of doing business and attract new investments in specific areas or industries.

- Sales tax exemptions: These are exemptions of sales taxes on certain purchases of goods or services used for business purposes. Sales taxes are levied by state and local governments on the retail sale of tangible personal property and some services. Sales tax exemptions aim to reduce the cost of inputs and encourage production and consumption of certain goods or services.

- Income tax credits: These are reductions of income taxes based on certain criteria or activities. Income taxes are levied by state governments (and some local governments) on the income earned by individuals and corporations within their jurisdiction. Income tax credits aim to reward or incentivize certain behaviors or outcomes, such as job creation, investment, innovation, etc.

- Withholding tax rebates: These are refunds of withholding taxes paid by employers on behalf of their employees. Withholding taxes are deducted from employees' wages and remitted to state governments (and some local governments) as a prepayment of income taxes. Withholding tax rebates aim to increase the net income of workers and stimulate labor demand.

How can my Company get a tax Rebate?

Tax incentives for industrial companies can be classified into two main types: statutory and discretionary.

Statutory tax incentives are those that are established by law and apply automatically to all eligible taxpayers who meet certain criteria or conditions. Statutory tax incentives are usually transparent, predictable, and easy to administer. However, they can also be costly, inefficient, or ineffective if they are not well designed or targeted.

On the other hand, discretionary tax incentives are those that are granted by government agencies or officials on a case-by-case basis to specific taxpayers who apply for them and negotiate with them. Discretionary tax incentives are usually flexible, tailored, and responsive to specific needs or circumstances. However, they can also be opaque, arbitrary, or unfair if they are not well regulated or monitored.

Most Successful States Attracting New Investments through Tax Incentives

According to various studies and rankings, some of the most successful states and cities attracting new investments through tax incentives for industrial companies are:

- Texas: Texas offers a variety of tax incentives for industrial companies, such as property tax abatements, sales tax exemptions, franchise tax reductions, research and development tax credits, etc. Texas also has a low overall tax burden, a large and diverse economy, a skilled and abundant workforce, and a pro-business climate. Texas ranks first in the nation for the number of new and expanded corporate facilities in 2020, according to Site Selection magazine.

- Georgia: Georgia offers a variety of tax incentives for industrial companies, such as job tax credits, investment tax credits, research and development tax credits, quality jobs tax credits, etc. Georgia also has a competitive tax structure, a strong infrastructure, a strategic location, and a business-friendly environment. Georgia ranks second in the nation for the number of new and expanded corporate facilities in 2020, according to Site Selection magazine.

- North Carolina: North Carolina offers a variety of tax incentives for industrial companies, such as job development investment grants, one North Carolina fund grants, research and development tax credits, sales tax exemptions, etc. North Carolina also has a low and flat corporate income tax rate, a diverse and growing economy, a highly educated and talented workforce, and a high quality of life. North Carolina ranks third in the nation for the number of new and expanded corporate facilities in 2020, according to Site Selection magazine.

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