Much has been made of the new tax incentive programs that are a part of the New Jersey Economic Recovery Act of 2020, the six-year, $11.5 billion package that was passed by the Legislature recently and is awaiting Gov. Phil Murphy’s signature.
Breaking down the incentive deal
If you need a refresher on the Economic Recovery Act of 2020, here’s a quick overview.
But, what if you have a signed award from a previous incentive, Grow New Jersey, and now face issues caused by the economic downturn from the COVID-19 pandemic? There’s help for you, too.
Companies who have been recipients of Grow N.J. awards are now able to suspend their awards, adjust them — or even terminate them.
So said Ted Zangari, the chair of the real estate practice at Sills Cummis & Gross P.C.
“Lost in all the coverage of the new incentives programs is news that the bill includes COVID-related relief for businesses that had come to New Jersey or remained here in reliance on the former incentive program, Grow New Jersey,” Zangari said.
Most specifically, there is language pertaining to job requirements, which Zangari said could prove to the biggest obstacle post-pandemic.
“Many GROW recipients have had to reduce employee headcount as a result of the pandemic, which — in many cases — jeopardizes their incentive awards, which are calculated based on the number of full-time employees and are paid-out in tax credits, typically over 10 years,” he said.
Here are the three forms of relief for businesses that have had to downsize because of the pandemic.
- Skip a year (or two): A business may elect to skip its 2020 annual tax credit and push out its award to an 11th year. The bill allows a similar option in 2021, if the state of emergency extends past March.
- Reduce the headcount requirement (and also the award): If the company’s headcount is not likely to fully recover, but is still significant, the business may elect to reduce its job commitment to the state. That action will proportionately reduce the incentive award amount for the remainder of the tax credit payout, but at least the business cannot be thrown into default and lose its entire award, retroactively and prospectively.
This may be the biggest:
- Terminate the agreement: If the headcount reduction is significant and the company is at risk of losing not just the future award payments but also facing a so-called “clawback” of tax credits already received, it can elect to terminate its incentive award and keep whatever tax credits it has received without clawbacks or other reprisals.
Cecilia Lassiter, a co-chair of the state and local tax and incentive practice at Sills Cummis, said businesses looking to take advantage of these provisions need to understand they all have a limited shelf life — some coming as quickly as April 2021.
“These relief options are extremely time-sensitive, so businesses would be wise to consider their options immediately,” she said.
What the New Jersey Economic Recovery Act of 2020 says
Here’s more on each option, as written in the bill:
Suspending the obligation: “To take advantage of this option, the business must make the election in writing to the New Jersey Economic Development Authority before the date the annual report is due — which is not later than 120 days after the end of the company’s fiscal year. (For example, if a company’s fiscal year is a calendar year, then the company must elect to suspend its 2020 tax credit before April 30, 2021.)
“Such properly elected suspension would extend the term of the eligibility period by a corresponding amount of time. The suspension will require an amendment to the incentive agreement, which will provide that the failure to submit the annual report due to the suspension will not be considered a forfeiture or an uncertified tax period.”
Changing the jobs requirement: “A business may request a reduction in the number of jobs specified in its incentive agreement based on a certification of the business of the eligible positions at the qualified business facility commencing with the 2020 tax period and each subsequent tax period remaining in the eligibility period. To qualify for this relief, the business must still maintain the minimum number of new or retained full-time jobs required to be eligible for the Grow NJ Program.
“The reduction in jobs shall first apply to the number of new full-time employees, and then shall apply to the number of retained full-time employees. The EDA will re-calculate the total tax credit amount for the 2020 tax period and the remainder of the eligibility period based on the reduced number of jobs and will amend the incentive agreement to reflect the recalculated award amount.”
Terminating the agreement: “A business may also request, before Dec. 31, 2022, to terminate its incentive agreement due to the COVID-19 public health emergency. To avail itself of this option, the business must submit a certification signed by its CEO or equivalent officer stating that the termination is due to the public health emergency and describing the impact of the public health emergency on the business.
“All tax credits for the tax period in which the termination occurs and all subsequent tax periods would be forfeited, but any prior tax credits of the business would remain unaffected. This is the perfect time for a business negatively affected by COVID to terminate its incentive agreement if the company determines that it will not recover from COVID, while keeping past tax credits without any fear of having those tax credits clawed back by EDA.”
Sills Cummis & Gross P.C.’s Ted Zangari said all three options are an example of good government. Or rather, government showing a willingness to adjust rules and regulations because of unforeseeable circumstances.
“Gov. (Phil) Murphy and the state Legislature are to be commended for giving businesses that chose New Jersey a flexible range of relief options,” he said. “It’s smart economic development strategy because we all know from past recessions that many companies forced to prune-back headcount come back fuller and healthier when the economy springs back to life.”