Many economic incentives are complex but can provide significant value with some creative strategizing. State and local governments offer tax incentives to businesses to create new jobs, often requiring that the recipients prove they have hired “net new” employees over an established time period. In the current economic environment, it could be advantageous for you or your clients to consider a strategic acquisition.
But what happens when new employees sign on as the result of a business acquisition?
Acquisitions offer companies unique and significant opportunities for future growth. They can also mean operations may be reduced, moved or closed altogether if the acquiring company does not see value in the acquired business.
This makes acquisition decisions, and the results, extremely important to new and existing employees.
Like all economic incentives, the interpretation of acquired employees as “net new” employees depends on the state’s legislative statute. Some states will allow for employees to be considered as net new as they are new to the Federal Employer Identification Number of the acquiring employer.
Other states will consider employees of the acquired company as existing employees within the state and therefore will not include them in the “net new” count. Most of these states have specific provisions in their state laws that exclude any employees who worked in the same industry or location from the net new count.
Consider the following example of how incentives through an acquisition might work: An electronic components manufacturer struggling to keep up with new business growth and customer demand may seek out a competitor to enter into an asset acquisition deal. The acquiring company agrees to purchase the assets of the business (building, machinery, etc.) and then needs to determine where to place the newly acquired assets. After considering several options and working with the state’s economic development office, the acquiring business is offered a new job creation tax credit for the jobs that are net new to the acquiring business. The job creation incentives total $900,000 for the acquisition and include future job growth commitments of nearly $7,000 per new job. Talk about bottom-line impact.
Opportunities in crisis
In this year of COVID-19, acquisitions have become more important than ever. Some companies are weathering these uncertain times, whereas others are making the difficult decision to close their doors. Other businesses may realize they don’t have the bandwidth internally to grow and expand and are looking for a more robust company that could help them reach that position.
The pandemic has already caused thousands of small businesses to shutter their doors for good, leaving employees out of work and with an uncertain future. Growing companies looking to make acquisitions can keep these jobs alive with the added benefit of receiving tax incentives for maintaining key employment opportunities.
As we begin to see light at the end of this tunnel, businesses should use all government tools possible to retain jobs and seize opportunities for growth. Though it’s an untraditional way of looking at incentives, support for acquisition projects accomplishes the core of what economic incentives aim to do: attract additional investment, help businesses grow and improve the overall quality of life in the community.
Jay Lee is the Chief Technology Officer at Colonial Surety Company, spearheading the design and distribution of innovative technology. Colonial Surety, a leading direct and digital insurer, is dedicated to providing customers with a straightforward and seamless experience when purchasing insurance and bonds. The company's online platform, combined with exemplary customer service, simplifies the insurance-buying process and removes the hassle from these transactions.
Sabrina Ticer-Wurr was a summer intern for Financial Planning through the Dow Jones News Fund in 2024.
She was a rising senior at Columbia University studying English Literature and East Asian Languages and Cultures. An aspiring business reporter, she was a deputy university news editor for the Columbia Daily Spectator, where she covered race/DEI and graduate schools.
John Newcome brings extensive experience in the insurance industry and a wealth of knowledge to the clients he serves as Vice President and Senior Consultant with Kelly Benefits Strategies (KBS).
John serves clients ranging in size from 500 to 25,000 employees. He is a member of Kelly Benefits' Compliance Committee and the Kelly Benefits Technology Business Leadership Team.
By allowing acquiring companies to take advantage of new job creation credits and incentives, states create an environment where jobs and investment remain in their home communities. Credits and incentives encourage further investment in their communities, as the cost savings realized from the incentive benefit are reinvested at a faster rate into the acquired location. This then adds further opportunities for investment and net new jobs.
Acquisitions can be a win-win for both companies acquiring new employees and those being acquired. With the uncertainty created by our current economic climate, businesses and governments should consider every opportunity for an additional edge. Take advantage of planned growth and job retention efforts by exploring new hire economic credits and incentives.
