Technological Differentiation in the Capture of Tax Credits and Incentives

Technological Differentiation in the Capture of Tax Credits and Incentives Abstract The purpose of this white paper is to help businesses obtain a better understanding of the importance of innovation in the tax credit and incentives field. The information covered in this document is based on Walton Management s experience and expertise as a niche tax credit vendor for over 35 years. The information contained in this white paper is intended for businesses that are either outsourcing their tax credit and incentive programmatic services to a tax credit and incentives vendor or internally managing the identification, application, and administration of tax credit and incentives programs. In the following document, we discuss the role of technology and innovation in the tax credit and incentives field, the importance of technological innovation, the differentiation in the capture of tax credits and incentives from taking advantage of technological advancements. Convergence of Tax and Technology The Future of Innovation The convergence of tax and technology has become an inevitability in the tax credit and incentive (TCI) industry, yet few firms in the tax credit and incentive sector have embraced this convergence to the detriment of themselves and their clients. Images of ledger paper and adding machines still come to mind when one mentions anything tax related: A traditionally labor intensive, manual process before the advent of Quickbooks and Turbo Tax. The TCI industry has barely kept pace, with low tech screening methods, human data entry, simple database tracking, only partial digitization, and rudimentary reporting. For many companies dealing with TCI program identification, processing, tracking, capture, and administration related activities, evolution stops there. The emergence of technology has resulted in evolutionary changes to the tax credit process. However, with the newest technologies now available, the opportunity for advancing far beyond simple tax credit capture is finally available to businesses The advancements in the TCI industry as a whole have been limited in scope and value. Screening for point-ofhire TCI program eligibility through an applicant tracking system or geographic-based TCI program evaluation software system, filing forms through an online state agency portal, or access to electronic signature capabilities For example, early WOTC Program reporting was simplistic in nature with information limited to tracking the individuals who were potentially eligible, certifications received, and the tax credit calculation. are common place in the TCI industry these days. These basic technological components of processing TCI programs help to ensure businesses capture a significant portion of their TCI program benefits. However, these basic technological components do not ensure the full compliance needed to capture all the tax credit and/or incentives value available; provide forecasting and predictive modeling to assist with budgets as well as staffing and resource allocation; or deliver key performance indicators (KPIs) or metrics for analysis to ensure the 1

smooth, issue free processing, tracking, and capture of TCI program benefits. With the technological advancements available today in Software-as-a-Service (Saas), Platform-as-a-Service (Paas), and Infrastructure-as-a-Service (IaaS), businesses have available everything they need to move faster, save money, and introduce previously unavailable levels of flexibility and efficiency in their operations. Many companies have incorporated components of technological advancements in their operations already. However, reaping the full benefits of these technological advancements as they relate to tax credit and incentives and/or incorporating them into one s existing operations requires a specialized knowledge that combines experience in tax credit and incentives with information technology specialists. The best opportunity for many companies to receive this benefit of reduced cost, increased operating efficiency, greater tax credit capture, and easily integrated TCI program processing and methodologies is to find a vendor that has already incorporated innovative solutions to TCI program identification, application/screening, tracking, and capture either as a niche provider of TCI program services or as an integrated partner to such a provider. TCI program technological advancements have gone from evolutionary to revolutionary for TCI industry vendors that have embraced the convergence of tax and technology. Why technology is so important to tax credits and incentives The numbers seem impressive: Businesses take advantage of over $22 billion in general business tax credits every year. 1 For example, it is estimated that businesses will have taken $200 million in empowerment zone tax credits in 2015 alone, $1.1 billion in New Market Tax Credits, and $5.0 billion in research and experimental expenditures tax credits. 2 Additionally, tax credit expenditures at the federal level are only one aspect of the TCI value available to businesses. There are TCI programs available to businesses at the local and state level as well, generating additional above and below the line savings for companies. 3 However, these numbers represent only a portion of the savings available to businesses through the implementation of TCI program benefits. 1 Internal Revenue Service. Returns of Active Corporations Table 2 Balance Sheet, Income Statement, and selected Other Items by Size of Total Assets: Tax Year 2012 (https://www.irs.gov/uac/soi-tax-stats-table-1-returns-of-active-corporations,-form-1120s). 2 Joint Committee on Taxation, Congress of the United States, Table 1.. Tax Expenditure Estimates By Budget Function, Fiscal Years 2015 2019, 2015 December 7, JCX- 141R-15. https://www.jct.gov/publications.html?func=startdown&id=4857 (Reflects legislation enacted by September 30, 2015 only). Joint Committee on Taxation, Conress of the United States, Table 1. Tax Expenditure Estimates By Budget Function, Fiscal Years 2014-2018, JCX-97-14, 2014 August 5. 3 A tax expenditure is measured by the difference between tax liability under present law and the tax liability that would result from a recomputation of tax without benefit of the tax expenditure provision. An alternative way to measure expenditures is o express their values in terms of outlay equivalents. Background Information on Tax Expenditure Analysis and Historical Survey of Tax Expenditure Estimates, Scheduled for Public Hearing Before the Senate Committee on Finance on March 1, 2011. Joint Committee on Taxation, U.S. Senate, February 28, 2011, JCS-15-11. 2

Tax credits or any type of government incentives require adherence to certain criteria put forth by the governing authority. In certain situations, those criteria are delineated clearly in regulations, as with statutory or as of right tax credits. In other situations, those involving discretionary (negotiated) incentives, the criteria for eligibility as well as compliance are more broadly defined, in order to provide the governing authority with flexibility in the awarding and distribution of these discretionary incentives. Adhering to the various requirements in both the application stage of TCI programs and in the down-the-road capturing of the incentives is rift with potential for mistakes, miscalculations, and mismanagement resulting in the failure to capture the full potential of the TCI programs or, in quite a few situations, failure to capture the TCI program benefits at all. Consequently, the intersection of technology and tax credits is an inevitability for any business that wants to ensure it is maximizing all avenues for savings and operational efficiency. Therefore, having available an innovative, advanced solution could be the difference between having tools that enable a business to capture thousands, hundreds of thousands, or even millions in savings and a business only capturing a third of that potential TCI value. Furthermore, failing to maximize TCI program opportunities means foregoing additional savings that can be used to offset other vendor costs or having available funds for new capital, reinvestment in equipment, and workforce enhancements. When TCI firms have embraced innovative approaches, the result has been greater tax credits and savings for businesses participating. For example, there is a 17% increase in employees screened when a company converts from paper-based screening to online screening. On average, approximately 10% of those screened are certified, resulting in an average certification value of almost $1,350 versus paper-based clients whose average certification value is $1,044.78. 4 In other words, by simply screening online, a business can capture approximately 25% more in tax credits per eligible applicant. With an industry average screening and compliance percentage of 60% - 75%, the additional boost to screening and compliance rates enables companies to truly maximize their TCI potential, representing tens to hundreds of thousands of dollars in additional savings. By implementing additional technological advancements for identifying, capturing, and tracking TCI program benefits, the additional tax credit dollars, reduced staff involvement, and a decrease in resources devoted to TCI program processing and administration or TCI vendor outsourcing costs results in potentially double to triple the savings against above and below the line costs. Yet, screenings and tracking compliance are only the tip of the iceberg when it comes to innovative approaches to TCI programs, not to mention handling the multitude of tasks required for every day operations: From I-9s and payroll, to recruitment and onboarding, to UI benefits and background screenings. The use of dynamic dashboards that embed various services within a common platform experience and which utilize single authentication 4 Walton Management Services, Inc. 2015 Work Opportunity Tax Credit Program Client Data. 3

capabilities, enable tracking of overall user activity, and provide permissions settings for each individual component of the dashboard can reduce the staff and resources required to manage these everyday tasks together and individually. Unfortunately, there are very few TCI vendors that have any truly cutting edge TCI solution available, particularly one that has created a solution that takes advantage of the full scope of technological advancements in IaaS, PaaS, and SaaS in the TCI industry. Despite the inevitability of the convergence of technology and tax credits, many TCI firms have been slow to adopt innovative processes for TCI program identification, capture, and tracking not to mention integration of services with other vendors. Even multi-service vendors have been slow to fully integrate their various services, including TCI program services, into a single platform. Innovation in the TCI industry, whether niche providers or multi-service bundled providers, is unusual and virtually unknown as are TCI firms with management teams of big data, enterprise IT, and Softwareas-a-Service experience despite the clear correlation between innovative approaches to TCI program administration and accelerated growth in TCI program capture. TCI Program Innovative Solutions: Increase Cost Reduction and Offsets Businesses often choose a multi-service provider offering bundled services over a niche provider of a service for a number of reasons: Simplicity of dealing with a single vendor, integrated solutions (e.g., I-9, WOTC screening, ATS, background screening), integrated systems, a single invoice, less expensive/discounted offerings, and centralized customer service. These bundled services are offered as integrated technological solution across services meant to reduce costs through efficiencies resulting from streamlining systems. Implementing and deploying solutions that take advantage of the convergence of the newest technologies and the requirements of TCI programs require specialized IT skills and an understanding of tax that go beyond most TCI vendors Unfortunately for businesses, they often find out too late that the bundled experience of multi-service providers can be as expensive, limiting, and/or uncoordinated as dealing with multiple niche vendors. In many situations, the provision of a bundled service line is the result of acquisitions by the multiservice provider with all of the associated financial, logistical, and technological challenges. Integrating the acquisitions to provide a truly innovative, bundled solution, and not one that involves each entity continuing to operate separately, requires a technological capability, flexibility, and/or interest in integrating the acquired solution into the rest of its operations that multi-service providers often do not have. Furthermore, to the degree that the solution is integrated, the costs are as high as a niche provider and the solution has a cobbledtogether user experience with basic reporting and minimal efficiencies. Additionally, businesses may pay more for the service without realizing it due to the complexity of the bundled billing, while continuing to have multiple client service representatives one for each service line, and still requiring accessing multiple systems: From project management systems to reporting. Consequently, multi-service providers with their bundled offerings are in reality disparate services without integrated systems and reporting. Relying instead on the all-in-one, presumably less expensive and simplified billing as the main attraction for many businesses, the solution offerings 4

The failure of multi-service providers with their bundled offerings to provide businesses with a less expensive, yet more technologically sophisticated bundled experience, in part, is the result of their inability to achieve the efficiencies and scale of niche providers that have integrated the newest technologies; a feat more easily accomplished by niche providers due to their streamlined, flexible, focused operating requirements and specialized technical teams. Rather than choosing application development frameworks that enable a write once, deploy everywhere capability, multi-service providers have less flexible bureaucratic structure, resulting in independent technological upgrades with a mismatched, piecemeal experience for the user. In the case of TCI services, instead of a simplified, streamlined, efficient process, the user experience with multi-service, bundled providers ranges from disruptive to similar to a niche provider with standard technology. Conversely, appropriately integrated, innovative TCI solutions offer businesses access to niche provider services with similar expertise in their respective industries wrapped in a bundled service provider experience. Advanced TCI vendors offer clients access to other service lines from I-9 screening and compliance to background screening, applicant and onboarding solutions, employment verification and UI services, and payroll. A business intelligence solution that incorporates data mining with user interfaces that provide graphicbased displays and customized dash boards. True innovation in the tax credit and incentive field enables companies to integrate and deploy the newest emergent technologies for more than TCI services, creating above and below the line savings. With the most recent wave of technological advancements from screening and document capture via mobile apps and devices and voice integrated, artificial intelligence data gathering to Azure Notification Hubs with the ability to manage the scale of notifications, businesses have more options for combining services in a way that provides an all-in-one service experience similar or even better than the bundled services provided by a multi-service provider. However, it is only with the most advanced TCI vendor that companies will experience such technological advantages as a single-sign on capability and single source reporting with all the bells and whistles of business intelligence (BI) systems with always-on reporting for coordinating the flow of work, focusing on ways to increase the overall credits, and managing labor cost to pursue certifications. While cloud computing provides access to job banks and talent pools, improving the likelihood of hiring potentially eligible applicants, finding a TCI vendor with an integrated solution for such advanced, targeted recruiting is still limited to only a few vendors. Truly innovative firms take advantage of emergent technologies to remain at the forefront of providing innovative solutions to their clients. For example, Walton Management Service s RecruitMilitary integrated solution provides clients with a method of maximizing TCI related to a specific targeted group: Veterans. Leveraging the integrated platform of RecruitMilitary, the leading full service military-to-civilian recruiting firm in the United States, and Walton Management s Work Opportunity Tax Credit screening service (Tax Credit Assessment Portal TCAP), businesses have the ability to identify and locate qualified veterans looking for employment while accruing tax credit savings. Hiring managers are able to locate candidates via proximity analysis, using strategic search functions to quickly identify candidates who are the best fit for company 5

openings. With approximately 845,000 veteran job seeker accounts, over 3.2 million job seeker profile views, and almost 230,000 jobs, companies can search profiles of qualified candidates, who are also potentially from the veteran WOTC targeted group, post jobs, reach out through targeted email campaigns, and even build a branded presence on the site for veterans to review. Moreover, with the RecruitMilitary-Walton Management TCAP integrated solution, companies are able to pay for the RecruitMilitary solution through the tax credit capture with each qualified veteran from the WOTC targeted veteran group. Another common example of a growing need to meet technological changes in business process services is the Form I- 9. With the advent of the U.S. E-verify system, companies were able to electronically file and track I-9 forms. While some firms entered and operate in the I-9 service business with a simple solution that utilizes the government s E-Verify system, scanning older forms on behalf of clients, and providing a rudimentary tracking system, only a few I-9 vendors invested in technology to create an entirely new I-9 experience. One such firm that took advantage of the full potential of digitizing the traditionally labor intensive I-9 process is LawLogix Group, Inc. Founded in 2000, LawLogix Group, Inc., a Software as a Service (SaaS) provider to immigration attorneys and human resource professionals, is the leader in Electronic I-9, E-Verify and Immigration Case Management software. LawLogix three flagship SaaS products, Guardian, EDGE and Globetrotter, automate the labor and paper-intensive I-9 and immigration processes for more than 160,000 organizations worldwide. LawLogix Group, Inc. and Walton Management Services, Inc. integrated their platforms for screening and compliance for both I-9s and capturing tax credits and incentives to provide clients with a single platform for I-9 and TCI services experience. As with the RecruitMilitary-Walton TCAP integrated solution, the integrated solution of LawLogic s I-9 Solution and Walton s TCAP takes advantage of the newest API and cloud technology to improve both the company and its new hires with a seamless onboarding workflow that results in perfect I-9 and E-Verify compliance and substanitally increases the completion rate of the WOTC screening process. Furthermore, new hires and hiring managers use one login and one workflow for both the Form I-9 and WOTC Program screening, and, if desired, new hires can be forced to complete the WOTC screening through the WMS Tax Credit Assessment Portal (TCAP) as a condition to accessing the manadatory I-9 form. No more toggling between systems and websites, potentially getting lost or missing the opportunity to save valuable tax dollars from the WOTC Program. The integrated WMS- Guardian workflow can also easily plug into any existing ATS or HRIS system, making onboarding simple, fully compliant with legal and regulatory I-9 government mandates, and revenue-producing. While bundled services are provided by multi-service line companies as a way for companies to save money and improve efficiencies, as the examples above suggest, integrated, bundled niche vendor services provide businesses with best of class services, while maximizing the delivery of these services with access to the most advanced, innovative solutions available. 6

Convergence of Tax and Technology: The Work Opportunity Tax Credit Program An excellent example of the convergence of technology and tax credits is the evolution of the Work Opportunity Tax Credit (WOTC) Program. The WOTC Program has evolved over its almost 20 years in existence as a federal tax credit program. What began as a paper-based, wet signature required program with photocopies of such back up documentation as driver s licenses SSI letters has become, for those able to take advantage of it, software as a service (SAAS). As mentioned above, with any technological innovation in processing, tax credit savings for participating companies have been enhanced significantly by the use of advancements in automation, digitization, and electronic exchanges of data. Together these technologies have enabled the WOTC Program to evolve from a labor intensive, manual process to a software service in which companies can choose from vendor assisted to self-service subscription processing. Compliance, tracking, and reporting in the TCI program field have advanced far beyond the days of simple counting of forms completed. Companies can now take advantage of big data and business intelligence to more easily and effectively capture TCI program benefits. One of the most significant technological advancement in the processing of the WOTC Program has been the acceptance of the electronic signature for the IRS Form 8850 ( e-8850 ). Prior to the introduction of the e-8850, a wet signature was required, creating a plethora of paper and significant labor needed to process it. The e-8850 has enabled companies to take advantage of the efficiencies of automation, including increased productivity from online screening for the WOTC Program. Furthermore, companies are better able to utilize their applicant tracking systems (ATS) to streamline the recruiting and onboarding process to include the WOTC Program screening. Consequently, eligibility for the WOTC Program can be determined without human involvement. Another significant technological advancement in the WOTC Program process has been the creation, expansion, and integration of state agency databases. Prior to the advancement in state agency databases, companies had to rely on new hires to provide proof of participation in such programs as TANF and SNAP, two of the largest target groups certified under the WOTC Program. Additionally, often tax credit opportunities were missed due to new hires not having information readily available on relatives who may have participated in such social welfare programs. Thus, it was common to miss out on tax credits. This advancement in state agency databases has enabled state certifying agencies to confirm the largest target groups in the WOTC Program SNAP, TANF, and, in some cases, Veterans without requiring backup to be provided by the new hire, further eliminating the need for additional human involvement in 87% of the certifications. Furthermore, as a consequence of state certifying agencies being able to verify target group eligibility, a larger percentage of eligible individuals are captured than previously possible. 7

Further benefiting the tax credit capture of many firms is the roll out by WOTC coordinating agencies of electronic system for processing the WOTC Program. While varying in functionality and requirements, these systems enable the processing of e-8850s and corresponding backup and determination of eligibility electronically, eliminating the need for human involvement. With access to systems that allow tracking of metrics, measuring of Key Performance Indicators (KPIs) across services in a single platform, companies can experience significant productivity gains among human resource, payroll, tax department, and individual location operations. Finally, with technological advancements in business intelligence (BI) systems and cloud computing, companies are better able to manage internal staff, track and hire from potentially eligible pools of applicants, and ensure and maximize compliance. BI systems with always-on reporting can be used to coordinate the flow of work, focus on ways to increase the overall credits, and manage labor cost to pursue certifications, while cloud computing provides access to job banks and talent pools, improving the likelihood of hiring potentially eligible applicants. Ultimately, maximizing the full potential of TCIs available to businesses requires a convergent skill set of both TCI program and technical process/technology that enables the leveraging data mining capabilities, integrated technological solutions, business intelligence analytics, and predictive modeling. A TCI industry vendor capable of providing such a robust technological solution requires a dedicated IT team that specializes not only in integrating the most recent technology for the provision of identifying, capturing, tracking, reporting, and forecasting tax credits and incentives on behalf of clients, but also capable of identifying and developing systems that go beyond the TCI industry in order to take advantage of the specialized services of other vendors as well as provide services that companies have not realized a need for, but for which the provision of such services will enable these companies to be light years ahead of competitors. For More Information Contact WMS at (800) 221-0832 or visit www.waltonmgt.com. About Walton Management Services, Inc. As a trusted advisor, Walton Management Services, Inc. (WMS) delivers specialized tax credit screening solutions using state-of-the-art technology. With a rich legacy and solid reputation in the last 35 years, WMS has developed seamless, innovative, proven best practices, delivering millions of federal, state, and local tax savings. As an integrated extension to our client s finance departments, WMS consults, identifies, and realizes their full savings potential. From Fortune 50 to small and mid-sized companies, WMS works with all industries to generate tax savings through business activities such as hiring, expanding and downsizing facility locations, making capital investments, and training new and incumbent workers. About the Author: Dr. Vignola has worked with WMS in various capacities for over 13 years. As a senior analyst, Dr. Vignola secured and administered over $1M in grants and tax credits on behalf of clients. She has since advanced within WMS, providing regulatory compliance with tax credit programs on behalf of clients, serving as a liaison between clients and governmental agencies, overseeing the WOTC Program lobbying efforts of the firm, performing division oversight of the incentive consulting division, which has secured millions of dollars in non-wotc benefits for clients, and providing the firm s blog and marketing content. 8