Once upon a time, in the fairy tale land of Washington, D.C., a group of people got together and created magical realms called Empowerment Zones.
Oh, wait. This isn’t fairy tale time, so let’s talk about real places created by a very real Congress in 1993. Yes, there really are geographic areas in the United States designated as either Enterprise Zones or Enterprise Communities (EZ/EC). The purpose of designating a specific area as an EZ or EC was to allow stakeholders in the community access to a combination of Federal income tax breaks and grant funds. This, Congress hoped, would lead to a revitalization of declining communities.
The plan worked. Businesses have opened or reopened in areas where you previously wouldn’t even send your worst enemy. Crime is down, neighborhoods have been cleaned up and everyone in Congress is patting themselves on the back for being so innovative in their thinking … and perhaps they should. In 1994, there were 6 urban EZs, 65 urban ECs, 3 rural EZs, and 30 rural ECs. In 1998, a second round of EZ/EC legislation was passed and an additional 15 urban EZs, 5 rural EZs and 20 rural ECs were authorized.
December 2000 saw a third round of legislation that resulted in the authorization of a total of 40 Renewal Communities (RC) – 12 rural and 28 urban. Like their EZ/EC brothers and sisters, the RCs seek to promote economic development through Federal Tax incentives to hire residents or expand operations. Unlike their older brothers and sisters, RCs will not allow access to any grant funding and, therefore, the tax credits are quite substantial.
This article will be a very brief recap of what’s available and where it’s available. There simply isn’t enough space in this article to list everything, but we’ll try to hit the highlights and give you some references to take away with you.
First of all, to do the arithmetic, there are now a total of 144 EZs/ECs and 40 RCs coming online as we speak. This means not everyone is going to live in or even near a RC, or EZ/EC. However, they do tend to be located in economically depressed, higher population areas.
What Federal assistance communities are eligible for depends on the designation of the community and in which round it gained that designation. The full scoop is in Tax Incentive Guide For Businesses in the Renewal Communities, Empowerment Zones, and Enterprise Communities
, published by the U.S. Department of Housing and Urban Development. However, in general, Empowerment Zones established in Round I qualify for the larger grants and most of the credits, enhanced deductions and tax exemptions. Enhanced Round I ECs, Supplemental Round I Ezs, and Round I ECs qualify for grants and many of the credits available, but only the Supplemental Round I EZs qualify for capital gains tax relief. Round II EZs qualify for HUD EZ grants and both the Round II and III EZs qualify for most of the tax credits, enhanced deductions and exemptions available to other EZs. Finally, RCs are eligible for all tax credits except the EZ credit, enhanced deductions and a zero percent capital gains rate for RC Assets and DC Zone (District of Columbia) Assets. RCs are just now being designated and, as such, anything related to them will be available in 2002 forward.
The Enterprise Zone Employment Credit provides a credit to eligible employers of up to $3,000 for each year of EZ designation and per each new employee who lives in the EZ. You can’t use the same wages for both the Work Opportunities Tax Credit, Welfare to Work Credit and the EZ Employment Credit.
The Renewal Community Employment Credit provides a credit of up to $1,500 for businesses for each year of RC designation and each employee. While the same rules apply for the RC Employment Credit as apply to the EZ Employment Credit insofar as interplay with other credits and the credit is less than the EZ Employment Credit, you get to count all employees in figuring the amount of the RC Employment Credit. Compared to the EZ Employment Credit which includes only new hires, this can be a huge benefit.
The Work Opportunity Tax Credit (WOTC) provides a credit of $2,400 for each new hire that is certified by the applicable state agency as being part of a targeted group. All employers are eligible for this credit, but it only applies to employees who begin work before December 31, 2001.
Like the WOTC, the Welfare to Work (WtW) Credit is available for all employers regardless of location, but only for individuals who start work before December 31, 2001 and are certified eligible by the applicable state agency. This credit provides up to a $3,500 credit in year one of the individual’s employment and $5,000 in year two.
The Indian Employment Tax Credit is available until the end of 2003 and provides a credit of up to $20,000 for each qualified employee who is an enrolled member of an Indian tribe (or spouse) and lives on or near an Indian reservation. The employee must perform a majority of the qualified services on an Indian reservation and the calculation includes employer payments for health insurance as wages. The reservation needn’t be located in a RC, EZ, or EC for the employee to qualify.
A New Markets Credit is available for equity investors in qualified Community Development Entities (5 to 6 percent of the investment for each year held for up to 7 years). A Low-Income Housing Tax Credit is available for construction or renovation of rental housing complexes that set aside a certain percentage of the units for low-income persons for a minimum of 15 years. The amount varies and each state has a maximum amount of credit available each year. The Low-Income Housing Tax Credit is available regardless of the location of the project (subject to state annual ceilings).
Enhanced deductions include greater Code Section 179 deductions ($35,000 in additional deduction for property acquired after December 31, 2001), favorable deduction rules for qualified revitalization expenditures, deduction of environmental cleanup costs in designated areas (brownfields), and accelerated depreciation on qualified property placed in service on an Indian reservation.
Capital gains on sales of RC and DC Zone assets held 5 or more years will not be taxed, if the asset was placed in service between January 1, 1998 and December 31, 2002 (DC Zone assets) or between January 1, 2002 and December 31, 2009 (RC assets).
Capital gains for sale of EZ assets will not have to be recognized if replacement EZ assets are purchased within 60 days. There is also an exclusion of up to 60 percent of the gain on sale of small business stock of a C Corporation located in an EZ that is held for more than 5 years.
There you have it. In a nutshell, the Federal Government has created a pretty attractive package to entice investors to return to depressed areas and the reality is that the package works. That is, if you are located in the right area for some of these incentives. For a more complete discussion, you can go to the Department of Housing and Urban Development’s website or obtain a copy of in Tax Incentive Guide For Businesses in the Renewal Communities, Empowerment Zones, and Enterprise Communities, published by the U.S. Department of Housing and Urban Development by following this link. Give us a call and let’s discuss the possibilities as they relate to you.
Have a great February.