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In the Zone: Enterprise Zone credits offer businesses tax breaks that make a difference.

Location-based incentive credits (LBICs) offer many advantages, including current and prior year refund potential and favorable financial statement impact.

Yet, according to the Franchise Tax Board, only 3,199 companies claimed hiring credits in 2003 (the most recent statistics available), representing less than 10 percent of potential eligible businesses.

Familiarity with these benefits can significantly impact negotiations during a merger, sale or purchase of a business. For CPAs, staying abreast of these can be a valuable service to current and prospective clients.

STATE VS. FEDERAL

State and federal LBICs vary in amount and qualification requirements.

Common incentives include hiring credits; property tax breaks; sales and use tax credits; income tax credits or percentage reductions; research and development credits; and investment tax credits. Common qualification requirements are tied to both the employer's physical location and employees' residential address or various socio-economic factors.

Also, federal LBIC programs can provide wage credits per qualified employee ranging from $1,500 to $4,000 per year; state credits (available in California and 38 other states) range from $500 to $10,000 per qualified employee, per year.

Arizona, California, Colorado, Florida, Indiana, New York and Virginia do not require any pre-qualification procedures other than submitting certain employee documentation. In California, companies can receive up to $32,000 (over a 60-month employment period) in state hiring credits for each qualified employee hired and sales/use tax credits on qualified machinery and equipment purchased or leased.

The types of credits and amounts vary from state to state.

HOW IT WORKS: CA

California Enterprise Zone (EZ) programs offer substantial tax credits and deductions to businesses located within any of 42 EZ regions, representing roughly 12 percent of the state (www.hcd.ca.gov/fa/cdbg/ez/enterprise/#maps). Benefits can be obtained retroactively for up to four years, as well as for current and future years. Note, however, that certain zones will expire later this year and in 2007, absent legislative extension or re-application by the EZ cities.

Sample cities with EZs include Los Angeles, Long Beach, Santa Ana, Pasadena, San Francisco, Oakland, Sacramento, San Diego and Fresno.

Major benefits of the program include:

1. Interest Exclusion -- A full California tax exemption for financial institutions on net interest earned on loans to businesses located exclusively in any of California's EZs. Generally 10 percent to 20 percent of a bank's business portfolio is eligible for exemption, resulting in a 10.84 percent tax benefit.

2. Employer-Level Wage Credits -- Up to $10,000 per "qualified" employee per year to the extent that the employee meets any one of 13 tests and works in an EZ. Generally, 20 percent or more of employees working in an EZ will qualify.

3. Employee-Level Credits -- Up to $525 per employee. Employees who work in an EZ can qualify themselves for the employee credit if they meet certain work, location and AGI requirements. Employers can assist employees in claiming these credits as a value-added employee benefit.

4. Equipment Credits -- A credit of up to 8.75 percent on purchased equipment and capitalized leases to the extent the equipment is used 100 percent in an EZ. This credit is available for equipment that stores or receives information in an electronic format, such as data collection equipment, ATMs, computers, security systems, phone systems, pollution control equipment, etc.

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FEDERAL CREDITS

In addition to state programs, federal credits are available, including:

* Work Opportunity Tax Credit: Up to $2,400 per eligible employee, per year (IRC Sec. 51, Form 5884);

* Welfare to Work: Up to $8,500 per eligible employee over a two-year period (IRC Sec. 51A, Form 8861);

* Empowerment Zone: Up to $3,000 in tax credits per eligible employee, per year (IRC Sec. 1396, Form 8844);

* Renewal Community: Up to $1,500 tax credit per eligible employee, per year (IRC Sec.1400H, Form 8844); and

* Indian Employment Tax Credit: Up to $4,000 in tax credits per eligible employee, per year (IRC Sec. 45A, Form 8845).

Industries that can benefit include manufacturing, health care, restaurants, fabrication, and financial institutions.

Many of these credits are based on targeted employment areas. The boundaries of these areas tend to change over time as census data is accumulated and qualification requirements get modified. Therefore, it is challenging to get 100 percent accurate information from public databases.

When evaluating addresses, use info contained in the public domain, as well as census tract and census block data, as these are more accurate than the EZ websites.

Gina Ballard, CPA, MBT, is a senior tax manager based in the Long Beach office of Holthouse Carlin & Van Trigt LLP. Blake Christian, CPA, MBT, is a partner with the firm. You can reach them at ginab@hcvt.com and blakec@hcvt.com, respectively.
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Title Annotation:location-based incentive credits
Author:Christian, Blake
Publication:California CPA
Geographic Code:1U9CA
Date:Jul 1, 2006
Words:787
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