Los Angeles revitalization zones.
Once approved, businesses within the areas may take advantage of the following incentives under AB18: (1) construction hiring credit; (2) general hiring credit; (3) sales and use tax credits; (4) business expense deduction for the purchase of qualified business property; (5) net interest deduction for lenders; and (6) net operating loss (NOL) carryover provisions. Generally, the incentives are available to offset taxable income, or the tax attributable to such income, generated within the Zone. Unused credits may be carried forward for 15 years. Incentives are effective May 1, 1992, and expire Dec. 1, 1998, except as noted.
Construction hiring credit
A qualified business may use the hiring credit to reduce tax based on the amount of "qualified wages" paid for construction work in the Zone. "Qualified wages" are wages paid for construction work in the Los Angeles Revitalization Zone to "qualified employees." "Qualified employees" are individuals who live within the Zone and who are hired to perform construction work within the Zone. The credit is based on 150% of the minimum wage base (equal to $6.37 per hour), and decreases over a 60-month period. The deduction for the qualifying wages must be reduced by any credit claimed. Recapture provisions apply if the employment is terminated by the taxpayer during specific time periods and under certain circumstances.
General hiring credit
Similar to the construction hiring credit, this credit is allowed on "qualified wages" (that portion of wages that does not exceed 150% of the minimum wage base) paid to "qualified disadvantaged individuals" (residents of the Los Angeles Revitalization Zone) who are "qualified employees." A "qualified employee" must meet both of the following tests: (1) at least 90% of his services must be directly related to the conduct of the trade or business located in the Zone and (2) he must perform at least 50% of his services in the Zone. The amount of the credit available decreases over a 60-month period. Reductions in the salary deduction and recapture provisions similar to the construction hiring credit apply.
Sales and use tax credits
A qualified business may reduce its tax by the amount of sales or use tax paid on qualified property purchased for exclusive use within the Zone. Qualified property consists of building materials to replace or repair the business's building and fixtures, and machinery or equipment to be used exclusively within the Zone. The basis of the property must be reduced by the amount of the credit taken. The credit is subject to recapture if the property is disposed of or no longer used within the Zone at any time before the end of the second tax year after the property is placed in service.
Business expense deduction
The cost of tangible personal property purchased for exclusive use in the Zone may be deducted as a business expense in the first year it is placed in service. There is no cap on the amount of property that may be expensed within a tax year, and the deduction may be used to increase an NOL. Recapture provisions apply if the property ceases to be used in a trade or business within the Zone at any time before the close of the second tax year after the property was placed in service. This provision applies to property purchased after Sept. 1, 1992, and remains in effect until Dec. 1, 1998.
Net interest deduction for lenders
This provision allows a deduction equal to the "net interest" received by the taxpayer on indebtedness incurred after May 1, 1992 of a trade or business located in the Zone. "Net interest" is defined as the full amount of the interest, less any direct expenses incurred in making the loan. To qualify for the deduction, at the time of making the loan the business borrowing the money must be located solely within the Zone, the indebtedness must be incurred solely in connection with activity within the Zone, and the borrower must have no equity or other ownership interest in the debtor.
NOL carryover provision
One hundred percent of the NOLs (as opposed to the usual 50%) of entities conducting business in the Zone may be carried over to future years to reduce the amount of taxable income for those years. The NOL carryover is the portion of the loss attributable to the taxpayer's business activities within the Zone. The NOL may offset income in future years attributable to the business activities located within the Zone. The loss may be carried forward for 15 years.
The California Franchise Tax Board (FTB) is encouraging taxpayers to take advantage of these incentives. Additional information is available from both the FTB and the individual cities located within the Zone.