Enterprise Zone

• Link to City of Eureka's Official Site
• Introduction
• Hiring Credit
• Sales and Use Tax Credit
• Business Expense Deduction
• Net Interest Deduction for Lenders
• Net Operating Loss Carryover
• Apportionment
• California Manufacturers Investment Tax Credit

Introduction

Enterprise zones were established in California to stimulate development and hiring in selected economically depressed areas and to make California more competitive. The Enterprise Zone Act provides special tax incentives for entities and individuals that operate or invest in a business located within a designated enterprise zone. Businesses operating within an enterprise zone do not need to qualify or receive prior approval to take advantage of these special tax incentives. Enterprise zone designation is effective for 15 years from the date of designation.

Further information about the designation date and the geographic boundaries of an enterprise zone may be obtained from:
California Trade and Commerce Agency
Attention: Enterprise Zone Programs
801 "K" Street, Suite 1700
Sacramento, California 95814
Telephone: (916) 324-8211

The Enterprise Zone Legislation has the following incentives/benefits:
1) Hiring Credit
2) Sales and Use Tax Credit
3) Business Expense Deduction
4) Net Interest Deduction for Lenders
5) Net Operating Losses
6) Apportionment
7) California Manufacturers Investment Tax Credit

To claim any deduction or credit, the business must attach Form FIB 3805Z to its California return. Credits may be used to reduce tentative minimum tax (note: in no case lower than $800 minimum franchise tax).

Hiring Credit

Employers conducting a trade or business inside an enterprise zone may claim the hiring credit for wages paid to a qualified employee. A qualified employee is someone who is hired after the area is designated as an enterprise zone and who, immediately preceding employment, was:
eligible to receive subsidized employment, training or services under the terms of the Federal Job Training Partnership Act (JTPA); or

• eligible to be registered under the Greater Avenues for Independence Act (GAIN); or
• certified by the Employment Development Department as eligible for the Federal Targeted Jobs Tax Credit Program (TJTC); or
• an economically disadvantaged individual 14 years of age or older; or
• a "dislocated" worker (generally individuals who are unemployed due to economic conditions and not likely to be able to return to their previous occupation); or
• a disabled individual or veteran (eligible for a state rehabilitation plan); or
• an ex-offender; or
• was eligible for Federal Supplemental Security Income (SSI) benefits, Aid to Families with Dependent Children, food stamps, or state or local general assistance; or
• was a member of a federally recognized Indian tribe, band, or other group of Native American descent; or
• was a resident of a targeted employment area (census tracts designated by the U.S. Department of Housing and Urban Development as having at least 51% of its residents of low- or moderate-income levels)

The credit is based on the lesser of the actual hourly wage paid or 150% of the minimum hourly wage established by the Industrial Welfare Commission. Current minimum hourly wage is $5.75 per hour (effective March 1, 1998) and, therefore, the maximum hourly wage on which the credit may be based is $8.62 per hour. Based on the maximum hourly wage amount, the hiring of a "qualified" employee on January 1, 1999 and assuming 2,080 hours in a year, the employee would generate the following hiring credit amounts, before adjustment for the required salary and wage add-back:

Year     Credit Amount
1999     $8,965
2000     $7,172
2001     $5,379
2002     $3,586
2003     $1,793
Totals    $26,895

The minimum hourly wage for prior periods has been as follows:
Period Beginning            Minimum Wage

The credit is equal to a percentage of qualified wages paid to qualified employees during a specified time period as shown below:
Period of                        Credit (%) Allowed
Employment                   on Wages Paid
First 12 months                     50%
Second 12 months                40%
Third 12 months                    30%
Fourth 12 months                  20%
Fifth 12 months                     10%
After 60 months                    None

In addition to this general hiring credit, for taxable years beginning on or after January 1, 1996, the "qualified wages" on which the hiring credit is based has been increased to 202 percent of the minimum wage for employers located in the Long Beach Enterprise Zone that are engaged in manufacturing aircraft, aircraft parts, and search and navigation equipment activities as described in SIC code sections 3721 to 3728 and 3812.

In considering the potential hiring credits detailed above — the following limitations need to be kept in mind:

• At least 90% of the "qualified" employee's work must be directly related to a trade or business activity located in an EZ, and at least 50% of the employee's work must be performed inside the boundaries of an EZ.
• The business expense deduction for wages must be reduced by the amount of the hiring credits.
• The credit must be reduced by any federal (i.e. W.O.T.C.) or state jobs credit claimed.
• The amount of the credit available for wages paid to all "qualified" employees may not exceed the amount of tax that would be imposed if the income related to business activity in an EZ was your only income. The hiring credit may be used to reduce the regular tax below the tentative minimum tax.
• If the amount of the credit for employing "qualified" persons is greater than the tax on EZ income in any year, the excess credit may be carried over to future years.

The hiring credit is subject to recapture if the "qualified" new employee is terminated within the first 270 days of employment. This recaptured tax is not applicable in the following terminations:

• voluntary on the part of the employee
• caused by the employee becoming disabled
• a response to employee misconduct
• due to a substantial reduction in business; or
• carried out so that other "qualified" individuals could be hired, creating an increase in the number of "qualified" employees and their hours of employment. You may amend a return to claim the EZ hiring credits.

Sales and Use Tax Credit

Employers conducting a trade or business inside an enterprise zone may claim a credit for the sales or use tax paid or incurred on the purchase of qualified machinery. Qualified machinery must be used to:

1. Manufacture, process, combine, or otherwise fabricate a product,
2. Produce renewable energy resources, or
3. Control air or water pollution.
The amount of the sales and use tax credit has the following additional dollar limitations:
1. Individuals-partnerships and limited liability companies —up to $1 million in qualified machinery costs per year.
2. Corporations—up to $20 million in. qualified machinery costs per year. (Timing of purchases may be the key to planning in this area.)

Further limitations are as follows:
1. Machinery must be used exclusively within enterprise zone boundaries.
2. Annual credit limited to tax imposed on net income from enterprise zone only; carryover available.
3. Basis is not increased by sales or use tax paid (state basis will differ from federal/book basis).
4. Credit on out-of-state purchases available only if comparable equipment (i.e., quality and price) was not available in California (must be able to substantiate).
Taxpayers in an enterprise zone may file an amended return to claim this credit.

Business Expense Deduction

Businesses conducting a trade or business within an enterprise zone may elect to treat forty percent of the cost of qualified property as a business expense in the first year it is placed in service.
Qualified property is tangible personal property (IRC Section 1245) acquired by purchase for exclusive use within a zone.
The amount of the deduction is based on the following additional limitations:

   Applicable Annual
Tax Year                               Cost Limitation
Taxable year of designation EZ: $100,000
1st taxable year thereafter: $100,000
2nd taxable year thereafter: $75,000
3rd taxable year thereafter: $75,000
Each taxable year thereafter for the duration of the EZ: $50,000

Property does not qualify if:
a. Transferred between members of an affiliated group
b. Acquired as a gift or inherited
c. Traded for other property, or
d. Received from a related party (as defined in IRC Section 267).

The full amount of the deduction must be recaptured if the property is no longer used in an enterprise zone during the first two years after it was first placed in service.
This election must be made on an originally filed form.

Net Interest Deduction for Lenders

A deduction from income is allowed for the amount of net interest received from loans made to a trade or business located in an enterprise zone. Net interest is defined as the full amount of interest earned less direct expenses incurred in making the loan.
Qualified loans include:

• Business loans
• Mortgages,and
• Loans from noncommercial sources.

Other limitations include the following:

• loan must be made to a trade or business located solely within an enterprise zone
• money loaned must be used strictly for business activities within the enterprise zone
• lender can have no equity or other ownership interest in the business
• loan must be made after enterprise zone designation.
  Amended returns are allowed.

Net Operating Loss Carryover

A business that operates or invests within an enterprise zone may carryover 100% of their net operating loss which results from activity within the zone and which was generated after the date of zone designation. The carryover can only be carried forward — not back and can only be applied to income from within the zone. Carryover period is 15 years from date of loss. This irrevocable election must be made on the original return.

Apportionment

The enterprise zone tax incentives are limited to the tax on income attributable to the business operations within the zone. Apportionment is required if the business is located and/or doing business both within and outside of the EZ. For years beginning on or after February 1, 1996, business located in an enterprise zone or program area will have their credits limited if they make sales to customers located outside the zone, or have payroll or property outside the zone. The credits will be limited to the tax on the income attributable to the zone as determined by a double weighted three-factor formula similar to that used by a unitary business.

California Manufacturers Investment Tax Credit

Allows qualified taxpayers to claim an investment tax credit equal to 6% of the costs paid or incurred after January 1, 1994, for the purchase of qualified property including sales and use tax, placed in service in California. A "qualified taxpayer" is defined as any taxpayer or partnership engaged in those lines of business described in Codes 2000 through 3999, inclusive, of the 1987 edition of the Standard Industrial Classification (SIC) Manual, published by the U.S. Office of Management and Budget.

"Qualified property" is defined as property used directly in a manufacturing or other qualifying activity which is both tangible personal property and property that is described in IRC §1245(a). However, special-purpose buildings and foundations used in certain high-tech, biotech and biopharmaceutical activities qualify.

• Off-the-shelf computer software used primarily in a "qualified activity" — such as manufacturing, processing, refining, fabricating, recycling, pollution control and research and development — qualifies for the credit.
• Qualified property acquired through leasing transactions is eligible for the credit. Only the lessee qualifies for the credit.
  

    For taxable and income years beginning on or after January 1, 1996, manufacturer-lessors may elect to pay sales tax based on the cost of the equipment they manufacture and lease, thus making lessees eligible for the six percent manufacturers investment tax credit at the time the property is acquired and placed in service.

This election is irrevocable and must be made on or before the due date of the return for the period in which the property is first leased. This credit may be used in conjunction with the sales tax credits generated under the EZ legislation, but not with the LARZ sales tax credits.