Invest, operate or locate a business in an Enterprise Zone and you could be eligible for significant California tax credits.

California’s Enterprise Zone Program is a fantastic opportunity for businesses to earn huge credits that offset California income and/or franchise taxes dollar for dollar. The Enterprise Zone Program is authorized by the state legislature to designate economically depressed areas of California as Enterprise Zones. Anaheim, Santa Ana and Long Beach are all Enterprise Zones.

The program offers California tax credits and special incentives to encourage business investment, economic growth, and the creation of new jobs. California taxpayers who invest, operate, or locate a trade or business within an Enterprise Zone may be eligible for significant special tax credits or incentives.

The benefits of the program include:
● Hiring Credits – $37,440 or more in tax credits for each qualified employee hired
● Sales Tax Credits – Corporations can earn sales tax credits on purchases of up to $20 million per year of qualified machinery or equipment
● Indefinite Carry Forward – Unused Enterprise Zone tax credits can be applied to future tax years
● Net Interest Deduction – Interest income received by lenders (including individuals) to Enterprise Zone businesses may be non-taxable subject to special reductions.

Working in an Enterprise Zone
There are also potential tax planning opportunities to consider when hiring employees and purchasing equipment. Your offices or facilities don’t have to be in an Enterprise Zone, you need only have your employees work and/or your equipment operate in an Enterprise Zone.

Construction contractors should get an analysis identifying job locations. According to Article 2 of Chapter 17 of Part 11 of the California Revenue and Taxation Code, if a business operates both inside and outside an Enterprise Zone, the business must apportion its income to the Enterprise Zones in which it operates to determine the amount of credits available.

The apportionment is based on two factors, property and payroll both within and outside the Enterprise Zone. If the business operates entirely within the Enterprise Zone, it can offset its entire California tax liability with Enterprise Zone tax credits.

Qualifying for the hiring credit
The California Revenue & Taxation Code provides a state hiring credit for a business that employs a "qualified employee" within a designated Enterprise Zone. The hiring credit amount is $37,440 per employee generated over a five-year period. The credit calculation is limited to the lower of 150 percent of the state minimum hourly wage or the employee’s actual wage.

A “qualified employee” need not live in an Enterprise Zone. An employee will qualify for the hiring credit if at the time of hire the employee was:
● Economically disadvantaged
● Receiving Supplemental Security Income (SSI)
● Receiving food stamps
● Receiving State/Local General Assistance
● Receiving refugee cash assistance
● Native American, American Samoan, Native Hawaiian
● Enrolled in a Workforce Investment Act (WIA) training program
● Physically challenged
● An ex-offender (recent conviction)
● Receiving public assistance (Welfare)
● A Targeted Employment Area (TEA) resident
● A vocational rehabilitation client
● A Vietnam Veteran (8/5/64 to 5/7/75)
● A recently separated veteran (within 48 months of employment date)
● A service-connected disabled veteran
● A person who was laid off or received a layoff notice due to a permanent plant closure or substantial layoff (50 or more people affected within a one-month period)
● Formerly self-employed person, now unemployed due to general economic conditions or natural disaster
● Person who was terminated or laid off, is eligible for unemployment insurance, and is unlikely to return to previous occupation
● Long-term unemployed (at least 15 of the past 26 weeks) and facing significant employment barriers.

To claim a Hiring Credit on your tax return, you must first apply to the local Enterprise Zone coordinator’s office for a voucher certificate for each employee. The application must include documentation specified in the regulations that supports the claim that the employee meets one of the criteria. Your tax preparer can submit the voucher certificate application on your behalf.

Sales or use tax credit
If you pay or incur Sales or Use Tax on certain qualified property used in an Enterprise Zone you may be eligible for a tax credit. The property must be machinery or machinery parts used for any of the following:
● Fabricating, processing, assembling, or manufacturing a product
● Producing renewable energy resources
● Controlling air or water pollution
● Data processing and communications equipment, including but not limited to computers, computer-automated drafting systems, copy machines, telephone systems, and fax machines

For corporations, this credit is limited to the sales or use tax paid or incurred on up to $20 million of qualified property placed in service in the tax year. For all other entities, the limitation drops to $1 million of qualified property.

Net interest deduction
Interest earned on loans to a business located solely within an Enterprise Zone is free from California tax. The money loaned must be used strictly for business activities within the Enterprise Zone. Net interest refers to the full amount of the interest, less any direct expenses in making the loan.

-By Nic Waldenmayer, CPA, MBA, MBT, Tax Manager with Glenn M. Gelman & Associates, Certified Public Accountants and Business Consultants. He can be reached at (714) 667-2600 or www.gmgcpa.com.