In our June 2009 issue of Tax News we asked the question, “Are you familiar with California’s Enterprise Zones?”

We now ask, “Are you aware some taxpayers who work in an Enterprise Zone may be entitled to a credit for the wages they earned?”

The Enterprise Zone tax incentive programs were created to help local businesses, and encourage outside businesses to locate in economically depressed areas. Also, the programs have a provision that allows low income individuals working within an Enterprise Zone to claim a credit that may help eliminate their California tax liability.

The Enterprise Zone Employee Credit is five percent of the wages attributable to employment within an enterprise zone up to $10,500. The maximum credit per zone is $525. The Enterprise Zone Employee Credit is reduced by nine cents ($0.09) for every dollar the taxpayer receives in excess of $10,500 and any unused credit is lost (no carryover is allowed).

The Enterprise Zone Employee Credit is claimed on form FTB 3553 and the taxpayer must file a Form 540 or the Long Form 540NR to claim this credit. The Enterprise Zone Employee Credit can only be used to offset the tax attributable to employment within the enterprise zone. If a taxpayer earned wages in more than one zone, a separate form FTB 3553 is needed for each zone.

The following business-related tax incentives are also potentially available to a taxpayer doing business in an Enterprise Zone, so you may want to see if your clients are doing business within one of the state’s many Enterprise Zones.

Hiring credit.
Sales or use tax credit.
Business expense deduction.
Net interest deduction for lenders.

Enterprise Zone tax incentives apply only to business activities and investments that take place in an Enterprise Zone that has received final designation.

While these Enterprise Zone incentives have been around for quite some time, there have been recent changes to the zones.

For a listing of all Enterprise Zones, expired, active and conditional, or to check if any of your clients work or have a business located within an Enterprise Zone, go to the California Department of Housing and Community Development (HCD) website at www.hcd.ca.gov/fa/cdbg/ez/.

For more information on the Enterprise Zone incentives and the Enterprise Zone Employee Credit, please call our Enterprise Zone Hotline at 916.845.3464.

I think there is a mistake here. The article state, “Enterprise Zone tax incentives apply only to business activities and investments that take place in an Enterprise Zone that has received final designation.” However, AB 1550 explicitly enabled taxpayers to utilize the benefits of the program even before a conditionally designated zone receives its final designation:

Section 7074.2(c) Notwithstanding any other provision of law, an expiring enterprise zone that applies for a new enterprise zone designation pursuant to Section 7073 or 7073.1, and receives a conditional designation letter from the department, may offer, and a taxpayer doing business within the geographic boundaries of the new zone referenced in the conditional designation letter shall be eligible to receive, all enterprise zone benefits until the department makes a final designation or declines to redesignate the zone. The department shall make the effective date of the new zone the date of expiration of the previous designation and the term of the new zone shall begin on that date.

This month’s edition includes a section on the “New Jobs Tax Credit:”

Will Your Client Qualify for the New Jobs Credit?

Newly enacted state law, ABX3 15 (Assembly Budget Committee, Stats. 2009 Third Extraordinary Session, Ch. 10) allows a potential income tax credit of $3,000 to a qualified taxpayer for each additional full-time employee hired. The total amount of the credit available to taxpayers is capped at $400 million.

This credit will not be subject to the 50 percent limitation for business credits in 2009. This credit does have an eight year carryover provision.

The credit must be claimed on a timely-filed original return received by us before the cut-off date. This cut-off date is defined as the last day of the calendar quarter within which we estimate the $400 million limit will be reached. The cut-off date has not yet been determined.

This credit is allowed for taxable years beginning on or after January 1, 2009.

An employer qualifies for the credit if both apply:

1. They employed a total of 20 or fewer employees on the last day of the preceding taxable year (for Calendar taxpayers this would be December 31, 2008).

2. They have a net increase in qualified full-time employees compared to the number of full-time employees employed in the preceding taxable year.

This month’s edition includes an article called, “Enterprise Zone – Nonprofits May be Allowed Net Interest Deduction:”

California provides for special tax incentives to encourage investment in specific geographic areas targeted for economic revitalizing called Enterprise Zones within the state. One of these incentives is the net interest deduction. It is available to banks and other lenders. The requirements are simple. If a bank or lender makes a qualified loan to a qualified debtor, it is allowed to deduct the net interest received from such loan against its California taxable income. To be a qualified transaction, the loan must be made to a debtor that is engaged in a “trade or business” in an Enterprise Zone. The term “trade or business” is generally defined for tax purposes as “an activity engaged in for profit.” When a bank or lender makes an otherwise qualified loan to a nonprofit organization, the question arises as to whether a nonprofit is engaged in a trade or business, and thus considered to be a qualified debtor for the purposes of the net interest deduction.

In the past, we disallowed debts made to nonprofit organizations based on the general presumption that nonprofit organizations are not engaged in a trade or business as defined under various tax provisions in the Internal Revenue Code and the California Revenue and Taxation Code.

However, we recently revised this policy based on statutory authority in the California Corporation Code that suggests a nonprofit could be recognized as being engaged in a trade or business. The California Corporation Code which governs nonprofit entities affirms the nonprofit’s right to “carry on a business at a profit,” and use that profit for any lawful activity.” Many nonprofit organizations accept donations, conduct fundraising activities, or charge fees. This revenue is used to sustain the organization, pay salaries, interest, fund capital improvements, expansions, etc. These activities are similar to a trade or business engaged to earn a profit.

Therefore, qualified loans made to nonprofit organizations can qualify for the Enterprise Zone net interest deduction if the debtor meets all the other required qualifications.

This is clearly related to the appeal before the Board of Equalization in the matter of Farmers and Merchants Bank. See here for more details on that case.