Tax Benefits
Tax Benefits are designated areas that offer tax benefits to businesses, financial incentives for investing, and relief from Federal, state, or local regulations.
The Federal government has designated Kentucky Highlands Investment Corporation's application as an empowerment zone. Our application covers part of Wayne, and all of Jackson and Clinton Counties in Kentucky. The recognition means the Federal government will make available $40 million to these counties for economic and community development over a ten year period. Part of these funds can be used for improving your work-force, including job skills training, capital for new or expanding businesses, and management consulting purposes.
Tax Incentives
Businesses that qualify and operate in empowerment zones will be eligible for three incentives:
1. Employer wage credit,
2. Increased section 179 deduction, and
3. New tax-exempt bond financing.
*Before taking any tax credits, the business should seek advice from a qualified tax specialist. Kentucky Highlands Investment Corporation does not offer tax advice.
Employer Wage Credit
The employer wage credit, part of the general business credit, is available to any employer engaged in a trade or business in an empowerment zone, even if it is not an "enterprise zone business,"
defined later.
• Amount of Credit
Initially, an employer can claim a tax credit equal to 20% of the first $15, 000 of qualified wages paid or incurred to each employee who meets the criteria listed later. The rate of the credit begins to phase down in 2002. The rates and
maximum credits are:
Year................Rate.......Maximum Credit
1994-2001........20%..........$3,000
2002.................15%...........$2,250
2003.................10%...........$1,500
2004...................5%..............$750
The credit will not be available after December 31, 2004.
For purposes of the $15,000 limit, all employers of a controlled group (or partnerships or proprietorships under common control) are treated as a single employer.
• Qualified Employees
An employer can claim the credit for wages paid to all full- or part-time employees who:
1. Are zone residents, and
2. Perform substantially all of their services for the employer within
the zone in the employer's trade or business.
• Nonqualified Employees
The credit cannot be claimed for wages paid to:
1. An individual employed for less than 90 days (unless he or she meets
certain exceptions),
2. Certain related taxpayers,
3. Any 5% owner,
4. An individual employed at any:
a. Private or commercial golf course,
b. Country club,
c. Massage parlor,
d. Hot tub facility,
e. Suntan facility,
f. Racetrack or other gambling facility,or
g. Store whose principal business is the sale of alcoholic beverages
for off-premise consumption, or
5. An individual employed in a trade or business the principal activity
of which is farming, but only if the farm assets exceed $500, 000 at
the close of the tax year.
• Qualified Wages
Salaries and wages (as defined for Federal Unemployment Tax (FUTA) purposes) and certain training and educational expenses paid on behalf of a qualified employee are considered qualified wages.
The employer must also reduce the deduction for wages on his or her tax return by the amount of the employer wage credit.
• Carrybacks & Carryovers
Any unused employer wage credit can be carried back 3 years and forward 15 years. However, any unused credit cannot be carried back to any tax year ending before January 1, 1994.
• Alternative Minimum Tax
The wage credit can be used to offset up to 25% of the employer's alternative minimum tax liability.
Increased Section 179 Deduction
Certain taxpayers can elect to deduct up to $17,500 of the cost of qualifying Section 179 property in the year it is placed in service, instead of recovering that cost through depreciation. Section 179 property does not include buildings. The maximum deduction for Section 179 property that is "qualified zone property" is increased to $37,500 for "enterprise zone businesses."
• Qualified Zone Property
Depreciable tangible property (including buildings ), is qualified zone property if:
1. It is acquired by the taxpayer (but not from a related party) after
the zone designation is in effect,
2. Its original use in an empowerment zone begins with the taxpayer,
and
3. Substantially all of the property's use is in an empowerment zone
and in the active conduct of the taxpayer's qualified trade or
business in the zone.
Used property may be qualified zone property if it has not previously been used within an empowerment zone.
If property has been substantially renovated by the taxpayer, (1) and (2) above do not apply. Property has been substantially renovated if, during any 24-month period after the designation takes effect, the additions to the taxpayer's basis of the property exceed the greater of:
1. 100% of the taxpayer's adjusted basis at the beginning of the 24-
month period, or
2. $5,000.
• Enterprise Zone Business
A corporation, partnership, or sole proprietorship is an enterprise zone business if, for the taxable year:
1. Every trade or business of a corporation or partnership is the
active conduct of a "qualified business" within an empowerment
zone. (This rule does not apply to sole proprietorships.)
2. At least 80% of the total gross income is from the active conduct
of a "qualified business" within a zone.
3. Substantially all of the use of its intangible property is within a
zone.
4. Substantially all of its intangible property is used in, and
exclusively related to, the active conduct of the business.
5. Substantially all of the employee's services are performed within a
zone.
6. At least 35% of the employees are residents of an empowerment
zone.
7. Less than 5% of the property owned by the business is certain
financial property.
8. Less than 5% of the property owned by the business is collectibles
not held primarily for sale to customers.
For sole proprietorship, the term employee in (5) and (6) includes the proprietor.
The activities of related entities are not taken into account as long as those entities are legally separate.
A business may not relocate all or a substantial part of its existing operations to receive any empowerment zone benefits.
• Qualified Business
A qualified business is generally any trade or business except one that consists primarily of the development or holding of intangibles for sale or license.
The rental to others of real property located in an empowerment zone is a qualified business only if the property is not residential rental property and at least 50% of the gross rental income from the real property is from enterprise zone businesses.
The rental to others of tangible personal property is a qualified business only if substantially all of the rental of the property is by enterprise zone businesses or empowerment zone residents.
A qualified business does not include any business listed in items (4) and (5) under Nonqualified employees, earlier, except that the special rule for farms in item (5) is based on whether the assets of the business exceeded $500,000 at the close of the preceding tax year.
• Investment Limit
For each dollar of cost over $200,000 for section 179 property placed in service in a tax year, the maximum section 179 deduction is reduced by one dollar (but not below zero). However, only one-half of the cost of qualified zone property is taken into account when reducing the maximum section 179 deduction.
• Recapture
The recapture rules of section 179 apply when qualified zone property is no longer used in an empowerment zone by an enterprise zone business.
• Alternative Minimum Tax
The increased section 179 deduction is not treated as an adjustment for purposes of the alternative minimum tax.
• More Information
See Publication 946, How to Begin Depreciating Your Property, for more information on the section 179 deduction.
Tax Exempt Bond Financing
The Revenue Reconciliation Act created a new category of tax-exempt private activity bonds; qualified enterprise zone facility bonds. Tax-exempt bonds have lower interest rates than conventional financing.
This tax incentive will be available to finance property in both enterprise communities and empowerment zones. To qualify, 95% or more of the net proceeds of the bond issue must be used to finance:
1. "Qualified zone property" whose principal user is a qualified
"enterprise zone business," and
2. Certain land used for a related purpose (for example, land where
the business is located and a parking lot for customers and
employees).
The terms qualified zone property and enterprise zone business were defined earlier. However, for purposes of this tax incentive, qualified zone property also includes property that would qualify except that it is located in an enterprise community, rather than an empowerment zone. Also, an enterprise zone business includes a business located in a zone or that would qualify if it were separately incorporated. For example, a business that is part of a national chain could qualify providing that it would meet the definition of an enterprise zone business if it were separately incorporated.
• Limit
A bond issue will not qualify if the total amount of outstanding enterprise zone facility bonds allocable to any person and any related person (taking into account such issue) is more than
$3 million per zone or community or $20 million for all zones and communities.
• Exemption From Certain Restrictions
Qualified enterprise zone facility bonds are exempt form the general tax-exempt bond restrictions on financing the acquisition of land and existing property. Generally, all other rules related to tax-exempt private activity bonds for exempt facilities apply.
• Interest Not Deductible
No deduction will be allowed for bond-financed interest accruing in any year in which:
1. Substantially all of the facility ceases to be used in an
empowerment zone, or
2. The principal user of the facility ceases to be an enterprise
zone business (defined earlier).
This rule does not apply if the use of the facility ceases to qualify because of bankruptcy or the termination or revocation of the designation as an empowerment zone.
In addition, interest will remain deductible if the issuer and principal user attempted in good faith to meet the requirements and any failure is corrected within a reasonable period after discovery.
Other Benefits
A number of Federal agencies have agreed to provide additional resources for businesses in empowerment zones.
• The Small Business Administration is creating one-stop shops within empowerment zones to help package financial assistance and offer certain types of loans. You should contact your local SBA office for additional information.
• The Labor Department is offering special targeted job training programs for zone residents through local Private Industry Councils. These customized programs are designed to ensure that you can find qualified workers among residents in the zone.
• The Department of Housing & Urban Development is offering help to communities in targeting resources to provide housing for your employees who would like to live near their place of work.
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