Can You Claim the Enterprise Zone Credit?

November 23, 2011

The California Enterprise Zone program is intended to stimulate development in specific economically distressed areas of California.  The result is that new and existing businesses located in these areas can take advantage tax incentives while at the same time invigorating local economy and creating new jobs.

There are 42 Enterprise Zones located throughout California: Anaheim*, Antelope Valley, Arvin, Barstow, Calexico, Coachella Valley, Compton, Delano, East Los Angeles, Eureka, Fresno, Fresno County, Harbor Gateway Communities*, Hesperia, Hollywood, Imperial Valley, Kings County, Long Beach, Merced, Oakland, Oroville, Pasadena, Pittsburg*, Richmond, Sacramento*, Salinas Valley, San Bernardino, San Diego*, San Francisco*, San Joaquin County, San Jose, Santa Ana, Santa Clarita Valley*, Sequoia Valley*, Shasta Metro, Siskiyou County, Southgate/Lynwood, Stanislaus, Taft, Watsonville, West Sacramento, and Yuba-Sutter (*conditionally-designated zone).

The benefits of being an Enterprize Zone business include:

– Enterprise Zone Hiring Credit

– Sales Tax Credit, and

– 35% reduction in DWP utility rate.

California Enterprise Zone Overview

All businesses that are located in an Enterprise Zone are eligible for the tax credits and benefits as follows.

– Up to $37,4400 hiring credit over 5 years for each qualified W-2 employee.

– Sales & use tax credits on purchases of qualified machinery and machinery parts.

– Up-front expensing of certain depreciable property.

– Net interest deduction for Lenders that make loans to Zone businesses.

– Up to 100% Net Operating Loss (NOL) carry-forward. NOL may be carried forward 15 years.

– Unused tax credits can be applied to future tax years.

 

What needs to be filed

Hiring Credit

The vouchering form for each qualified employee must be completed and sent to the coordinator before the year end.  Also, Form 3805Z must be completed and filed with the annual tax return.

Sales & Use Credit

Form 3805Z must be filed with the annual tax return.

Lenders Net Interest Deduction

Form 3805Z must be filed with the annual tax return.

Calculation

Hiring Credit

The chart below shows the percentage of qualified wages paid that may be claimed as a hiring credit.

Period ofemployment Percentage of qualifiedwages allowed as credit
1st 12 months 50%
2nd 12 months 40%
3rd 12 months 30%
4th 12 months 20%
5th 12 months 10%
6th 12 months 0%

The credit calculation is based on the smaller of actual hourly wage paid or 150% of the minimum hourly wage established by the Industrial Welfare Commission. The 2011 minimum hourly wage is $8.00 multiplied by 150% equals $12.00.

Sales & Use Credit

In any taxable year, individuals may claim a credit equal to the sales & use tax paid on the first $1 million of qualified property. Corporations may claim a credit equal to the sales & use tax paid on the first $20 million of qualified property. The qualified property has to be used exclusively within the boundaries of the Enterprise Zone.  Qualified property includes:

¤ Machinery or machinery parts used to manufacture, process, assemble, or fabricate a product; produce renewable energy resources; or control air or water pollution

¤ Data processing and communication equipment

¤ Motion picture manufacturing equipment.

Lenders Net Interest Deduction

A lender can take a deduction for the amount of “net interest” earned on loans made to a trade or business located in an Enterprise Zone.  “Net interest” means the full amount of the interest, less any direct expenses incurred in making the loan. Some examples of direct expenses incurred are commissions paid to the loan representative and the cost of money incurred in funding the loan.

Please contact our office for further information or to see if your business is located in a California Enterprise Zone.