n an effort to spur development in economically distressed areas, Congress passed the Community Renewal Tax Relief Act of 2000. Essentially, this law provides tax incentives for businesses to locate and hire residents in urban and rural areas that have not experienced recent economic expansion. This law creates, extends and expands three vehicles to attract business investment and create employment opportunities in specific, designated geographic areas.
Renewal communities. Under the new law, 40 new renewal communities will be created: Each will be entitled to receive tax breaks similar to the current empowerment zones. To be designated as a renewal community, an area must have certain high rates of poverty and unemployment (relative to the national level) and must be an area of “pervasive poverty, unemployment, and general distress.” There are no geographic size limitations, but a renewal community cannot exceed 200,000 in population.
To gain designation, state and local governments must make written commitments to specific, measurable goals, actions and timetables that reduce burdens on employers and employees in the area and promote economic growth.
Qualifying businesses in these communities may be entitled to employer wage credits for full-time employees and summer workers, an expanded expense deduction for tangible assets, an accelerated commercial revitalization deduction and a 100% exclusion for capital gains on the sale of certain renewal community business interests or tangible assets.
Empowerment zones. While these entities were originally created in 1993, the new law authorizes the creation of additional empowerment zones and expands some of the business incentives. In addition, existing empowerment zones can apply for designation as renewal communities.
Businesses located in empowerment zones will enjoy a wage credit for certain employees, increased expensing of some property, a 60% exclusion of gain from the sale of their stock, deferral of gain on qualifying assets if the proceeds are reinvested in appropriate replacement assets and easier access to tax-exempt financing.
Community development entities. In general, the Internal Revenue Code has offered few incentives to either invest in, or make loans to, small businesses located in low-income communities. The new law changes this by providing tax incentives to those willing to invest in economically disadvantaged communities. The new law establishes a new markets credit (part of the general business credit) for investment in the stock of community development entities (CDEs). CDEs are domestic corporations or partnerships the primary mission of which is serving or providing capital for low-income communities or persons, that maintain accountability to residents (who are represented on governing and advisory boards) and that are certified by the Treasury. Taxpayers and businesses that invest in economically challenged communities will be able to take a credit for “qualified equity investments.” To earn the credit, an investor must make capital or equity investments in (or loans to) qualified businesses located in low-income communities and may also provide financial counseling to both the businesses and the residents.
Unlike the community renewal and empowerment-zone tax breaks, the new markets credit may be taken directly by a passive investor as well as an active business.
For an expanded discussion of this law and other developments, see the Tax Clinic, edited by Anthony Bakale, in the August 2001 issue of The Tax Adviser.
—Nicholas Fiore, editor
The Tax Adviser