Since the mid-1990s, Congress
has tried to help businesses operating in certain
low-income and economically disadvantaged areas.
This has taken the form of tax credits and
deductions for businesses that locate in, and hire
residents from, those areas. These inducements may
be of interest to companies looking to start new
operations, or expand or relocate existing ones.
EMPOWERMENT ZONES AND RENEWAL COMMUNITIES
Certain economically distressed communities
have been designated as “empowerment zones.” These
are nominated by state and local governments, and
meet certain criteria (for example, population,
general economic distress and poverty rate).
Empowerment-zone businesses may be eligible for
several tax incentives. Other communities
characterized by high unemployment and poverty
rates have been designated as “renewal
communities”; qualified businesses in these areas
are eligible for similar (not identical)
Empowerment-zone businesses may take a 20%
credit on the first $15,000 of qualified wages
paid to either full- or part-time employees living
in the zone, up to a maximum $3,000 credit per
employee per year. Employees must perform
substantially all of their work in the employer’s
trade or business within the zone. For renewal
communities, the credit is 15% of the first
$10,000 of qualified wages.
SECTION 179 EXPENSING
In general, IRC section 179 allows
businesses to deduct immediately the cost of
certain assets (up to a ceiling), rather than
capitalizing and depreciating the property over
its life. For 2007, this dollar limit is $112,000,
reduced dollar-for-dollar for qualified asset
purchases over $450,000.
purchasing qualified zone property to use in an
empowerment zone, the $112,000 limit may be
increased by as much as $35,000; the $450,000
limit is reduced by 50% of the cost of qualified
zone asset purchases (rather than the
dollar-for-dollar reduction). Businesses in
renewal communities are eligible for the same
increased section 179 benefits.
CAPITAL GAIN ROLLOVERS AND EXCLUSIONS
In certain cases, a taxpayer can elect to
roll over (or defer recognition of) capital gain
realized from the sale or exchange of qualified
empowerment-zone assets purchased after Dec. 20,
2000, and held for more than a year. The seller
must use the proceeds from the sale to purchase
other qualifying empowerment-zone property within
60 days of the original sale; the new property
must be used in the same empowerment zone as the
sold asset. For renewal communities, qualified
capital gains resulting from the sale of certain
qualified renewable community assets held more
than five years are tax-free.
Qualified small business stock.
Generally, noncorporate investors
can exclude up to 50% of the gain on the sale or
exchange of qualified small business stock issued
after Aug. 10, 1993, and held for more than five
years. For empowerment-zone stock sales, the gain
exclusion percentage is 60%.
detailed discussion of these and other available
incentives, see “Tax Incentives for Businesses in
Distressed Communities,” by Larry R. Garrison,
Ph.D., CPA, in the May 2007 issue of The Tax
—Lesli S. Laffie, editor
The Tax Adviser