Enterprise Zone Incentives: Often Overlooked State Tax Benefits
2013-Issue 27—As the economy continues to improve and companies are investing long-held cash in domestic expansion programs, it seems appropriate to revisit state enterprise zones and the benefit they can bring to a business. Many states have implemented programs designed to stimulate economic growth within the state and to revitalize distressed areas, seemingly a win-win for all parties. Currently, about 35 states offer some form of a credit for undertaking activities or investments in an enterprise zone. Businesses located in areas designated as enterprise zones may be eligible for significant state tax credits, incentives and other benefits, including but not limited to hiring tax credits, sales and use tax credits, increased expense deductions, net operating loss carryforward and property tax incentives.
States generally do not require special applications for a business to be considered in the enterprise zone. If the business is located within the zone, the business should be eligible to obtain special state and local tax incentives or regulatory tax credits, thus providing an economic stimulus to an area that might otherwise be neglected.
What Is an Enterprise Zone?
An enterprise zone is generally a defined geographic area with certain economic and social characteristics. The size of an enterprise zone varies, with consideration by the state for its own budget, socioeconomic profile and needs of the locality. Some states establish enterprise zones that are limited to a few city blocks, while others designate an entire county or the entire state for economic expansion. California, Florida, Illinois and New York have created more traditional enterprise zones in designating only small, specific areas of the state as enterprise zones.
Other states, including Alabama, Arkansas, Georgia and Utah, have designated broader areas such as counties or even the entire state as an enterprise zone. Mississippi and Georgia, for example, classify each county into one of three categories: less developed, moderately developed and developed. In Mississippi, specific employment levels are established for each county to qualify for an income tax credit.
Examples of Enterprise Zone Credits
Some of the most common enterprise zone credits available to businesses are job-creation type credits that encourage increased employment opportunities, particularly for enterprise zone residents. Virginia provides credits for businesses that create at least four net new qualifying jobs with health benefits that pay at least twice the federal minimum wage rate. A job grant amount of up to $4,000 is available for each job over the four job threshold amount. In enterprise zones designated as high unemployment areas by the Virginia Department of Housing and Community Development, businesses paying 1.5 times the federal minimum wages rate are eligible for up to $2,500 per qualifying job over the threshold amount. Virginia generally pays these grants in annual installments of a maximum of either $500 or $800 per job and makes these grants available for qualifying jobs over the four job threshold amount for a five-year grant period. However, businesses are required to qualify for the grants annually, and the incentives are subject to proration if demand for the program exceeds budget levels. Qualifying business may claim these grants on up to a maximum of 350 jobs per year.
Another state that provides a job creation credit is California. California's hiring tax credit is available to businesses for each qualified hourly employee. A qualified employee is an employee who performs at least 90 percent of his or her services during a year for the employer in activities directly related to the conduct of the taxpayer's business located in an enterprise zone, performs at least 50 percent of his or her services during a taxable year in an enterprise zone, is hired after the date of original designation of the area as an enterprise zone and meets the employment disadvantage criteria set forth under Cal. Rev. & Tax. Cd. Section 17053.74(b)(4). Businesses must generally obtain a certification from the California Employment Development Department or other federal or local agency, certifying that an employee meets the employment eligibility criteria. California provides businesses with a tax credit equal to 50 percent of the employee's wages for the first year of employment, after which the tax credit decreases by 10 percent for each subsequent year. The credit is generally available for a total of five years. A single qualified employee can provide a tax credit of $37,000 or more during the first five years of employment.
Florida offers businesses located in an enterprise zone a credit against their sales tax due or their corporate income tax when wages are paid to new employees who have been employed for at least three months and are residents of a Florida enterprise zone or rural enterprise zone. This Florida jobs tax credit provides a credit equal to 20 percent of wages paid to new eligible employees who are residents of a Florida enterprise zone. Where 20 percent of a business's employees are residents of an enterprise zone, the available credit increases to 30 percent. If the business is located in a rural enterprise zone, the credit increases to 30 percent and 45 percent, accordingly.
In addition to the jobs tax credit, Florida provides other tax incentives, including a property tax credit equal to 96 percent of ad valorem taxes paid on new or improved property for new or expanding businesses located in an enterprise zone. This credit can be claimed for five years, up to a maximum of $50,000 annually. Florida also provides a sales tax refund for business machinery and equipment used in an enterprise zone, and for building materials put in place in an enterprise zone. Lastly, Florida may also exempt sales tax for electrical energy used in an enterprise zone.
The Texas Enterprise Zone Program allows local communities to grant sales and use tax refunds to qualified businesses that promote job creation and capital investment in economically distressed areas of the state. This discretionary program requires that local communities nominate a company to be eligible to participate in the program, and an application must be submitted to the state for approval. However, the state limits the number of participants per biennium. If the business qualifies for the program and maintains its qualifications, the company may file for a refund of sales and use taxes paid while maintaining the business at the qualified business site. The refund varies based on the number of qualified jobs and the amount of capital investment. For example, if a business invests between $1 million and $4,999,999 over a five-year period, the refund will be $2,500 per job for up to 125 employees, for a maximum refund of $312,500.
While most of the enterprise zone incentives available require either a capital investment and/or creation of jobs, each state program is different. Texas, for example, limits the number of candidates that can apply and participate in them, while Virginia merely prorates the incentives received by each business if participation exceeds its budget cap. However, several enterprise zone programs merely require the business to be located in a zone. Therefore, businesses should consider the requirements carefully and investigate thoroughly before assuming that they do not qualify for an enterprise zone program.
Alvarez & Marsal Taxand Says:
The majority of state legislatures have authorized enterprise zone programs with the goal of stimulating growth and development in distressed areas within their state. Before making a significant investment in assets or significantly increasing the payroll, a business should consider whether these additions will occur within an enterprise zone. Often a business will discover that these enterprise zone benefits may be claimed only upon an initial investment in capital assets or the employment of individuals for a new, expanded or relocated business facility. It is imperative for businesses to check with their tax advisors to determine whether they are taking full advantage of the programs available to them, as most of the enterprise zone incentives involve tax credits.
Author
Alex Joya
Managing Director, Miami
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Emilio E. Martinez, Director, contributed to this article.
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