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FIN 48-Friendly Tax Savings for Right and Left Coast Practitioners

New York and California have very lucrative location-based credits. Chances are one out of every five of your clients is eligible. This article describes how to take advantage of them.

July 12, 2007
by Chuck Swenson, CPA/PhD

New York and California have two of the most lucrative, yet underutilized Enterprise Zone (EZ) programs in the United States. Each year, the two states each give in excess of $400 million in tax benefits (see http://www.hcd.ca.gov/fa/cdbg/ez/HCD_Final_Report.pdf; and http://www.budget.state.ny.us/archive/fy0203archive/0203TaxExpend
Report.pdf
). But, in my experience, these benefits could be much higher because only a fraction of companies actually take advantage of the programs. You may be able to zero out your clients’ tax liabilities if you take advantage of these completely legitimate programs.

Life Is Like a Box of Chocolates

Just enter 10 California or New York client business addresses using one of the software products available (http://www.ntcgtax.com/eztrial.html) and chances are at least one of them is in a zone. Or, go to the California EZ site or New York government site and look up the addresses from a list. California has 45 large zones located in most major metropolitan areas, while New York has 73 zones with similar statewide coverage. Both states recently expanded the areas covered by these zones.

California Is the Golden State

Here are the benefits for a company locating in an EZ:

Up to a $35,000 hiring credit over five years for each qualified W-2 employee; sales-and-use tax credits of up to 8.75 percent on purchases of qualified machinery and machinery parts; lenders that make loans to Zone businesses may receive a net interest deduction; exclusion from taxation of net interest received on loans from EZ businesses; and up-front expensing of certain depreciable property. Unused tax credits can be carried forward indefinitely, and tax returns can be amended up to four years prior to claim tax benefits.

Filing requirements:

There are no pre-approval forms required. For the hiring credit, the taxpayer completes a vouchering form for each qualified employee and sends it to the local EZ coordinator before year-end. The hiring credit and other EZ benefits are claimed on Form 3805Z, which is filed with the annual California tax return.

Cashing In on the Empire State

Here are the tax benefits for New York:

  • EZ Wage Tax Credit — This credit is available for up to five consecutive years for companies hiring full-time employees in newly created jobs. For employees in special targeted groups, this credit equals $3,000 per year, with a credit of $1,500 per year effective 1/1/2002, for all other new employees.
  • EZ Investment Tax and Employment Incentive Credits — Businesses that create new jobs and make new investments in production, property and equipment may qualify for tax credits of up to 19 percent of the company's eligible investment.

NOTE: New Business Refund — Businesses new to NY are entitled to a 50 percent cash refund of unused EZ-WTC and ITC amounts. Other businesses may carry forward unused credits indefinitely.
  • EZ Capital Credit — A 25 percent tax credit against personal or corporate income taxes is available for contributing or purchasing shares in a zone capital corporation; or for a direct equity investment in a certified zone business; or for contributions to approved community development projects within an EZ.
  • Sales Tax Exemption — Employment that exceeds the average employment during the three (3) previous years may be exempt from the NYS share of Sales Tax (4%) on tangible property, goods and services used by the business for 10 years.
  • Sales Tax Refund or Credit — Purchases of building materials to be used for commercial or industrial real property located in an EZ are eligible for a refund or credit of NYS sales taxes. A similar refund or credit of local sales tax may also be available from the locality.
  • Real Property Tax Abatement — EZs may offer tax abatements from an increased assessment, with the abatement value based on improvements to real property for up to 10 years. This holds true for up to seven years at 100 percent, decreasing over the last three years of the exemption.
  • Utility Rate Savings — Special reduced electric and gas rates may be available through invest-owned utilities in New York State. Businesses that locate or expand their operations in an EZ may receive significantly reduced rates.

Filing requirements

A taxpayer must be certified under Article 18-B of the General Municipal Law. This is accomplished by filing Application for Joint Certification of an Empire Zone Business Enterprise (Form EZ-1). To obtain the EZ Wage Tax Credit, complete Form CT-601 (PDF), Claim for EZ Wage Tax Credit, and file Form CT-601 along with taxpayer's NY State Income Tax Returns. For the EZ Investment Tax and Employment Incentive Credits, complete Form CT-603, Claim for EZ Investment Tax Credit and EZ Employment Incentive Credit, and file Form CT-603 along with taxpayer's NY State Income Tax Returns. For sales tax exemption, complete DTF-84, Application for Qualified Empire Zone Enterprise (QEZE) Sales Tax Certification and apply for Sales Tax Exemption number from NY State Department of Taxation within two weeks after receipt of Empire Zone Certificate of Eligibility. For the EZ Zone Capital Tax Credit, file Form Z10, Eligibility to Apply for a Zone Capital Tax Credit from Empire State Development Corporation. Attach a copy of Form Z10 to Form CT-602, Claim for EZ Capital Tax Credit, when applying for the EZ capital tax credit, and file Form Z10 & Form CT-602 along with taxpayer's NY income tax returns.

More States, Please!

Thirty-eight other states have EZ or similar location-based credits and incentives. Go to your state’s economic development Web page and find out. Or, type in a client address on the EZ software mentioned at the beginning of this article; if it’s in a state EZ, it will let you know.

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Charles Swenson, CPA, MBT, PhD is Professor and Leventhal Research Fellow at the University of Southern California. He has authored over 50 articles and two textbooks on taxation, and is editor of a treatise on state and local taxation forthcoming by Lexis-Nexis.