What are Enterprise Zones and the tax credits they offer?
In the late-80s and early-90s, California established the Enterprise Zone Program in an effort to revitalize economically depressed areas throughout the state. Businesses receive tax incentives for hiring new employees (hiring credit) or making capital expenditures (sales and use tax credit).  Today, there are 39 such Enterprise Zones across the state, including many cities or portions of cities within Los Angeles and Orange counties.  You might be surprised by some of the cities that are included.

Is it really worth spending the time to figure out if a business does qualify for the credit?
I hear that all the time. Let’s just look at the hiring credit, which is worth as much as $31,544 per qualifying employee. One or two employees make it worthwhile, but what if you employ 20 such employees? Then we’re talking some tremendous tax savings. And the credit can be applied retroactively. We recently worked with a company based in Torrance with $7 million in annual gross sales that received a refund of $132,500 after we looked back at their tax forms from 2001 to 2004, and they expect to receive $60,000 per year in future savings. Lastly, remember this is a tax credit, not a deduction.

What’s the difference between a tax deduction and a tax credit?
Deductions reduce your taxable income when preparing your return and are valued based on the percentage corresponding to your tax bracket. Credits are direct dollar-for-dollar subtractions off your total tax liability.

What cities qualify as Enterprise Zones?
This is where it gets difficult because there are many different zones, and they don’t follow directly along town borders. Some parts of Long Beach, Los Angeles, Watts, Gardena, Torrance, Wilmington, San Pedro, and Santa Ana qualify, to name a few. One way to determine if your business is within such a zone is to check out the website: www.hcd.ca.gov/fa/cdbg/ez/enterprise#maps.. Our area has both city and county Enterprise Zones, and the maps are different, so you should check the county map too: www.lacdc.org/economic/incentives/incentives.shtm. Then, if you do qualify, you have to contact the representative handling your region to begin the process. That’s another web site: www.caez.org/about_caez/members.htm

For the hiring credit, how do you determine if an employee qualifies?
There are about 20 different criteria, where if the employee qualifies for just one, your business qualifies for the credit. Some examples: the employee lives in a designated areas called “Targeted Employment Areas,” he or she is a veteran, or he or she was laid off before coming to work for your business.  

How’s the employee credit work?
The credit is earned over the first five years you employ a qualified worker. The first year, you receive a credit equal to 50 percent of their salary, capped at one-and-a-half times minimum wage. The credit then drops 10 percentage points each of the ensuing four years.  

Are there any other potential credits associated with Enterprise Zones?
As I mentioned earlier, there is also a sales and use tax credit, which is based on any sales or use tax you paid on manufacturing, telecommunication or data processing equipment.  Finally, there is a business deduction provision to accelerate the expensing of depreciable equipment. Again, all of this can be done for up to four years retroactively.  

Do you have to own a certain type of small business to qualify?
No. Whether you run an LLC or a C Corp or an S Corp or you’re a sole proprietor, you can qualify. Although, you may have to claim the credits differently on your tax forms. It should also be pointed out, it doesn’t  matter what type of business you operate, whether retail, manufacturing, or service enterprise, they all qualify if located in the designated area. My firm, which provides professional services, employs a veteran and since we are located in an Enterprise Zone, we qualify. Over the past two years we’ve received over $10,000 in credit. 

Are there any federal equivalents to Enterprise Zones?
The federal government has what it calls “Empowerment Zones” and “Renewal Communities.” Renewal communities typically surround Empowerment Zones, which are typically more impoverished and so receive larger credits, up to $3,000 per employee. A lot of the time, they overlap with Enterprise Zones, but to find out if your business is in such an area, there’s another Web site: http://www.hud.gov/offices/cpd/economicdevelopment/programs/rc/tour/ca/index.cfm.

Why don’t tax preparers notify qualifying businesses?
Well, I think there are a number of reasons.  First, it’s the age-old issue of generalist verses specialist. I’m a specialist – this is all I do. CPAs are generalists – they have to know a little about everything. Secondly, the credit information is not in one central location as there are many governing agencies. And finally, as you can tell from this quick tutorial, this stuff gets very complicated pretty quickly, which reminds me to say that all of this information should not be taken as tax advice. So, I think many CPAs just get overwhelmed or conclude that a business does not qualify before fully investigating it all. That said, the first things you should do are check out these Web sites, contact your CPA, and go from there.