EZ Wage Credit a business can obtain information over Internet using RC address locator



Renewal Community

Questions & Answers

Tax incentives are generally designed to encourage businesses to locate or expand operations in a Renewal Community (RC) and to hire residents of the RC.  Two RC incentives -- Increased Section 179 Expensing Deduction and Zero Percent Capital Gains for RC Assets-- require that the business meet the definition of "Renewal Community Business" in order to qualify for the incentive.

A business qualifies as a Renewal Community Business if it actively conducts business in a RC, has its tangible and intangible property located and used in the active conduct of business in a RC, employs residents of a RC (a required 35% of its employees), and has its employees perform services in a RC.  The business can be a sole proprietorship, partnership, or corporation for Federal tax purposes.  Some businesses are excluded from qualifying.  The business must meet the requirements of being a Renewal Community Business continuously for several years, depending on the incentive.

Employment Credit

The Renewal Community Employment Credit (RC Wage Credit) gives businesses an incentive to retain or hire individuals who both live and work in a Renewal Community (RC).  Businesses can claim the credit if they pay or incur "qualified zone wages" to a qualified employee.  The credit can be up to $1,500 for the RC Wage Credit.  The credit is available with respect to all EZs and RCs beginning January 1, 2002.  Round I Zones are currently eligible for the EZ Wage Credit, Continuing through December 31, 2009. 
 

Are there any employer incentives for hiring employees who work in a RC? 
Yes. The tax code allows employers a credit against Federal taxes for hiring and retaining employees who live and work in a RC.  RC Wage Credit is available in RCs since January 1, 2002, and will continue for all RCs through December 31, 2009.

Can a business use this credit for current employees? 
Yes. The RC Wage Credits are incentives to hire and retain individuals who live in an RC, so it is available each year throughout the RC Wage Credit periods. (January 1, 2001 - December 31, 2009)

How does a business document that an employee is an RC resident? 
The employer should obtain a statement from the employee, under penalty of perjury, that gives the address of the employee's principal residence and provides assurance that the employee will notify the employer of a change in the employee's principal residence.  The local RC CoRA can confirm that the address is in the RC or a business can obtain the information over the Internet using the RC address locator.  The statements are not filed with the business's tax return, but should be retained like any other documents that support a tax return.

What if the employee works part-time? 
The credit is available for both part-time and full-time employees as long as they have been employed by the employer for at least 90 days.  The amount of the credit is tied to the amount of wages paid rather than to the number of hours worked.

What is the definition of qualified wages? 
Qualified wages are generally wages subject to the Federal Unemployment Tax Act (FUTA). The credit is calculated against a maximum of $10,000 for the RC Wage Credit. A business may pay the employee more than $10,000 for RCs, but the maximum for purposes of calculating the credit is $10,000 for an RC. The instructions for IRS Form 8844 provide additional information on qualified wages.

What is the credit amount? 
The credit amount for the RC Wage Credit is 15 percent of wages up to the $10,000 wage amount.

Is there a limit on the number of employees for which a business can take the credit? 
An employer can take the credit for as many employees as qualify.

What if the employee works in a RC for only part of the year? 
An employer can use either the pay-period or calendar-year method for determining the period of time the employee performs services in a RC. No other time periods can be used to prorate the credit. For example, if an employee works in several factory locations and is paid weekly, an employer can claim the wage credit for the weekly pay periods during which the employee works substantially all of his or her time in the factory located in a RC. Substantially all is defined as 85 percent for the purposes of some of the tax incentives discussed in this guide, but the regulations on the RC Wage Credits do not define substantially all. The employer must use the same method for all employees, but may change the method applied to all employees from one taxable year to another.

What if the business is located in a RC, but the employees spend part of their time working outside the boundaries of the RC? 
The credit is available only if substantially all of the services performed during the period (see answer to question above on pay-period and calendar year calculations) are in a RC. Substantially all is defined as 85% for purposes of some of the tax incentives discussed in this guide, but the regulations on the RC Wage Credits do not define substantially all. If an employee does not perform substantially all services inside a RC within the calculation period selected, the credit cannot be prorated and no portion of the wages for that period would qualify for the credit.

What if the Federal tax liability of the business is less than the total credit amount? 
The RC Wage Credits generally are subject to the same rules as other business tax credits. As with other business tax credits, unused credit amounts can be carried forward for up to 20 years and carried back a year. However, the credit cannot be carried back prior to the RC designation.

Are there special procedures for taking the RC Wage Credit? 
The credit is accounted for on IRS Form 8844 and would be part of a business's tax filing.

Can nonprofit organizations benefit from the RC Wage Credits? 
Tax-exempt organizations, other than certain cooperatives, are ineligible for the credits.

Can a pass-through entity, such as a partnership or S-corporation, use the credit? 
The RC Wage Credits are general business tax credits for Federal tax purposes and may be passed through under the rules similar to other business tax credits.

Does the RC Wage Credit reduce Alternative Minimum Tax (AMT) liability? 
AMT may be reduced by 25 percent of the RC Wage Credit amount.

Can the RC Wage Credit for an employee be taken concurrently with Work Opportunity Tax Credits (WOTC) or Welfare to Work (WtW) credits? 
Yes, but wages are not taken into account for the RC Wage Credit if they are being used in determining WOTC or WtW. In addition, the $10,000 cap on wages taken into account for the RC Wage Credit, respectively, would be reduced by any wages taken into account in computing WOTC or WtW.

Which categories of employees would not qualify for the RC Wage Credits? 
The RC Wage Credits cannot be taken for any individual employed at any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other gambling facility, or store whose principal business is the sale of alcoholic beverages for consumption off premises. The RC Wage Credits are not available for family members of the employer, including sons, daughters, parents, stepchildren, stepmothers, stepfathers, in-laws, and other persons treated as dependents under the tax code. Similar exclusions apply to 5 percent owners related to the employer and family members of majority shareholders or partners of the employer.

Can entities that lease their employees use the credit? 
Employers should check with their tax advisors. The RC Wage Credits are based on FUTA wages, so the ability to take the credit will depend on who the employer is for purposes of the FUTA wages.

Is there a definition of employee? 
The credit is tied to wages as defined for purposes of FUTA. Any individual treated as an employee under FUTA would generally be treated as an employee for purposes of the EZ Wage Credit.

Can the RC Wage Credit be taken for farm workers?  
If the employer's principal activity is farming, the credit is available for employees only if the sum of value of the assets owned or leased by the employer for use in the farming business does not exceed $500,000. The definition of farming and the method for calculating the value of the assets are found in the tax laws, and the employer should consult its legal advisor on this matter before taking the credit.

How does the credit affect the deduction for salaries and wages? 
A business must reduce the deduction for salaries and wages by the amount of the credit taken.

Where can a business obtain more information on this incentive? 
A business should consult with its tax advisor. IRS Publication 954 and IRS Form 8844 describe this incentive. For copies call 1-800-829-3676 or visit www.irs.ustreas.gov. 
 

Increased Section 179 Deduction

Deduction that allows business to claim increased section 179 deduction (up to $35,000 for property acquired after December 31, 2001) if the business qualifies as a Renewal Community Business.  Can be claimed on certain depreciable property such as equipment and machinery.  Section 179 of the Internal Revenue Code allows businesses to choose to deduct all or part of the cost of certain qualify property in the year they place it into service.  Businesses can do this instead of recovering the cost by taking depreciation deduction over a specified recovery period.  There are limits, however, on the amount businesses can deduct in a tax year. 
 

What assistance is available to businesses located in an EZ or RC for equipment purchases? 
The tax code allows a Renewal Community Business to take an additional expense deduction of up to $35,000 after December 31, 2001, on purchases of tangible personal property (equipment) for use in a RC.

What is the benefit of additional expensing? 
Expensing permits a business to take a deduction for the full cost of equipment in the year it is purchased. In addition, this write off of costs means that a business does not have to set up a tax depreciation schedule and deduct the expense over time. Expensing is particularly helpful for equipment with a long recovery period.

Are some businesses ineligible for this incentive? 
Certain business activities do not qualify, such as residential rental activity; commercial real estate, unless at least 50 percent of the gross rental income is from Renewal Community Businesses; rental of personal property, such as car rental agencies, unless at least 50 percent of the rentals are to Renewal Community Businesses, or to RC residents; businesses that predominantly hold or develop intangibles for sale or license; country clubs; liquor stores; golf courses; racetracks; or gambling facilities.

What type of property qualifies? 
The additional expensing allowance is available only for a Qualified Renewal Property (QRP), defined as the following:  Eighty-five percent of the use of the property must be in the active conduct of a Renewal Community Business by a taxpayer in a RC.  The taxpayer acquired the property by purchase after the date of RC designation. Original use of the property in a RC commences with the taxpayer (that is, the taxpayer is the first person to use the property inside a RC), or the taxpayer meets the substantial renovation rule. Property is substantially renovated if, during any 24-month period beginning after RC designation, there are additions to the basis of the property equal to either 100 percent of the adjusted basis of the property or $5,000, whichever is greater.

How do the expensing phase-out limits work? 
The general tax rule is that for each $1 of Section 179 property greater than $200,000 placed in service in a tax year, the expensing allowance is reduced by $1. However, for each $1 QRP greater than $200,000 in a tax year, the expensed amount is reduced by 50в.

How does a business file for this incentive? 
The additional expensing amount is recorded on IRS Form 4562. This form has a special line, along with instructions, for QRP. A business should consult with its tax advisor.

Commercial Revitalization Deduction

Businesses that construct or rehabilitate commercial property in Renewal Communities (RCs) can deduct a portion of the costs of acquisition and rehabilitation over a shorter period of time than permitted under standard depreciation rules.  A business can elect a deduction of one-half of "qualifying revitalization expenditures" (QRE) up to $10 million for any one project in the year the building is placed in service or can deduct all QRE pro-rata over 10 years.  The project must receive an allocation from the State (up to $12 million allocated for each RC in the State from 2002 through 2009). 
 

Are there any incentives for commercial building investment in a RC? 
In 2000, Congress created a new "commercial revitalization deduction" (CR Deduction) that is intended to increase economic development in RCs. The incentive is a deduction from income before calculating Federal income tax liability, and provides a way to deduct costs on an accelerated basis.

Are there limits on the deduction? 
The amount of the deduction is subject to a State limitation of up to $12 million of "commercial revitalization expenditures" (CREs) for each RC located within a State for each calendar year after 2001 and before 2010. In addition, the CREs for a particular building cannot exceed the actual qualifying costs and there is an overall limit per building of $10 million.

Is the CR Deduction available only for new construction? 
The deduction is calculated on the basis of qualifying CREs. CREs include the depreciable costs of a new building or the costs associated with an existing building that is substantially rehabilitated. Substantial rehabilitation means that, within a 24-month period, rehabilitation expenditures exceed the lesser of the adjusted basis of the building (and its structural components) or $5,000. For purposes of determining whether a building has been substantially rehabilitated, rehabilitation expenditures do not include enlarging a building. If the substantial rehabilitation test is met (without taking into account the costs of expansion), the cost of expanding the building could qualify as a CRE.

To what extent do building acquisition costs qualify for the CR Deduction? 
A taxpayer can include the cost of the building acquisition in taking a CR Deduction, but only to the extent that the acquisition cost does not exceed 30 percent of the aggregate qualifying CREs (determined without regard to the acquisition cost). For example, if the building cost $500,000 to acquire and renovations eligible for CREs were $1 million, up to $300,000 of the acquisition cost could qualify as a CRE.

Could an investor obtain special tax advantages for land speculation in an RC? 
The CR Deduction is permitted only for the cost of acquiring a building and rehabilitating it, not for land costs. Acquisition of land for speculation would not qualify.

Is the CR Deduction available for residential rental property? 
The building must be used for commercial purposes, so a residential rental property would not qualify. However, if a developer were to provide commercial facilities at or near the residential rental property, these expenditures might be eligible, assuming the commercial development is located in a RC.

Who will make the allocation of the CR Deduction? 
This incentive requires that each State identify an entity to act as the community revitalization agency (CRA). The CRA will develop the procedures for allocating the $12 million in CR Deductions permitted for each RC.

How can a developer determine if a particular project might be competitive for obtaining the CR Deduction? 
The CRA must develop a plan for allocating the CR Deduction and must submit the plan to a public hearing. The plan must then be approved by the governmental unit of which the RC is a part. The Federal statute provides guidelines for the qualified allocation plan, requiring the CRA to take into account full-time jobs created by the project, active community involvement and contribution to the implementation of the Strategic Plan of the RC. The developer of a potential project should obtain a copy of the plan to determine the priorities of the CRA where the project might be located.

What is the accelerated period for the CR Deduction? 
The taxpayer may elect one of two permitted accelerated deduction methods. A taxpayer can elect either to (a) deduct one-half of the CREs for the taxable year the building is placed in service or (b) 
amortize all the CREs ratably over a 120-month period beginning the month the building is placed in service. The method selected will depend on a taxpayer's particular tax situation. This special deduction provision would be in lieu of depreciating the property over a period up to 39 years.

What if the building was purchased and renovated prior to RC designation? 
The CR Deduction is available only to buildings placed in service after the RC designation and before January 1, 2010. If the building was purchased before RC designation, but the renovation was not completed until after RC designation, the renovation expenditures would be treated as a separate building for purposes of determining when it was placed in service and could qualify for the CR Deduction on that basis.

What other tax consequences arise from using the CR Deduction? 
No depreciation is allowed for amounts deducted as CR Deduction. The adjusted basis of the building is reduced by the amount of the CR Deduction, and the deduction is treated as a depreciation 
deduction in applying the depreciation recapture rules.

Does a CR Deduction affect Alternative Minimum Tax (AMT) liability? 
The CR Deduction is allowed as a deduction in computing a taxpayer's AMT income.

Do the passive loss limitation rules apply to the CR Deduction? 
The CR Deduction is treated in the same manner as the Low-Income Housing Tax Credit in applying the passive loss rules. That means that an individual taxpayer can have up to $25,000 of passive activity deductions (the CR Deduction together with the other deductions and credits not subject to the passive loss limitation), regardless of the taxpayer's adjusted gross income. Corporations are not subject to the $25,000 passive loss limitation.

Zero Percent Capital Gains Rate for Renewal Community Assets

If a business holds a Renewal Community Business asset acquired after December 31, 2001, and before January 1, 2010, for a minimum of 5 years, the business does not have to include any "qualified capital gain" from the asset's sale or exchange in its gross income. This exclusion applies only to an interest in, or property of, certain businesses operating in a Renewal Community (RC). The following qualify as RC assets: RC business stock, RC partnership interests, or RC business properties. Only gain attributable to the period from January 1, 2002, through December 31, 2014, for RCs.

Is there any special capital gain treatment for property in a RC? 
The capital gain on certain assets is eligible for 0-percent capital gains rate in all RCs.

What assets are eligible for 0-percent capital gains in RCs? 
The 0-percent capital gains rate applies to gain from the sale of an RC asset acquired after December 31, 2001, and before January 1, 2010. Qualifying assets include (1) stock in a domestic company acquired by the taxpayer at its original issue from the corporation solely in exchange for cash, (2) any capital or profits interest in a domestic partnership if the interest was acquired by the taxpayer from the partnership solely in exchange for cash, and (3) tangible business property acquired by the taxpayer by purchase, in which either the original use of the property in an RC commences with the taxpayer or the taxpayer substantially improves the property. In the case of stock or partnership interests and ownership of the tangible business property, the business must be a Renewal Community Business or DC Enterprise Zone Business when the stock, interest, or property is acquired (or be formed with the purpose of being a Renewal Community Business) and must remain a Renewal Community Business for substantially all of the holding period. (See appendix A.)

If the asset was purchased before an area receives a RC designation does the 0-percent capital gains rate apply? 
No. The asset must be purchased after designation. If additional stock or partnership interests of an entity are purchased at original issuance after the RC designation, these additional interests might qualify.

What if a taxpayer purchased a RC asset, such as an existing building, from the taxpayer's parents? 
The business must meet the requirements for substantially all of the 5-year holding period. "Substantially all" generally means 85 percent of the period. If the business ceases to meet the test after the 5-year holding period, the 0-percent rate applies, but only to the extent of the gain to the date the business failed to meet the requirements.

What if a business ceases to meet the definition of a Renewal Community Business? 
Qualified wages are generally wages subject to the Federal Unemployment Tax Act (FUTA). The credit is calculated against a maximum of $10,000 for the RC Wage Credit. A business may pay the employee more than $10,000 for RCs, but the maximum for purposes of calculating the credit is $10,000 for an RC. The instructions for IRS Form 8844 provide additional information on qualified wages.

How long must the asset be held? 
The minimum holding period is 5 years.

If the asset is sold before the end of the 5-year period, can the 0-percent gain feature be preserved for the subsequent holder? 
A subsequent purchaser of an asset that otherwise qualifies for 0-percent capital gain treatment is eligible for the incentive. The original purchaser would not be able to exclude any gain attributable to the period the asset was held, however, because the asset was not held by that original purchaser for the minimum period.

What if the asset is held beyond the RC designation period? 
The 0-percent rate applies only to gain attributable to the period after December 31, 2001, and before January 1, 2015, in the case of an RC asset. The taxpayer is not required to sell the asset in in 2015, but must determine and substantiate the gain attributable to that period and may apply the 0-percent rate to that amount.

What if the stock or partnership interest is redeemed before the end of the minimum holding period? 
The asset would not be eligible for the 0-percent capital gains rate, must be held for 5 years.

Appendix (Summarization of all sections)

Tax incentives are generally designed to encourage businesses to locate or expand operations in a Renewal Community (RC) and to hire residents of a RC. Two of the RC incentives Increased Section 179 Expensing Deduction and Zero Percent Capital Gains for RC Assets require that the business meet the definition of "Renewal Community Business" in order to qualify for the incentive.  A business qualifies as a Renewal Community Business if it actively conducts business in a RC, has its tangible and intangible property located and used in the active conduct of business in a RC, employs residents of a RC (a required 35 percent of its employees), and has its employees perform services in a RC. The business can be a sole proprietorship, partnership, or corporation for Federal tax purposes. Some business-es are excluded from qualifying. The business must meet the requirements of being a Renewal Community Business continuously for several years, depending on the incentive.

What is a Renewal Community Business? 
In general, a Renewal Community Business is a corporation, partnership, or sole proprietorship that, for each taxable year, meets the following tests:

  1. Except with respect to a sole proprietorship, every trade or business of the entity is actively conducted in a RC (legally separate entities are not aggregated with related entities for these tests).
  2. At least 50 percent of the total gross income of the entity is derived from the active conduct of business within a RC.
  3. A substantial portion of the use of the tangible property of the entity (whether owned or leased) is within a RC.
  4. A substantial portion of the intangible property of the business is used in the active conduct of the business.
  5. A substantial portion of the services performed for the employer by its employees occur within a RC.
  6. At least 35 percent of the employees reside in a RC.
  7. No more than 5 percent of the property is nonqualified financial property (such as debt, stock, and various financial instruments) except for reasonable amounts of working capital held in cash, cash equivalents, or debt instruments with a term of 18 months or less and certain accounts receivable arising from sales of inventory.
  8. No more than 5 percent of the property is works of art or other collectibles unless held for sale to customers.

How does a business know whether its building is in the RC? 
The local RC entity can provide businesses with information on its boundaries, or businesses may obtain the information over the Internet at www.hud.gov/offices/cpd/ezec 
 

Are there any types of businesses that cannot be Renewal Community Businesses? 
Yes. The tax laws exclude certain businesses from the definition, including liquor stores, golf courses, racetracks, gambling facilities, country clubs, residential rental properties, businesses that predominantly hold or develop intangibles for sale or license, or businesses that rent personal property, such as car rental agencies (unless at least 50 percent of the rentals are to a Renewal Community Businesses or to RC residents). Non-profit organizations are not automatically precluded merely because the activities carried on by the organization are conducted on a non-profit basis. 
 

Can a high-technology company qualify as a Renewal Community Business? 
The answer depends on its operations. The tax law states that no business consisting predominantly of the development or holding of intangibles for sale or license can qualify as a Renewal Community Business. 
 

Can a real estate developer qualify as a Renewal Community Business? 
A business that develops and owns commercial real estate can qualify only if at least 50 percent of its gross rental income from real property is from a Renewal Community Businesses. The owner is permitted to accept certifications of lessees in determining whether the lessee is a Renewal Community Business. If the project is residential rental property, the business is automatically excluded by statute from the definition of a Renewal Community Business. 
 

Is farming a qualified business for purposes of the Renewal Community Business definition? 
Farming is a qualified business only if the sum of the value of the assets owned or leased by the employer for use in the farming business does not exceed $500,000. The definition of farming and the method for calculating the value of the assets are found in the tax laws. An employer should consult its legal advisor on this matter. 
 

How does a business apply the tests if it has several locations? 
The tests generally apply to legally separate entities. If a single business entity has locations both within and outside a RC, all of the tests apply to the overall operations. If the various locations are operated by legally separate entities, the tests apply only to that location's operations even if the various legal entities are related for Federal tax purposes. For example, if a national chain store or restaurant set up operations in a RC, the tests would be measured with respect to the RC location store only if that store or restaurant was separately incorporated from other stores or restaurants in the chain. 
 

What does it mean that "legally separate entities are not aggregated with related entities for the Renewal Community Business tests?" 
This rule permits businesses to set up separate corporations or partnerships to conduct business in a RC. All Renewal Community Business tests would be measured based on the RC business, and a business would not have to include any activities of other related entities outside of the RC. Many other tax law provisions treat related entities as one business and require adding together the activities of all entities. This rule for and Renewal Community Businesses is more lenient than other tax rules.

How does a business apply the active conduct of business within a RC test if raw materials and customers come from outside the RC? 
The tax regulations relating to Enterprise Facility Bonds describe a mail-order clothing business that is located in an EZ. The business purchases the supplies for its clothing business from suppliers located both within and outside the EZ and expects that orders will be received both from customers who will reside or work within the EZ and from others outside the EZ. All orders are received, filled at, and shipped from the clothing business located in the EZ. The income generated from the sales would be treated as gross income derived from the active conduct of business within an EZ.  The same would apply to a Renewal Community. 
 

How do the tests apply if a business makes deliveries inside and outside a RC? 
The tax regulations for Enterprise Facility Bonds give an example of a printing operation located in an EZ: All orders are taken and completed, and all billing and accounting activities are performed, at the print shop located in the EZ. The business, on occasion, uses its equipment (including its trucks) and employees to deliver large print jobs to customers who reside outside the EZ. As long as the business is able to establish that its trucks are used in the EZ a substantial portion of the time and that its employees perform a substantial portion of their services for the business in the the business meets the requirements with respect to the use of tangible property and location of services performed by employees. The same test would apply to Renewal Communities. 
 

How does a business calculate the requirement that 35% of its employees be RC residents? 
The tax regulations relating to tax-exempt bonds permit calculation either on a per-employee fraction or an employee actual work-hour fraction. In the per-employee fraction method, the business would compare the number of RC resident employees in a taxable year to the total number of employees during the same taxable year. Employees include persons employed for at least 90 days and who work at least 15 hours per week. The employee actual work-hour fraction seeks to accommodate businesses with full-and part-time workers and compares actual hours worked by RC residents to total employee hours worked in a taxable year. A business must apply the same method consistently over the period of the tax incentive once a method is selected. The same methods of determining whether the 35-percent test is met may apply for purposes of the other RC incentives and the incentives that require a Renewal Community Business, but the Internal Revenue Service (IRS) has not formally extended the rules. 
 

Are there any waivers for businesses that meet requirements in all other areas but the "35% rule" for RC employees? 
The 35-percent RC employee requirement is statutory and cannot be waived. For purposes of tax-exempt financing, the is permitted to average yearly percentages over a rolling, consecutive 5-year period. There are no tax regulations on whether the averaging provision applies to any of the other RC incentives. 
 

Do employees contracted through a temporary agency meet the definition of employee for purposes of the Renewal Community Business tests? Do employees who are also relatives meet the definition of employee for this purpose? 
The tax laws do not directly address these issues with respect to the Renewal Community Business definition. If the business treats the individuals as employees for other Federal tax purposes, the business presumably could treat them as employees for this purpose. 
 

How does a business know it qualifies as a Renewal Community Business?  
There is no formal application or certification process for being a Renewal Community Business. A business must analyze the requirements in light of its own operations and use the same standards it applies for taking any position on its Federal tax return. This requires a legal determination, so a business should consult a tax attorney or its tax preparer. The business should retain documents that establish that it is a Renewal Community Business, such as statements that an employee is a RC resident, in case of an audit by the IRS.







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    EZ Wage Credit a business can obtain information over Internet using RC address locator

    Renewal Community

    Questions & Answers

    Tax incentives are generally designed to encourage businesses to locate or expand operations in a Renewal Community (RC) and to hire residents of the RC.  Two RC incentives -- Increased Section 179 Expensing Deduction and Zero Percent Capital Gains for RC Assets-- require that the business meet the definition of "Renewal Community Business" in order to qualify for the incentive.

    A business qualifies as a Renewal Community Business if it actively conducts business in a RC, has its tangible and intangible property located and used in the active conduct of business in a RC, employs residents of a RC (a required 35% of its employees), and has its employees perform services in a RC.  The business can be a sole proprietorship, partnership, or corporation for Federal tax purposes.  Some businesses are excluded from qualifying.  The business must meet the requirements of being a Renewal Community Business continuously for several years, depending on the incentive.

    Employment Credit

    The Renewal Community Employment Credit (RC Wage Credit) gives businesses an incentive to retain or hire individuals who both live and work in a Renewal Community (RC).  Businesses can claim the credit if they pay or incur "qualified zone wages" to a qualified employee.  The credit can be up to $1,500 for the RC Wage Credit.  The credit is available with respect to all EZs and RCs beginning January 1, 2002.  Round I Zones are currently eligible for the EZ Wage Credit, Continuing through December 31, 2009. 
     

    Are there any employer incentives for hiring employees who work in a RC? 
    Yes. The tax code allows employers a credit against Federal taxes for hiring and retaining employees who live and work in a RC.  RC Wage Credit is available in RCs since January 1, 2002, and will continue for all RCs through December 31, 2009.

    Can a business use this credit for current employees? 
    Yes. The RC Wage Credits are incentives to hire and retain individuals who live in an RC, so it is available each year throughout the RC Wage Credit periods. (January 1, 2001 - December 31, 2009)

    How does a business document that an employee is an RC resident? 
    The employer should obtain a statement from the employee, under penalty of perjury, that gives the address of the employee's principal residence and provides assurance that the employee will notify the employer of a change in the employee's principal residence.  The local RC CoRA can confirm that the address is in the RC or a business can obtain the information over the Internet using the RC address locator.  The statements are not filed with the business's tax return, but should be retained like any other documents that support a tax return.

    What if the employee works part-time? 
    The credit is available for both part-time and full-time employees as long as they have been employed by the employer for at least 90 days.  The amount of the credit is tied to the amount of wages paid rather than to the number of hours worked.

    What is the definition of qualified wages? 
    Qualified wages are generally wages subject to the Federal Unemployment Tax Act (FUTA). The credit is calculated against a maximum of $10,000 for the RC Wage Credit. A business may pay the employee more than $10,000 for RCs, but the maximum for purposes of calculating the credit is $10,000 for an RC. The instructions for IRS Form 8844 provide additional information on qualified wages.

    What is the credit amount? 
    The credit amount for the RC Wage Credit is 15 percent of wages up to the $10,000 wage amount.

    Is there a limit on the number of employees for which a business can take the credit? 
    An employer can take the credit for as many employees as qualify.

    What if the employee works in a RC for only part of the year? 
    An employer can use either the pay-period or calendar-year method for determining the period of time the employee performs services in a RC. No other time periods can be used to prorate the credit. For example, if an employee works in several factory locations and is paid weekly, an employer can claim the wage credit for the weekly pay periods during which the employee works substantially all of his or her time in the factory located in a RC. Substantially all is defined as 85 percent for the purposes of some of the tax incentives discussed in this guide, but the regulations on the RC Wage Credits do not define substantially all. The employer must use the same method for all employees, but may change the method applied to all employees from one taxable year to another.

    What if the business is located in a RC, but the employees spend part of their time working outside the boundaries of the RC? 
    The credit is available only if substantially all of the services performed during the period (see answer to question above on pay-period and calendar year calculations) are in a RC. Substantially all is defined as 85% for purposes of some of the tax incentives discussed in this guide, but the regulations on the RC Wage Credits do not define substantially all. If an employee does not perform substantially all services inside a RC within the calculation period selected, the credit cannot be prorated and no portion of the wages for that period would qualify for the credit.

    What if the Federal tax liability of the business is less than the total credit amount? 
    The RC Wage Credits generally are subject to the same rules as other business tax credits. As with other business tax credits, unused credit amounts can be carried forward for up to 20 years and carried back a year. However, the credit cannot be carried back prior to the RC designation.

    Are there special procedures for taking the RC Wage Credit? 
    The credit is accounted for on IRS Form 8844 and would be part of a business's tax filing.

    Can nonprofit organizations benefit from the RC Wage Credits? 
    Tax-exempt organizations, other than certain cooperatives, are ineligible for the credits.

    Can a pass-through entity, such as a partnership or S-corporation, use the credit? 
    The RC Wage Credits are general business tax credits for Federal tax purposes and may be passed through under the rules similar to other business tax credits.

    Does the RC Wage Credit reduce Alternative Minimum Tax (AMT) liability? 
    AMT may be reduced by 25 percent of the RC Wage Credit amount.

    Can the RC Wage Credit for an employee be taken concurrently with Work Opportunity Tax Credits (WOTC) or Welfare to Work (WtW) credits? 
    Yes, but wages are not taken into account for the RC Wage Credit if they are being used in determining WOTC or WtW. In addition, the $10,000 cap on wages taken into account for the RC Wage Credit, respectively, would be reduced by any wages taken into account in computing WOTC or WtW.

    Which categories of employees would not qualify for the RC Wage Credits? 
    The RC Wage Credits cannot be taken for any individual employed at any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other gambling facility, or store whose principal business is the sale of alcoholic beverages for consumption off premises. The RC Wage Credits are not available for family members of the employer, including sons, daughters, parents, stepchildren, stepmothers, stepfathers, in-laws, and other persons treated as dependents under the tax code. Similar exclusions apply to 5 percent owners related to the employer and family members of majority shareholders or partners of the employer.

    Can entities that lease their employees use the credit? 
    Employers should check with their tax advisors. The RC Wage Credits are based on FUTA wages, so the ability to take the credit will depend on who the employer is for purposes of the FUTA wages.

    Is there a definition of employee? 
    The credit is tied to wages as defined for purposes of FUTA. Any individual treated as an employee under FUTA would generally be treated as an employee for purposes of the EZ Wage Credit.

    Can the RC Wage Credit be taken for farm workers?  
    If the employer's principal activity is farming, the credit is available for employees only if the sum of value of the assets owned or leased by the employer for use in the farming business does not exceed $500,000. The definition of farming and the method for calculating the value of the assets are found in the tax laws, and the employer should consult its legal advisor on this matter before taking the credit.

    How does the credit affect the deduction for salaries and wages? 
    A business must reduce the deduction for salaries and wages by the amount of the credit taken.

    Where can a business obtain more information on this incentive? 
    A business should consult with its tax advisor.     IRS Publication 954 and IRS Form 8844 describe this incentive. For copies call 1-800-829-3676 or visit www.irs.ustreas.gov. 
     

    Increased Section 179 Deduction

    Deduction that allows business to claim increased section 179 deduction (up to $35,000 for property acquired after December 31, 2001) if the business qualifies as a Renewal Community Business.  Can be claimed on certain depreciable property such as equipment and machinery.  Section 179 of the Internal Revenue Code allows businesses to choose to deduct all or part of the cost of certain qualify property in the year they place it into service.  Businesses can do this instead of recovering the cost by taking depreciation deduction over a specified recovery period.  There are limits, however, on the amount businesses can deduct in a tax year. 
     

    What assistance is available to businesses located in an EZ or RC for equipment purchases? 
    The tax code allows a Renewal Community Business to take an additional expense deduction of up to $35,000 after December 31, 2001, on purchases of tangible personal property (equipment) for use in a RC.

    What is the benefit of additional expensing? 
    Expensing permits a business to take a deduction for the full cost of equipment in the year it is purchased. In addition, this write off of costs means that a business does not have to set up a tax depreciation schedule and deduct the expense over time. Expensing is particularly helpful for equipment with a long recovery period.

    Are some businesses ineligible for this incentive? 
    Certain business activities do not qualify, such as residential rental activity; commercial real estate, unless at least 50 percent of the gross rental income is from Renewal Community Businesses; rental of personal property, such as car rental agencies, unless at least 50 percent of the rentals are to Renewal Community Businesses, or to RC residents; businesses that predominantly hold or develop intangibles for sale or license; country clubs; liquor stores; golf courses; racetracks; or gambling facilities.

    What type of property qualifies? 
    The additional expensing allowance is available only for a Qualified Renewal Property (QRP), defined as the following:  Eighty-five percent of the use of the property must be in the active conduct of a Renewal Community Business by a taxpayer in a RC.  The taxpayer acquired the property by purchase after the date of RC designation. Original use of the property in a RC commences with the taxpayer (that is, the taxpayer is the first person to use the property inside a RC), or the taxpayer meets the substantial renovation rule. Property is substantially renovated if, during any 24-month period beginning after RC designation, there are additions to the basis of the property equal to either 100 percent of the adjusted basis of the property or $5,000, whichever is greater.

    How do the expensing phase-out limits work? 
    The general tax rule is that for each $1 of Section 179 property greater than $200,000 placed in service in a tax year, the expensing allowance is reduced by $1. However, for each $1 QRP greater than $200,000 in a tax year, the expensed amount is reduced by 50в.

    How does a business file for this incentive? 
    The additional expensing amount is recorded on IRS Form 4562. This form has a special line, along with instructions, for QRP. A business should consult with its tax advisor.

    Commercial Revitalization Deduction

    Businesses that construct or rehabilitate commercial property in Renewal Communities (RCs) can deduct a portion of the costs of acquisition and rehabilitation over a shorter period of time than permitted under standard depreciation rules.  A business can elect a deduction of one-half of "qualifying revitalization expenditures" (QRE) up to $10 million for any one project in the year the building is placed in service or can deduct all QRE pro-rata over 10 years.  The project must receive an allocation from the State (up to $12 million allocated for each RC in the State from 2002 through 2009). 
     

    Are there any incentives for commercial building investment in a RC? 
    In 2000, Congress created a new "commercial revitalization deduction" (CR Deduction) that is intended to increase economic development in RCs. The incentive is a deduction from income before calculating Federal income tax liability, and provides a way to deduct costs on an accelerated basis.

    Are there limits on the deduction? 
    The amount of the deduction is subject to a State limitation of up to $12 million of "commercial revitalization expenditures" (CREs) for each RC located within a State for each calendar year after 2001 and before 2010. In addition, the CREs for a particular building cannot exceed the actual qualifying costs and there is an overall limit per building of $10 million.

    Is the CR Deduction available only for new construction? 
    The deduction is calculated on the basis of qualifying CREs. CREs include the depreciable costs of a new building or the costs associated with an existing building that is substantially rehabilitated. Substantial rehabilitation means that, within a 24-month period, rehabilitation expenditures exceed the lesser of the adjusted basis of the building (and its structural components) or $5,000. For purposes of determining whether a building has been substantially rehabilitated, rehabilitation expenditures do not include enlarging a building. If the substantial rehabilitation test is met (without taking into account the costs of expansion), the cost of expanding the building could qualify as a CRE.

    To what extent do building acquisition costs qualify for the CR Deduction? 
    A taxpayer can include the cost of the building acquisition in taking a CR Deduction, but only to the extent that the acquisition cost does not exceed 30 percent of the aggregate qualifying CREs (determined without regard to the acquisition cost). For example, if the building cost $500,000 to acquire and renovations eligible for CREs were $1 million, up to $300,000 of the acquisition cost could qualify as a CRE.

    Could an investor obtain special tax advantages for land speculation in an RC? 
    The CR Deduction is permitted only for the cost of acquiring a building and rehabilitating it, not for land costs. Acquisition of land for speculation would not qualify.

    Is the CR Deduction available for residential rental property? 
    The building must be used for commercial purposes, so a residential rental property would not qualify. However, if a developer were to provide commercial facilities at or near the residential rental property, these expenditures might be eligible, assuming the commercial development is located in a RC.

    Who will make the allocation of the CR Deduction? 
    This incentive requires that each State identify an entity to act as the community revitalization agency (CRA). The CRA will develop the procedures for allocating the $12 million in CR Deductions permitted for each RC.

    How can a developer determine if a particular project might be competitive for obtaining the CR Deduction? 
    The CRA must develop a plan for allocating the CR Deduction and must submit the plan to a public hearing. The plan must then be approved by the governmental unit of which the RC is a part. The Federal statute provides guidelines for the qualified allocation plan, requiring the CRA to take into account full-time jobs created by the project, active community involvement and contribution to the implementation of the Strategic Plan of the RC. The developer of a potential project should obtain a copy of the plan to determine the priorities of the CRA where the project might be located.

    What is the accelerated period for the CR Deduction? 
    The taxpayer may elect one of two permitted accelerated deduction methods. A taxpayer can elect either to (a) deduct one-half of the CREs for the taxable year the building is placed in service or (b) 
    amortize all the CREs ratably over a 120-month period beginning the month the building is placed in service. The method selected will depend on a taxpayer's particular tax situation. This special deduction provision would be in lieu of depreciating the property over a period up to 39 years.

    What if the building was purchased and renovated prior to RC designation? 
    The CR Deduction is available only to buildings placed in service after the RC designation and before January 1, 2010. If the building was purchased before RC designation, but the renovation was not completed until after RC designation, the renovation expenditures would be treated as a separate building for purposes of determining when it was placed in service and could qualify for the CR Deduction on that basis.

    What other tax consequences arise from using the CR Deduction? 
    No depreciation is allowed for amounts deducted as CR Deduction. The adjusted basis of the building is reduced by the amount of the CR Deduction, and the deduction is treated as a depreciation 
    deduction in applying the depreciation recapture rules.

    Does a CR Deduction affect Alternative Minimum Tax (AMT) liability? 
    The CR Deduction is allowed as a deduction in computing a taxpayer's AMT income.

    Do the passive loss limitation rules apply to the CR Deduction? 
    The CR Deduction is treated in the same manner as the Low-Income Housing Tax Credit in applying the passive loss rules. That means that an individual taxpayer can have up to $25,000 of passive activity deductions (the CR Deduction together with the other deductions and credits not subject to the passive loss limitation), regardless of the taxpayer's adjusted gross income. Corporations are not subject to the $25,000 passive loss limitation.

    Zero Percent Capital Gains Rate for Renewal Community Assets

    If a business holds a Renewal Community Business asset acquired after December 31, 2001, and before January 1, 2010, for a minimum of 5 years, the business does not have to include any "qualified capital gain" from the asset's sale or exchange in its gross income. This exclusion applies only to an interest in, or property of, certain businesses operating in a Renewal Community (RC). The following qualify as RC assets: RC business stock, RC partnership interests, or RC business properties. Only gain attributable to the period from January 1, 2002, through December 31, 2014, for RCs.

    Is there any special capital gain treatment for property in a RC? 
    The capital gain on certain assets is eligible for 0-percent capital gains rate in all RCs.

    What assets are eligible for 0-percent capital gains in RCs? 
    The 0-percent capital gains rate applies to gain from the sale of an RC asset acquired after December 31, 2001, and before January 1, 2010. Qualifying assets include (1) stock in a domestic company acquired by the taxpayer at its original issue from the corporation solely in exchange for cash, (2) any capital or profits interest in a domestic partnership if the interest was acquired by the taxpayer from the partnership solely in exchange for cash, and (3) tangible business property acquired by the taxpayer by purchase, in which either the original use of the property in an RC commences with the taxpayer or the taxpayer substantially improves the property. In the case of stock or partnership interests and ownership of the tangible business property, the business must be a Renewal Community Business or DC Enterprise Zone Business when the stock, interest, or property is acquired (or be formed with the purpose of being a Renewal Community Business) and must remain a Renewal Community Business for substantially all of the holding period. (See appendix A.)

    If the asset was purchased before an area receives a RC designation does the 0-percent capital gains rate apply? 
    No. The asset must be purchased after designation. If additional stock or partnership interests of an entity are purchased at original issuance after the RC designation, these additional interests might qualify.

    What if a taxpayer purchased a RC asset, such as an existing building, from the taxpayer's parents? 
    The business must meet the requirements for substantially all of the 5-year holding period. "Substantially all" generally means 85 percent of the period. If the business ceases to meet the test after the 5-year holding period, the 0-percent rate applies, but only to the extent of the gain to the date the business failed to meet the requirements.

    What if a business ceases to meet the definition of a Renewal Community Business? 
    Qualified wages are generally wages subject to the Federal Unemployment Tax Act (FUTA). The credit is calculated against a maximum of $10,000 for the RC Wage Credit. A business may pay the employee more than $10,000 for RCs, but the maximum for purposes of calculating the credit is $10,000 for an RC. The instructions for IRS Form 8844 provide additional information on qualified wages.

    How long must the asset be held? 
    The minimum holding period is 5 years.

    If the asset is sold before the end of the 5-year period, can the 0-percent gain feature be preserved for the subsequent holder? 
    A subsequent purchaser of an asset that otherwise qualifies for 0-percent capital gain treatment is eligible for the incentive. The original purchaser would not be able to exclude any gain attributable to the period the asset was held, however, because the asset was not held by that original purchaser for the minimum period.

    What if the asset is held beyond the RC designation period? 
    The 0-percent rate applies only to gain attributable to the period after December 31, 2001, and before January 1, 2015, in the case of an RC asset. The taxpayer is not required to sell the asset in in 2015, but must determine and substantiate the gain attributable to that period and may apply the 0-percent rate to that amount.

    What if the stock or partnership interest is redeemed before the end of the minimum holding period? 
    The asset would not be eligible for the 0-percent capital gains rate, must be held for 5 years.

    Appendix (Summarization of all sections)

    Tax incentives are generally designed to encourage businesses to locate or expand operations in a Renewal Community (RC) and to hire residents of a RC. Two of the RC incentives Increased Section 179 Expensing Deduction and Zero Percent Capital Gains for RC Assets require that the business meet the definition of "Renewal Community Business" in order to qualify for the incentive.  A business qualifies as a Renewal Community Business if it actively conducts business in a RC, has its tangible and intangible property located and used in the active conduct of business in a RC, employs residents of a RC (a required 35 percent of its employees), and has its employees perform services in a RC. The business can be a sole proprietorship, partnership, or corporation for Federal tax purposes. Some business-es are excluded from qualifying. The business must meet the requirements of being a Renewal Community Business continuously for several years, depending on the incentive.

    What is a Renewal Community Business? 
    In general, a Renewal Community Business is a corporation, partnership, or sole proprietorship that, for each taxable year, meets the following tests:

    1. Except with respect to a sole proprietorship, every trade or business of the entity is actively conducted in a RC (legally separate entities are not aggregated with related entities for these tests).
    2. At least 50 percent of the total gross income of the entity is derived from the active conduct of business within a RC.
    3. A substantial portion of the use of the tangible property of the entity (whether owned or leased) is within a RC.
    4. A substantial portion of the intangible property of the business is used in the active conduct of the business.
    5. A substantial portion of the services performed for the employer by its employees occur within a RC.
    6. At least 35 percent of the employees reside in a RC.
    7. No more than 5 percent of the property is nonqualified financial property (such as debt, stock, and various financial instruments) except for reasonable amounts of working capital held in cash, cash equivalents, or debt instruments with a term of 18 months or less and certain accounts receivable arising from sales of inventory.
    8. No more than 5 percent of the property is works of art or other collectibles unless held for sale to customers.

    How does a business know whether its building is in the RC? 
    The local RC entity can provide businesses with information on its boundaries, or businesses may obtain the information over the Internet at www.hud.gov/offices/cpd/ezec 
     

    Are there any types of businesses that cannot be Renewal Community Businesses? 
    Yes. The tax laws exclude certain businesses from the definition, including liquor stores, golf courses, racetracks, gambling facilities, country clubs, residential rental properties, businesses that predominantly hold or develop intangibles for sale or license, or businesses that rent personal property, such as car rental agencies (unless at least 50 percent of the rentals are to a Renewal Community Businesses or to RC residents). Non-profit organizations are not automatically precluded merely because the activities carried on by the organization are conducted on a non-profit basis. 
     

    Can a high-technology company qualify as a Renewal Community Business? 
    The answer depends on its operations. The tax law states that no business consisting predominantly of the development or holding of intangibles for sale or license can qualify as a Renewal Community Business. 
     

    Can a real estate developer qualify as a Renewal Community Business? 
    A business that develops and owns commercial real estate can qualify only if at least 50 percent of its gross rental income from real property is from a Renewal Community Businesses. The owner is permitted to accept certifications of lessees in determining whether the lessee is a Renewal Community Business. If the project is residential rental property, the business is automatically excluded by statute from the definition of a Renewal Community Business.     
     

    Is farming a qualified business for purposes of the Renewal Community Business definition? 
    Farming is a qualified business only if the sum of the value of the assets owned or leased by the employer for use in the farming business does not exceed $500,000. The definition of farming and the method for calculating the value of the assets are found in the tax laws. An employer should consult its legal advisor on this matter. 
     

    How does a business apply the tests if it has several locations? 
    The tests generally apply to legally separate entities. If a single business entity has locations both within and outside a RC, all of the tests apply to the overall operations. If the various locations are operated by legally separate entities, the tests apply only to that location's operations even if the various legal entities are related for Federal tax purposes. For example, if a national chain store or restaurant set up operations in a RC, the tests would be measured with respect to the RC location store only if that store or restaurant was separately incorporated from other stores or restaurants in the chain. 
     

    What does it mean that "legally separate entities are not aggregated with related entities for the Renewal Community Business tests?" 
    This rule permits businesses to set up separate corporations or partnerships to conduct business in a RC. All Renewal Community Business tests would be measured based on the RC business, and a business would not have to include any activities of other related entities outside of the RC. Many other tax law provisions treat related entities as one business and require adding together the activities of all entities. This rule for and Renewal Community Businesses is more lenient than other tax rules.

    How does a business apply the active conduct of business within a RC test if raw materials and customers come from outside the RC? 
    The tax regulations relating to Enterprise Facility Bonds describe a mail-order clothing business that is located in an EZ. The business purchases the supplies for its clothing business from suppliers located both within and outside the EZ and expects that orders will be received both from customers who will reside or work within the EZ and from others outside the EZ. All orders are received, filled at, and shipped from the clothing business located in the EZ. The income generated from the sales would be treated as gross income derived from the active conduct of business within an EZ.  The same would apply to a Renewal Community. 
     

    How do the tests apply if a business makes deliveries inside and outside a RC? 
    The tax regulations for Enterprise Facility Bonds give an example of a printing operation located in an EZ: All orders are taken and completed, and all billing and accounting activities are performed, at the print shop located in the EZ. The business, on occasion, uses its equipment (including its trucks) and employees to deliver large print jobs to customers who reside outside the EZ. As long as the business is able to establish that its trucks are used in the EZ a substantial portion of the time and that its employees perform a substantial portion of their services for the business in the the business meets the requirements with respect to the use of tangible property and location of services performed by employees. The same test would apply to Renewal Communities. 
     

    How does a business calculate the requirement that 35% of its employees be RC residents? 
    The tax regulations relating to tax-exempt bonds permit calculation either on a per-employee fraction or an employee actual work-hour fraction. In the per-employee fraction method, the business would compare the number of RC resident employees in a taxable year to the total number of employees during the same taxable year. Employees include persons employed for at least 90 days and who work at least 15 hours per week. The employee actual work-hour fraction seeks to accommodate businesses with full-and part-time workers and compares actual hours worked by RC residents to total employee hours worked in a taxable year. A business must apply the same method consistently over the period of the tax incentive once a method is selected. The same methods of determining whether the 35-percent test is met may apply for purposes of the other RC incentives and the incentives that require a Renewal Community Business, but the Internal Revenue Service (IRS) has not formally extended the rules. 
     

    Are there any waivers for businesses that meet requirements in all other areas but the "35% rule" for RC employees? 
    The 35-percent RC employee requirement is statutory and cannot be waived. For purposes of tax-exempt financing, the is permitted to average yearly percentages over a rolling, consecutive 5-year period. There are no tax regulations on whether the averaging provision applies to any of the other RC incentives. 
     

    Do employees contracted through a temporary agency meet the definition of employee for purposes of the Renewal Community Business tests? Do employees who are also relatives meet the definition of employee for this purpose? 
    The tax laws do not directly address these issues with respect to the Renewal Community Business definition. If the business treats the individuals as employees for other Federal tax purposes, the business presumably could treat them as employees for this purpose. 
     

    How does a business know it qualifies as a Renewal Community Business?  
    There is no formal application or certification process for being a Renewal Community Business. A business must analyze the requirements in light of its own operations and use the same standards it applies for taking any position on its Federal tax return. This requires a legal determination, so a business should consult a tax attorney or its tax preparer. The business should retain documents that establish that it is a Renewal Community Business, such as statements that an employee is a RC resident, in case of an audit by the IRS.
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