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San Diego Enterprise Zone Workshop 2011

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  1. San Diego Enterprise Zone Workshop2011 Enterprise Zone

  2. 5 Enterprise Zone Incentives Hiring Credit. Sales or Use Tax Credit. Net Interest Deduction. Business Expense Deduction. Net Operating Loss Carryover. EZ Issues

  3. Hiring Credit EZ Issues

  4. Hiring Credit • The hiring credit is allowed to: • Qualified employers who hire • Qualified employeesand pay them • Qualifiedwages. EZ Issues

  5. Qualified Employer A person or entity that must: • Be engage in a trade or business within an EZ. AND • Obtain and retain certification (vouchers) for qualified employees. EZ Issues 5

  6. Qualified Employee • Employee must meet allthe requirements of the following tests: • Time of Hire Test. • Annual Tests. EZ Issues 6

  7. Qualified Employee • Time of Hire Test: • Employee hired after the area designated as an EZ. • Immediately prior to hire, an individual meets one of the qualifying eligibility criteria. EZ Issues 7

  8. Qualified Employee • Annual Test: • At least 90% of the employee's work must be directly related to the conduct of the employer’s trade or business within an EZ. • At least 50% of the employee's services for the employer must be performed within the boundaries of an EZ. EZ Issues 8

  9. Qualified Wages Wages paid or incurred to qualified employees for the consecutive 60 month period beginning on the first date of hire. EZ Issues 9

  10. Wage Expense Reduction • The employer’s wage expense deduction must be reduce by: • The amount of the EZ hiring credit allowed. • AND • Any current year credit forward. EZ Issues 10

  11. Recapture • May be required to recapture the credit when employee is terminated within one year of hire date. • Recapture by adding prior claimed credit(s) to the business’ tax for the year employee terminated. • Recapture exceptions cover many situations. EZ Issues 11

  12. Recordkeeping Requirements • For each qualified employee: • Voucher and supporting documentation. • Date of hire. • Monthly hours worked including overtime. • Wage rate for each month of employment. • Location where the services were performed. EZ Issues 12

  13. Recordkeeping Requirements • For each qualified employee (continued): • Date employee was terminated and reason why. • Payroll records (EDD form DE-3, FF 941, W-2, W-4). • Copy of hiring credit worksheet used for credit calculations. EZ Issues 13

  14. Issues • Would a business that is not located in an EZ be able to claim credits if their employees work in the EZ? • It depends on the facts and circumstances of each case. EZ Issues 14

  15. Issues • Can FTB audit the vouchers? • Yes, we may request information during the audit to determine if the voucher was appropriately issued. • Vouchers issues prior to January 1, 2007. • HCD Regulations effective for vouchers issued on or after January 1, 2007. • (Appeal of Deluxe) EZ Issues 15

  16. Issues • What if a businesses within an EZ is acquired? • Employee shall not be treated as terminated if employment continues. Hire date remains original hire date. EZ Issues 16

  17. Issues • What about seasonal/intermittent employees? • Original hire date used. • Rehiring does not begin a new hire date. • May leased employees qualify? • They may qualify for the leasing company or subscriber depending on facts and circumstances. EZ Issues 17

  18. Sales or Use Tax Credit EZ Issues

  19. Sales or Use Tax Credit A person or entity that conducts a trade or business within an EZ can claim a credit equal to the sales or use tax paid or incurred in connection with the purchase of qualified property. EZ Issues

  20. Qualified Property • Qualified Property is property: • Used exclusively (100%) in the EZ. • Purchased and placed in services during the taxable year. • Placed in service after EZ designation date and before the EZ expiration date. EZ Issues

  21. Credit Computation • Annual Limitation: • First $1 million of qualified property for individuals, partnerships, estates or trusts and LLCs taxed as partnerships. • First $20 million of qualified property for corporations. EZ Issues

  22. Recordkeeping Requirements • Must keep records that: • Description and use of property. • Invoice verifying date of acquisition, shipping location, sales or use tax paid. • Sales or Use Tax Returns (or Audit Reports) from the Board of Equalization. • Date property was placed in service. EZ Issues 22

  23. Recordkeeping Requirements • Records (continue): • Records supporting location of property. • If purchased from a manufacturer located outside California, records to substantiate that property of comparable quality and price was not available for purchase in California. EZ Issues 23

  24. Do the assets meet the definition of qualified property? Was the Sales or Use Tax paid? Were the assets capitalized? Was the business income limitation computed properly? Issues EZ Issues 24

  25. Business Income Limitation EZ Issues

  26. Business Income Limitation The amount of the hiring credit or the sales or use tax credit claimed may not exceed the amount of tax on the taxpayer's EZ business income in any year. The unused credits are carried over to future years. California Income X EZ Apportionment Factor EZ Issues

  27. Business Income Limitation If a business is located within and outside of an EZ or in more than one EZ, the taxpayer must determine the portion of the business income that is attributable to each EZ under Uniform Division of Income for Tax Purposes Act (UDITPA). EZ Issues

  28. Net Interest Deduction EZ Issues

  29. Net Interest Deduction Allows lenders to deduct from their taxable income the amount of "net interest" it earns from loans it makes to a trade or business solely (100%) located in an EZ. EZ Issues

  30. Net Interest Deduction • Time of Indebtedness: • The trade or business must be located solely (100%) within a designated EZ. • Money loaned must be used strictly for the business’ activity within the EZ. • The creditor has no equity or other ownership interest in the debtor. EZ Issues

  31. Recordkeeping Requirements • Must keep all records that document each loan to identify or describe: • Debtor’s name, location and mailing address. • Purpose/use of the loan. • Stated interest. • Other items included in gross interest. EZ Issues

  32. Recordkeeping Requirements • Must keep all records (continued) • Any direct expenses associate with the loan. • Any property securing the loan. • Supporting documentation that the debtor’s trade or business was solely within the EZ at the time the loan was made. EZ Issues

  33. Issues • Can a deduction be claimed for a loan made to a business that is both within and outside the EZ? • It is our position that the statue requires, the business must be “solely” within the EZ to qualify. • (Pending appeal of Western Sierra Bancorp and the consolidated appeals of Southland Capital Corp., and Placer Sierra Bancshares.) EZ Issues 33

  34. Net Operating Loss EZ Issues

  35. Net Operating Loss (NOL) 100% of the EZ NOL for taxpayers doing business in the EZ may be carried forward for 15 years to reduce the amount of taxable EZ income in those years even if the EZ designation has expired. EZ Issues

  36. Limitations The NOL carryover is determined by computing the business loss that results strictly from business activity in an enterprise zone. EZ Issues

  37. Recordkeeping Requirements • Should maintain information that will substantiate the NOL deduction such as: • Records showing the date the business activities began in the enterprise zone. • Accounting records to support the loss. EZ Issues

  38. Recordkeeping Requirements • Should maintain (continued): • Financial data indicating that the income offset by the NOL carryover is the product of business activity in the enterprise zone. EZ Issues

  39. Key Resources Form 3805Z, Enterprise Zone Booklet available on FTB’s website: www.ftb.ca.gov Tax Questions – Enterprise Zone Hotline: 916.845.3464 Key Resources

  40. Telephone: 916.845.5613 Email: Brenda.Voet@ftb.ca.gov ftb.ca.gov Brenda VoetTechnical Assistant to the Advocate Key Resources