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tax incentives

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How the Empowerment Zones Program Could Help Your Business

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In 1993, Congress passed the Empowerment Zones and Enterprise Communities Act to alleviate poverty in certain regions across the country. The program targeted six strategic cities: New York, Chicago, Atlanta, Baltimore, Detroit, and Philadelphia-Camden. The goal was to uplift the lives of poor communities living in these regions.

The Empowerment Zones program, albeit ambitious, seems to have been forgotten. Here is a brief overview of the fundamental details of the EZ program and how it might apply to your business.

Qualification Requirements for Communities

The Empowerment Zones program was intended to rejuvenate strategic economic regions that were experiencing a decline in growth – Detroit is an excellent example. The program planned to incentivize the private sector to set up businesses in these locations and, by doing so, spur long-term economic growth.

The main requirement for a community to qualify for designation as an Empowerment Zone was a clear economic distress demonstration. Qualifying factors supporting economic distress included:

  • High unemployment levels
  • A poverty rate of at least 20%
  • A declining population rate
  • A clear pattern of divestment by existing businesses

Additionally, these communities had to clearly demonstrate the potential for economic development, which essentially is the program’s main goal. The government considered several factors when gauging these communities’ potential for economic improvement. The main consideration was a community’s capacity to build public-private partnerships. These communities were also required to help provide the necessary private and public resources to help support the economic rejuvenation efforts.

The Application Process

Communities that met the set qualifications were required to apply with the federal government. One of the application requirements was backing by the communities’ local and state governments. This was required to ensure that qualifying requirements received as much support as they needed.

Another important requirement was the submission of a strategic development plan based on the EZ program. The plan had to include the input and insight of all involved parties, including community members, businesses, NGOs, and government institutions. Finally, the communities had to provide a baseline of benchmark goals and measurements to gauge the program’s progress and achievements.

Requirements & Incentives for Businesses

The federal government planned to spur economic growth in these communities by offering tax incentives to businesses who were willing to set up shop there. For starters, businesses were offered a 20% wage credit for the first $15,000 paid in wages to an employee – the employee had to be a resident of the empowerment zone.

In addition to residents of the empowerment zones, businesses also had the option of hiring target employees in exchange for a 40% tax credit on each of these employees’ first-year wages totalling $6,000. Target employees were considered some of the more vulnerable members of the community, including at-risk youth, vocational rehabilitation referrals, SSI recipients, and food stamps recipients.

Businesses that contributed to physical developments in these communities also stood to benefit greatly from subsidized capital expenditures. Under the program’s Round III stipulations, capital expenditure on equipment erected on land parcels within these communities would depreciate by up to $35,000.  

Outcomes of the Federal Empowerment Zones Program

Results of the EZ program were mixed and largely inconclusive. However, there were more positive outcomes than negative ones. For example, five of the six empowerment zones realized an increase in jobs and a boom in minority-owned businesses. However, the incentives were more attractive to large organizations than small businesses. It should also be noted that the program coincided with an economic boom across the country.

Several other programs have been modeled after the Federal Empowerment Zones program of 1993 with the same intention. It is up to the communities and businesses to keep track of these programs and take advantage of whatever they have to offer.

Contact us today to help you learn more about federal empowerment zones, and how your business could benefit from this program.

federal empowerment zones

What Are Federal Empowerment Zones?

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Federal Empowerment Zones (EZs) are areas within the United States that are economically depressed. Communities that had poverty rates of at least 20% coupled with high rates of unemployment were designated EZs. In addition to high poverty and unemployment rates, the qualified communities also exhibited a high rate of emigration.

History of Federal Empowerment Zones

The Empowerment Zones and Enterprise Communities Act of 1993 made EZs possible. It made incentives available to businesses through the tax code. The act provided bonding authority for infrastructure development. Infrastructure improvements were seen as crucial to business growth and revitalization. A generous grant program was also provided, ensuring that distressed communities had the funding they needed to stimulate their economies.

Since the early 1990s, developments have been through legislation amending the original act. National competitions were held which allowed qualifying communities to compete with each other to gain designation as Empowerment Zones, Enterprise Zones (ECs), and Renewal Communities (RCs). All of these designations were designed to aid the economies of highly distressed communities.

Qualifying communities showed extremely high unemployment, poverty, and emigration rates. These same communities had to have regrowth potential. The aid meted out to EZs, ECs, and RCs indirectly benefited businesses through funds spent on infrastructure improvements. Businesses were eligible for employment tax credits of up to $3,000 per employee. These incentives encouraged business owners to hire within the Empowerment Zone because only wages paid to employees living and working within the zone qualified for the credit. 

Baltimore, a well known Enterprise Zone, also qualified for Empowerment Zone status. Unfortunately, several studies have shown that the results of the program were ineffective. Baltimore has a history of being a highly distressed city. It was not alone in its inability to experience growth. The EZ and EC Act of 1993 had little effect on the overall economies of the cities it was trying to help. The program instituted by Bill Clinton to help economically depressed areas did little more than bolster funding reserves for existing social programs.

Should EZs and ECs Continue?

With the current stormy economic climate, many more cities will experience highly distressing conditions. Unemployment for roughly half of the U.S. is at or above 11% as of the summer of 2020. Large national stimulus packages have been rolled out. The global economy is projected to experience an unprecedented blanket recession. Does targeted funding work? 

The previous studies conducted by government and independent agencies weren’t promising. This model for economic reform won’t meet the demands of a post-pandemic nation. The evidence for the efficacy of the EZ and EC Act of 1993 was inconclusive.

Does Your Business Qualify for EZ or EC Credit?

The original legislation of 1993 was extended by additional legislation into subsequent years. It is important for businesses to do their due diligence when it comes to tax filings. Many eligible business owners did not claim the tax credits associated with Empowerment and Enterprise community designations simply because they didn’t know about them. 

The original EZ and EC Act of 1993 was extended multiple times. The most recent extension allows employers to claim WOTC for employees that were hired within the zone prior to tax year 2020 and also live in the qualifying area. Wage credits can be claimed retroactively dating back two years.

Capital gains tax exclusion on business sales within the zones as well as other tax incentives and bond privileges were part of the Empowerment Zones and Enterprise Communities Act of 1993 and its subsequent extensions.  Many local businesses were unaware of these tax privileges and did not take advantage of them.  Contact us for help in filing for the tax credits you and your business are eligible for.

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4 Ways to Reduce Your New Company’s Tax Liability

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As the owner of a new small business, you will need to take several key steps to ensure your business’s success. One of the most important things that you should do from day one is properly manage your taxes, as not doing so could sink your business.

You will also need to find ways to reduce your tax liability, as doing so can help you to keep your hard-earned money, allowing you to continue to invest in your business. Fortunately, there are many tax-saving strategies that you can employ to reduce your company’s tax burden. Here are just a few steps that you can take to reduce your tax liability this year: 

Contribute to a Retirement Plan

Once your business is profitable, you can reduce your taxes by setting aside money in a retirement account. By placing money in a 401(k) or IRA, you can reap valuable tax benefits as you will get a deduction for your contributions.

For the 2020 tax year, the IRS allows you to put away up to $57,00 in total contributions for retirement into a one-participant 401(k) plan. Doing so gives you a way to prepare for your future while reducing your current tax liability.  

Structure Your Business The Right Way

In order to reduce your tax liability, it is critical to structure your company the right way, as structuring your business improperly could cost you greatly come tax season. For instance, if you have a closely held company where income passes through you as the business owner, then it is likely that you have established your company as an LLC or an S corporation.

While this may be the right choice in some circumstances, depending on your income bracket you may actually benefit by changing your company’s structure to a C corporation.  It can be beneficial to seek professional help when structuring your business in order to ensure that you choose the best option for your company.     

Consider Expanding Benefits Instead of Giving Raises

As your business grows, you may be inclined to give your employees raises to show your appreciation for their hard work as well as to incentivize them to keep working at your company. However, this may not always be the best option for tax purposes. A better option may be to compensate employees by increasing your contribution to their health insurance costs instead of giving them the same amount of money in the form of a raise.

If you gave your employees a salary increase, each employee would have to pay taxes on those wages, and you, as the employer, would have to pay the employer share of the FICA and Medicare taxes on this additional income as well. Instead of giving employees a $400 raise, it may be better for you to offer to contribute $400 more to their medical insurance. This not only prevents you and your employees from having to pay additional taxes, but also, in many instances employer contributions to employee benefits are tax-deductible as a business expense, helping you to save money. 

Find The Right Advisor to Help You Maximize Tax Credits

Of course, a great way to ensure that you are doing everything that you can to reduce your tax liability would be to talk to an advisor that can help you to take advantage of available tax credits. The government offers various tax credits at the state and federal levels for businesses of all types. However, it can be difficult to sort through all of the tax credits available to your business on your own.

Working with a tax credit expert helps ensure that you are doing everything that you can to reduce your tax liability. 

Contact us to learn how Incentax’s streamlined process can help you to identify and maximize all of the tax credits available to your business, as this could significantly reduce your tax liability.  

What is Cost Segregation in Real Estate?

By | Cost Segregation, Tax Incentives | No Comments

For those working in the investment real estate business, a well-implemented cost segregation study will quickly be shown to accelerate depreciation and benefit your financial situation. By undergoing a study, real estate owners will take advantage of accelerated depreciation deductions and shelter taxable income. Doing so will immediately reduce the amount of income tax that the company or individual will have to pay that year, improving cashflow. For investors with estimated quarterly payments, these studies can also help defer the payment of their income taxes. 

HOW DOES A COST SEGREGATION STUDY WORK?

A cost segregation study is a rigorous process where a cost segregation engineer analyzes real estate assets and identifies property with shorter depreciation life (personal property) from the real property , which is what creates accelerated depreciation benefits. 

The goal of each cost segregation analysis is to separate holdings into distinct categories, or asset classes, that have different depreciable recovery periods. The four main categories and their typical depreciation lives are as follows:

  • Tangible personal property, which are non-structural components of a building (furniture, fixtures, carpeting, window treatments, and specialized plumbing and electrical components, for example) typically has a five to seven year depreciable lifespan.
  • Land improvements are components found outside a building’s footprint (sidewalks, paving or landscaping) depreciate typically over fifteen years.
  • Buildings depreciate over 27.5 or 39 years depending whether the type of property is residential rental or commercial.
  • The land itself, which is not depreciable.

THE IMPORTANCE OF A GOOD CONSULTANT

Cost segregation studies involve a lot of detailed knowledge of the regulations surrounding all tax incentive rules, so finding the right provider to guide you through each step is very important. The cost segregation consultant will find every component of your property that can be legally considered to be shorter life property and reclassify those assets to generate more depreciation deductions for income tax purposes. 

Once the study is finalized, the client will be provided with the information they need to calculate the accelerated depreciation deductions for income tax purposes.  The cost segregation report will also act as supporting documentation in the possibility of any IRS audit.  

In general terms, any piece of commercial real estate that was acquired, built, or put into service after 1986, including acquisitions, construction, building, or improvements- will be eligible for cost segregation.  

At Incentax, we help companies gain access to money-saving tax incentive programs at both the federal and state level. Our team is entirely made up of tax incentive experts and engineers, that guarantee a high level of quality in our work by offering audit support for free. For more information about our services or processes, contact us today!