EZ does it - Enterprise zone tax incentive program is changing
Out with the old and in with the new
The Enterprise Zone tax incentive program was created in 1986 to help local businesses, and encourage outside businesses to locate in economically depressed areas. The Enterprise Zone (EZ) credit is available to taxpayers engaged in a trade or business within a designated enterprise zone.
The EZ designation is effective for 15 years after an EZ is approved and established. There are currently 42 approved enterprise zones located throughout California. The incentive has been around for quite some time, but recent changes to the Enterprise Zone program could positively affect your clients' businesses, and are described below.
Who's in charge?
The California Department of Housing and Community Development (HCD) is responsible for administering the enterprise zones. The HCD has recently issued new regulations on administrative issues related to enterprise zones, and is the key contact for zone boundaries and voucher issues. FTB is responsible for determining the accuracy of EZ credits claimed on individual and corporate tax returns.
Expiration of enterprise zones
Many of the originally designated zones that were created in the mid-80s have either expired in 2006 or will be expiring in 2007. Once expired, a zone can choose to apply again for a zone designation by following the rules and procedures as determined by HCD. On November 3, 2006, the Governor, in coordination with HCD, announced the conditional designation of 23 enterprise zones. Four of these 23 zones are designated as "brand new" zones (the county of Fresno, and the cities of Santa Clarita, Arvin, and Compton). These new zones include geographic areas that have never been an enterprise zone before and are now eligible for enterprise zone incentives for the first time, once they receive final designation from HCD.
The remaining 19 enterprise zones are "conditionally designated" zones until HCD grants them their final designation. These conditionally designated enterprise zones are zones that include both a geographic area that was previously in an enterprise zone, as well as geographic areas that were not previously in an enterprise zone.
"Conditionally designated" vs. "brand new" enterprise zones
One of the questions that business owners may ask is "What is the difference between a conditionally designated zone and a brand new zone that has received final designation?" As mentioned above, communities with an expired enterprise zone that wish to apply for a new designation, or that want to apply for an enterprise zone for the first time, must submit an application with HCD. After HCD scores and ranks the applications, it will select the most qualified applications based on the number of enterprise zone designations available. For example, in 2006, there were 23 designations available. After HCD awards a designation, HCD will issue a letter of conditional designation to the community, indicating the conditions that must be met before the enterprise zone receives its final designation.
Conditionally designated zones
Taxpayers located in a conditionally designated enterprise zone can claim the zone incentives while the HCD completes the designation process. As noted, these "conditionally designated" enterprise zones are zones that may include both a geographic area that was previously in an enterprise zone, as well as additional geographic areas that weren't previously in an enterprise zone. Current statutory language allows taxpayers that operate within these conditionally designated zones to claim the enterprise zone incentives from the date that HCD awards the conditional enterprise zone.
Once HCD grants the enterprise zone its final designation, the effective date for the new zone is the expiration date for the previous zone. For example, the city of Fresno's enterprise zone expired on October 14, 2006. However, this community applied for a new designation, and HCD conditionally designated this community in November 2006. HCD will ultimately grant a final designation date to the city of Fresno enterprise zone, and this date will be considered the start date for the new enterprise zone. Conditionally designated enterprise zones will ultimately receive a final designation date, which for purposes of the tax incentives has little meaning when compared to a new zone. Only in the situation where a final designation date is not granted will it have meaning in relation to the tax incentives. If final designation is not granted, then the tax incentives will cease from this point forward.
Brand new zones
A zone designated for the first time with no geographic areas in a previous enterprise zone is a brand new zone. Taxpayers operating in such a zone are not eligible to claim enterprise zone incentives until after HCD provides a final letter of designation with the designation date noted. Once this final designation date is known, qualifying events occurring after this date - such as hiring employees or acquiring assets - then qualify the taxpayers operating in these zones to claim enterprise zone incentives.
With the expiration of old enterprise zones, designation of new zones, and conditional designation of zones, there may be new reporting requirements for tax purposes.
- Taxpayers operating in an expired zone (where no geographic area was included within a new zone) should continue to file a 3805Z, Enterprise Zone Deduction and Credit Summary, claiming carryover amounts and continuing to incur the hiring credit (up to five years) for employees hired before zone expiration.
- Taxpayers operating in a brand new zone (where no geographic area was previously included in a prior enterprise zone) will file Form 3805Z and begin claiming tax incentives once final designation is noted for all qualifying activities engaged in, on or after the date of final designation.
- Taxpayers operating in a conditionally designated zone (where a geographic area - all or a portion of - was included in a now expired enterprise zone) need to file two Forms 3805Z. The first 3805Z is to report the incentives from the expired zone including carryover amounts and continuing to incur the hiring credit (up to five years) for employees hired before zone expiration. The second 3805Z is to report the tax incentives attributed to the conditionally designated zone for all qualifying activities engaged in on or after the date of conditional designation.
For more information on the EZ Credit, please visit our Website
- For questions relating to enterprise zone vouchers, zone boundaries, and newly designated zones, please visit the Housing and Community Development Agency's Website at www.hcd.ca.gov.