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EZ Does It

Tapping into the benefits offered by federal and state Enterprise Zones could cut your relocation or expansion project’s costs considerably.

By Mary Ellen McCandless

Generally speaking, Enterprise Zones (EZ) give tax breaks to qualified companies that are located within them to attract economic development to depressed areas. With most states offering some form of EZ, it’s worth your time to look into whether one of these areas is the right choice for your next relocation, expansion, or consolidation project.

Captive-Aire's facility in Redding, CA. Photo byCaptive-Aire Systems, Inc.

While the names for these zones may differ from state to state—Maine has Pine Tree Development Zones (PTDZ), Massachusetts has Economic Target Areas (ETA), Michigan has Renaissance Zones (RZ), Minnesota has Job Opportunity Building Zones (JOBZ), and in Pennsylvania there are Keystone Opportunity Zones (KOZ)—the common denominator is that companies that choose to locate their operations inside one can tap into a variety of financial benefits.

The primary benefits are “state tax reductions—income, property, and sales use taxes,” says Charles W. Swenson, Professor and Leventhal Research Fellow, Leventhal School of Accounting, University of Southern California. “In some states, a company can zero out its taxes. In some cases, better financing and fast tracking of processes are possible.

“The breaks vary widely by states,” Swenson continues. “Some states offer numerous types of breaks—Minnesota, New York, and Pennsylvania, for example. Some, like Ohio, offer only property tax relief. Income tax breaks can come in the form of hiring credits, asset investment tax credits, partial tax exemption, or any combination thereof. One commonality is that most states have a tax credit for hiring.”

The table on page 42 provides a guide to what each state has to offer. Here’s a general description of each of the columns in the table:

  • Must Pre-Qualify: Some states require an agreement before beginning operations to receive tax benefits. These requirements vary by state and can include creating a certain number of jobs, or staying in the location for a set time period.
  • Hiring Credit: A tax credit based on the number of employees hired.
  • Sales & Use Tax Credit/Exemption: Applies to purchases of materials used during construction or improvements.
  • Property Tax Credit/Exemption: Applies to personal or real property.
  • Income Tax Credit: Applies to state income tax.
  • Investment Credit: Based on the amount of capital investment.
  • R&D Credit: Based on research and development expenditures.
  • Industry Limitation: While manufacturers are eligible to tap into EZ benefits in any state that offers them, some do not offer them to retail or service-related companies.

There are both federal and state EZs, and the difference can be significant. “State programs are run by the state, and the tax benefits are on the company’s state tax bill—property, income, and sales/use,” Swenson explains. “There are numerous Federal Empowerment Zones, Renewal Communities, and Enterprise Communities throughout the country. The tax benefits available are hiring tax credits, taken on the company’s federal income tax returns, for hiring individuals who also live in these federal zones. The tax benefits are generally smaller than state EZ benefits, but should be considered at the margin.”

Who Benefits?

As previously explained, manufacturers are a common beneficiary of EZ incentives. But other factors come into play when determining which companies will benefit most from these locations. “It’s a matter of crunching numbers for a particular business to see how big the breaks are in any particular state,” says Swenson. “Also, because most states have some sort of hiring tax credits, generally the higher the head count, the higher the tax benefits across states.”

But choosing an EZ location is not always without risks. There are two potential downsides that companies should be aware of, according to Swenson. “The first is that after the firm locates in an EZ, the tax benefits [eventually] disappear,” he explains. “Almost always this is because of a scheduled expiration date of the EZ, and historically state governments extend an EZ’s life at this point. The only recent counter-example is Kentucky’s EZs, which are slowly phasing out. But in general states are creating more EZs—California just added three more—and more states are adopting EZ programs: Maine and Minnesota just started new programs in the last two years.

“The other potential downside is that for some states, some urban EZ areas have slightly higher crime rates,” he adds. “It’s not a prevalent problem, and the company can do its homework by checking crime data in advance.”

One of the new California EZs, pending final approval, is the Shasta Metro Enterprise Zone in Shasta County, located in the northern part of the state. It is one of 23 EZs named statewide replacing 23 zones that are expiring. Each zone designation is in effect for 15 years. Businesses within California’s EZs are eligible for substantial tax credits and benefits, including $31,234 or more in tax credits for each employee hired, sales tax credits on purchases of $20 million per year of machinery and machinery parts, and up-front expensing of certain depreciable property.

The new EZ designation in Shasta County was a major factor in Captive-Aire Systems’ decision to locate a 46,000-square-foot production plant in Redding, CA, creating 50 jobs. The North Carolina-based company also has manufacturing plants in North Carolina, Iowa, and Oklahoma.

“Shasta County’s tax credits make it possible for us to locate Captive-Aire’s western plant there and employ 50 American workers,” says Robert Luddy, Captive-Aire founder and president. “As a result, Captive-Aire is growing. And those 50 people—plus all those in service industries around them—now have greater power to save for a house and a good education for their children. Easing tax burdens lifts all boats.”

On the other side of the country, Georgia-Pacific Corp. will be the first business to test Chatham County, GA’s new EZ incentives. The company is expanding its Savannah gypsum plant and is expected to add up to 60 jobs.

G-P Gypsum is expanding in Savannah primarily because of the EZ. “We were looking at several potential sites in the Southeast,” President Dave Fleiner, Georgia-Pacific, told the Savannah Morning News. “We knew we needed to move quickly—there is more demand for our products in this area than our plants in Savannah and Brunswick can meet. The fact that our Savannah mill is now in an Enterprise Zone made the difference.”

Georgia-Pacific will get a dedicated staff person from the county to expedite the permitting process. The county also will waive requirements under its tree ordinance, as well as all county development fees. Georgia-Pacific could save $65,000 by expanding in the EZ.

Getting in the Zone

How can you make sure your company is tapping into all relevant EZ benefits? One option is to do the research yourself, visiting economic development department Web sites one by one. But with more than 1,000 EZs in the U.S., this can be unrealistically time consuming. The other option is to hire a consultant.

“Consultants will sometimes have such data for a particular state, but as far as I know National Tax Credit Group (NTCG) is the only company with a complete national data base and a Web-based EZ lookup tool, complete with contact information, forms, and instructions,” explains Swenson.

In partnership with CCH, NTCG (www.ntcgtax.com) offers the Tax Zone Locator application for a fee. By entering a specific address into the application, clients can get detailed information about available benefits. The program also provides information about Federal Empowerment Zones and Renewal Communities, Native American Tribal Areas, Gulf Opportunity Zones, California Targeted Employment Areas, Targeted Tax Areas, Manufacturing Enhancement Areas (MEA), and LAMBRA. CCH Tax Zone Locator also provides the necessary forms, instructions, and contact information for the specific tax zones. For more information, visit CCH at www.tax.cchgroup.com.

 

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