IRS Special Edition Tax Tip 2016-16 (Dec. 1, 2016).
IRS has reminded businesses that a number of special tax benefits are still available in 40 designated empowerment zones. Eligible businesses can still reap huge empowerment zone tax benefits through the end of 2016.
Background. The empowerment zone benefits provision is one of 35 temporary tax provisions scheduled to expire at the end of 2016. These temporary tax provisions are often referred to as “tax extenders.” In the past, Congress has regularly acted to extend expired or expiring temporary tax provisions. If temporary tax provisions are allowed to expire at the end of 2016, retroactive extensions may still be considered in the first session of the 115th Congress; or they may not be.
Under Code Sec. 1391, enacted in ’93, the designation of an economically depressed census tract as an “empowerment zone” renders businesses and individual residents within such a zone eligible for special tax incentives. The Department of Housing and Urban Development and the Department of Agriculture designated 40 economically distressed locations as empowerment zones. As listed in the Instructions to Form 8844, Empowerment Zone Employment Credit, parts of the following areas qualify as empowerment zones:
- Pulaski County, AR,
- Tucson, AZ,
- Fresno, CA,
- Los Angeles, CA (city and county),
- Santa Ana, CA,
- New Haven, CT,
- Jacksonville, FL,
- Miami/Dade County, FL,
- Chicago, IL,
- Gary/Hammond/East Chicago, IN,
- Boston, MA,
- Baltimore, MD,
- Detroit, MI,
- Minneapolis, MN,
- St. Louis, MO/East St. Louis, IL,
- Cumberland County, NJ,
- New York, NY,
- Syracuse, NY,
- Yonkers, NY,
- Cincinnati, OH,
- Cleveland, OH,
- Columbus, OH,
- Oklahoma City, OK,
- Philadelphia, PA/Camden, NJ,
- Columbia/Sumter, SC,
- Knoxville, TN,
- El Paso, TX,
- San Antonio, TX,
- Norfolk/Portsmouth, VA,
- Huntington, WV/Ironton, OH,
- Desert Communities, CA (part of Riverside County),
- Southwest Georgia United, GA (part of Crisp County and all of Dooly County)’
- Southernmost Illinois Delta, IL (parts of Alexander and Johnson Counties and all of Pulaski County),
- Kentucky Highlands, KY (part of Wayne County and all of Clinton and Jackson Counties),
- Aroostook County, ME (part of Aroostook County),
- Mid-Delta, MS (parts of Bolivar, Holmes, Humphreys, Leflore, Sunflower, and Washington Counties),
- Griggs-Steele, ND (part of Griggs County and all of Steele County),
- Oglala Sioux Tribe, SD (parts of Jackson and Bennett Counties and all of Shannon County),
- Middle Rio Grande FUTURO Communities, TX (parts of Dimmit, Maverick, Uvalde, and Zavala Counties), and
- Rio Grande Valley, TX (parts of Cameron, Hidalgo, Starr, and Willacy Counties).
Reminder. IRS reminds businesses that a number of special tax benefits are still available through the end of 2016. Key empowerment zone tax benefits include:
- Empowerment zone employment credit. This credit is part of the general business credit. It is available to all employers and is equal to 20% of the first $15,000 of qualified wages paid to each employee who is a resident of certain empowerment zones and who performs substantially all employment services within the zone in a trade or business of the employer. (Code Sec. 1396)
- Increased expensing for qualifying depreciable property. The maximum amount allowed to be expensed under Code Sec. 179 by an enterprise zone business is increased by $35,000 for “qualified zone property.” In general, an enterprise zone business is a corporation, partnership or proprietorship actively conducting a qualified business in an empowerment zone, and qualified zone property is depreciable tangible property used in an empowerment zone. Further, in computing the phaseout of the maximum amount allowed to be expensed, only 50% of the cost of the qualified zone property is taken into account. All other Code Sec. 179 expensing provisions generally apply to the increased expensing for enterprise zone businesses. (Code Sec. 1397D)
- Tax-exempt bond financing. Exempt enterprise zone facility bonds are bonds 95% or more of the net proceeds of which are used to finance an enterprise zone facility. An enterprise zone facility is qualified zone property the principal user of which is an enterprise zone business, and functionally related and subordinate land. Qualified zone property and enterprise zone businesses include property and businesses in both empowerment zones and enterprise communities. These bonds are subject to the state private activity bond volume limitations; (Code Sec. 1394)
- Deferral of capital gains tax on the sale of qualified assets sold and replaced. For any sale or exchange of a qualified empowerment zone asset held by the taxpayer for more than one year, the taxpayer can elect to defer the gain if he purchases certain other empowerment zone assets within 60 days of the date of the sale. Gain is recognized only to the extent that the amount realized from the sale exceeds the cost of any replacement zone assets (with respect to the same zone as the asset sold) purchased during a 60-day period, reduced by any portion of the cost previously taken into account under a rollover rule; (Code Sec. 1397B) and
- Partial exclusion of capital gains tax on certain sales of qualified small business stock (QSBS). There is a 60% exclusion of gain on QSBS in a qualified business entity held more than five years and acquired before Feb. 18, 2009. A qualifying business entity is a corporation that satisfies the requirements of a qualifying business under the empowerment zone rules during substantially all of the taxpayer’s holding period.
RIA observation: Code Sec. 1202(a)(4) provides that for QSBS acquired after Sept. 27, 2010, Code Sec. 1202(a)(2) (which provides the 60% exclusion for certain gain from QSBS in a qualified business entity) doesn’t apply. This rule coordinates the current 100% exclusion of gain on QSBS held for more than five years and acquired after Sept. 27, 2010 with the 60% exclusion by providing that the 60% exclusion doesn’t apply to QSBS acquired after Sept. 27, 2010—i.e., it doesn’t apply to QSBS eligible for the 100% exclusion. Thus, 100% of the gain attributable to qualified small business stock acquired after Sept. 27, 2010 is excluded from gross income and the limitations in Code Sec. 1202(a)(2) on the 60% exclusion don’t apply.
References: For empowerment zones, see FTC 2d/FIN ¶ J-3375; United States Tax Reporter ¶ 13,914; TG ¶ 15029.