If you set up a business or make investments and hire local workers in certain areas of California designated by the state as Enterprise Zones, you can take advantage of significant tax and other incentives. California established the Enterprise Zone program to stimulate business investment in depressed areas of the state and to create job opportunities for Californians.
There are 42 Enterprise Zones throughout the state. In addition, California legislation has established one Targeted Tax Area, two Manufacturing Enhancement Areas, and seven Local Agency Military Base Recovery Areas (LAMBRA). All these areas have the goal of improving the economic vitality of their communities, but each zone is unique in the local incentives and special assistance they provide to businesses. You can find a map of these zones, and information on local contacts on the California Association of Enterprise Zones website.
The tax incentives generally available for investing and hiring in an enterprise zone or other designated area include a credit of $36,000 or more over five years for each qualified employee you hire. To qualify, 90% of the employee’s work time must be spent within the enterprise zone, and at least 50% of the work itself must be within the enterprise zone. And the employee must be from a targeted group, including economically disadvantaged individuals, dislocated workers, veterans, recipients of government assistance, ex-offenders, and Native Americans. You can find a complete list of qualifying employees in the Enterprise Zone Business Booklet from the California Franchise Board. To claim this hiring credit, you need to get a completed Form VoucherCert 10-07 from the local agency responsible for verifying employee eligibility.
Accelerated expensing of some depreciable property will lower your taxable income. You can elect to treat 40% of the eligible cost of qualified property as a business expense rather than capitalizing and depreciating the cost. The property that qualifies for this treatment is tangible personal property as defined under Section 1245 of the Internal Revenue Code.
The incentives allow you to take up to a 100% net operating loss deduction with a 15-year carryforward. However, for taxable years beginning in 2008 and 2009, this carryover deduction has been suspended. But if you have taxable income for the year of less than $500,000 or you have a disaster loss carryover you are not affected by the suspension.
You can claim sales tax credits on purchases of up to $20 million per year of qualified machinery and parts. To qualify, the machinery or parts must be used to manufacture, process, fabricate or assemble a product; produce renewable energy resources; or control air or water pollution. Qualified property also includes data processing and communications equipment, and motion picture manufacturing equipment. You can also claim a credit for the use tax on property purchased outside California if property of a comparable quality and price was not available in California. Your business must use the property exclusively within the enterprise zone.
To facilitate business investment in enterprise zones, there is local financing available, with a net interest deduction for lenders who grant loans to zone businesses. The development process is streamlined, with one-stop permitting and same-day inspections, and deferred, reduced or waived fees. And business sites within the zones are offered at below-market purchase or lease costs.
Each individual zone offers its own local incentives, in addition to the state tax credits and other incentives. For example, in Los Angeles the Department of Power and Water offers a five-year electric rate discount to new businesses that are moving into the zone, reduced parking requirements, and a Work Opportunity Credit of up to $2,400 per year for each eligible hire.
How to claim the incentives
The enterprise and other designated area incentives are available to all types of business entities including individuals, sole proprietors, corporations, estates, trusts, partnerships and LLCs operating or investing within the zone.
To claim the tax incentives, you need to complete Form FTB3805Z, Enterprise Zone Deduction and Credit Summary. You file this form with your California state income or franchise tax return. The booklet that contains Form 3805Z details the requirements for claiming each credit and worksheets for calculating the credit.
California Enterprise Zone Business Booklet – California Franchise Tax Board
Economic Development Areas – California Department of Housing and Community Development
Welcome to California’s Enterprise Zones – California Association of Enterprise Zones