“My responsibility today is to let you know that what sounds too good to be true, is good and it is true,” said Brenda Voet, technical assistant for the State of California Franchise Tax Board at a business tax credit workshop on Wednesday.
What is this magical program with the power to turn “tax” into a pleasant word? The Enterprise Zone.
The San Diego Regional Enterprise Zone, one of 42 such zones in California, is a 15-year business tax credit program established to promote business growth in designated areas of the San Diego region. The current “One Zone” was established in 2006 with the merging of the Metropolitan and South Bay zones whose charters were expiring. It currently covers pockets of the city of San Diego, National City, and the city of Chula Vista, with a proposed expansion on the books to include sections of Rancho Bernardo, Kearny Mesa and Mira Mesa.
To qualify for any of the five Enterprise Zone incentives, businesses must be located within the designated zone boundaries. With a hiring credit, sales or use tax credit, net interest deduction, business expense deduction and net operating loss carryover available, it’s not hard for most businesses to qualify for a monetary incentive, yet a mere 10 percent of companies in the zone have done so.
Local and state officials held a business tax credit workshop in Chula Vista on Wednesday to try and increase that percentage by explaining the benefits and the process of the program to current and potential business owners.
The first of those five Enterprise Zone incentives, the hiring credit, gives businesses with qualifying employees up to a five-year tax credit based on a percentage of the employee’s wages. To qualify, employees must have been hired after the Enterprise Zone designation, conduct 90 percent of their business directly for the company with 50 percent of their total work taking place within the Enterprise Zone, and meet certain personal requirements. There is a long list of these possible qualifiers, including living in the Enterprise Zone, being an economically disadvantaged individual, a veteran or disabled. The credit generally applies to employees not earning more than 150 percent of the state’s minimum wage, with 50 percent of the employee’s wage returned as a credit the first year, gradually decreasing to a 10 percent credit the fifth year.
The second incentive available is for companies to earn a tax credit for the sales and use tax of certain machinery, such as desktop computers, communications equipment and manufacturing tools that are used only in the Enterprise Zone. Corporations are able to earn up to the first $20 million of sales or use tax from these purchases as a credit, with a $1 million annual limitation for individuals, partnerships, estates or trusts.
The net interest deduction is an encouragement for outside investors to make loans to companies solely located and doing business within the Enterprise Zone. The interest paid on these loans will not be counted as income tax for the lenders.
The business expense deduction allows businesses to place 40 percent of the cost of company property in the Enterprise Zone in the business expense rather than the capital expense column for the first year the property is put in use by the company.
The last of the five incentives, the net operating loss, allows taxpayers doing business within the Enterprise Zone to carry their net operating loss forward for 15 years and be deducted even if the zone designation expires.
Luis Rivera, the director of Encore Tax Consulting Group, also addressed attendees Wednesday morning to highlight yet another possible tax credit, this one for research efforts.
The Research and Development Tax Credit has both federal and state components, and is available to all companies within the United States. The federal tax credit is for 20 percent of research expenses in excess of a base amount, with a 15 percent California credit as well. The program was originated in 1981, but until 2001 only applied to companies making significant advances in innovation at an industry level. Now companies must only show their research and development efforts are innovative to their individual company to qualify for the credits.
A strikingly slim proportion of businesses are taking advantage of the enterprise and research credits, in part due to a lack of awareness. Rivera, Voet and local government officials at the forum urged companies to investigate these programs and reap their benefits if applicable, but cautioned that keeping detailed records and following protocol by the book was necessary.
While the Enterprise Zone is good news for businesses, they aren’t the only ones who benefit according to Chula Vista Councilmember Rudy Ramirez.
“Just from a very internal, inside City Hall perspective, the kind of work that we’re hoping you all will go out and do and take advantage of with regard to this Enterprise Zone is really important to the city in the way that it’s going to be able to provide services back to the community: police, fire, all the things that people want,” Ramirez said.