What is an Enterprise Zone?
An Enterprise Zone is an historically economically depressed geographic area that has been designated by the State of California to encourage and stimulate business growth, development, and investment in the area. Taxpayers that conduct business activities within the boundaries of an Enterprise Zone may qualify for special tax incentives.
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How do I know if I am located in an Enterprise Zone?
To verify whether your business is located within an Enterprise Zone, you use the online street verification, write or call the Office of Economic Development.
City of San Jose
Office of Economic Development
Enterprise Zone Administrator
1290 Parkmoor Avenue
San Jose, CA 95126-3449
Telephone: 408.277.3249
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What are the available Enterprise Zone tax incentives and who is qualified to take those incentives?
There are five incentives available to taxpayers that invest in or operate a trade or business located within an Enterprise Zone. The incentives are the:
- Hiring tax credit
- Sales or use tax credit
- Business expense deduction
- Net interest deduction
- Net operating loss (NOL) deduction
For additional information about each incentive, refer to the State of California
Franchise Tax Board Publications: FTB 3805Z, Enterprise
Zone Business Booklet.
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How do I claim Enterprise Zone tax incentives?
Form FTB 3805Z, found in the Enterprise Zone Business Booklet, is filed with your California tax return to claim the Enterprise Zone tax incentives. If an election is required to claim an incentive, the election is made on this form.
The hiring tax credit, sales or use tax credit, and net interest deduction may be claimed on either an original return or an amended return.
The business expense deduction can be claimed only by making an election on an original return; the election may not be made on an amended return. The election is revocable only upon the written consent of the Franchise Tax Board.
An Enterprise Zone Net Operating Loss (NOL) deduction can be claimed only by making an election on an original return; the election may not be made on an amended return. The election is revocable only upon the written consent of the Franchise Tax Board.
Before claiming the hiring tax credit on your tax return,
businesses must get a voucher for each eligible employee.
In the City of San Jose, the Office of Economic Development
issues vouchers. Please call 408.277.3249 for more information.
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Do I have to include the FTB 3805Z form with my tax return?
Yes. The Franchise Tax Board summarizes the information on this form and upon request provides the information to the California Legislature or the California Technology, Trade and Commerce Agency. The information may be used to evaluate the usefulness of the incentives, to improve the program, or to make future decisions about continuation of the program.
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Which employees qualify me for the hiring tax credit?
For income or taxable years beginning in 1997, you qualify for the hiring tax credit if you hire an employee who is hired after the area is designated as an Enterprise Zone and who, immediately before starting to work for you, is one of the following:
| A. |
CalWorks
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| B. |
A person enrolled in or eligible for WIA – Intensive Service or Core B
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| C. |
WOTC- Federal Worker Opportunity Tax Credit eligible
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| D. |
An economically disadvantaged individual 14 years of age or older with low household family income.
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| E. |
A qualified dislocated worker:
- Clean Air Act Compliance
- Active Armed Forces or National Guard as of 9/30/90
- Seasonal Unemployed
- Long-term Unemployed
- Unemployed/Self employed Due To Economic Conditions
- DOD Civilian Employee at a Military Installation
- Terminated, Laid Off and Eligible for unemployment Insurance (Unlikely to return to work in previous occupation/industry)
- Plant, Company or Facility Closure
|
| F. |
A disabled individual eligible for, enrolled in, or who completed a state rehabilitation plan
-or-
A service-connected disabled veteran |
| G. |
A veteran of Vietnam Era (service dates between 8/5/64-5/7/75)
-or-
veteran who recently separated from military service (within 48 mos.)
|
| H. |
An ex-offender convicted of a felony or misdemeanor punishable by incarceration or probation
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| I. |
A person eligible for or a recipient of:
- Federal Supplemental Social Security Income(SSI)
- Aid to Families with Dependant Children (AFDC)
- Food Stamps
- State and local General Assistance (GA)
|
| J. |
Native American Indian, Native Samoan, Native Hawaiian or other Native American descent
|
| K. |
A resident of a Targeted Employment Area (TEA) at the time of hire
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May I take the sales or use tax credit if the property purchased was exempt from sales or use tax when purchased?
No. The sales or use tax credit is allowed only for sales or use tax actually paid or incurred on the purchase of qualified property. If the property was exempt from sales or use tax at the time of purchase, no sales or use tax was paid or incurred.
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Do leases qualify for the business expense deduction or the sales or use tax credit?
Yes, if the property is acquired through a leasing arrangement that constitutes a financial (conditional sales) contract the property may qualify for the business expense deduction or the sales or use tax credit, or both. To determine whether the lease qualifies as a financial (conditional sales) contract, refer to IRS Revenue Ruling 55-540, 1955-2 CB 39, and FTB Legal Ruling 94-2, March 23, 1994.
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What type of loan qualifies a creditor for the net interest deduction?
Some types of loans that qualify for the net interest deduction include business loans and mortgage loans from commercial or noncommercial sources. To qualify all of the following must be met:
- The funds must be loaned after the Enterprise Zone was designated
- The loan must be made to a trade or business located solely within an Enterprise Zone
- The loan proceeds must be used only for the trade or business activities within an Enterprise Zone
Additionally, the lender may not have any type of ownership interest in the borrower's
trade or business.
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Is the net interest deduction allowed for the life of the loan?
No. The net interest deduction is allowed as long as the borrower's trade
or business is located in an Enterprise Zone. Once the Enterprise Zone designation
expires or the borrower moves out of the Enterprise Zone, the net interest
deduction is no longer allowed.
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Is the carryover of the net operating loss (NOL) deduction to future years limited?
If your business operates both inside and outside the Enterprise Zone, or is part of a unitary group, you must determine your NOL deduction by using the Enterprise Zone apportionment formula. The carryover deduction can offset only business income attributed to the Enterprise Zone. See FTB 3805Z, Enterprise Zone Business Booklet.
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What is the maximum amount of Enterprise Zone credits I may take in any one year?
The total of all Enterprise Zone credits that may be taken in any income or taxable year may not exceed the lesser of the Enterprise Zone tax limitation or the "net tax" limitation for individuals and the "tax" limitation for corporations. California Revenue and Taxation Code Sections 17039 and 23036 respectively defined "net tax" and "tax."
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What are the "Zone income" or "Zone tax" limitations on the Enterprise Zone incentives?
The maximum amount of Enterprise Zone credit that may be taken each year is limited to the tax on your business income attributed to the Enterprise zone. The amount of such tax is determined by considering ALL of your business activities conducted in the Enterprise Zone. The Enterprise Zone credit is the combined amount of the current year hiring credit and the sales or use tax credit, and any prior year carryovers of these credits.
The net operating loss and the net operating loss deduction are limited to the zone business loss or income, respectively.
To determine "Zone income," taxpayers must add the business income or loss from all of the trade or business activities they conduct in the Enterprise Zone. Non-business income is excluded from the calculation. For corporate taxpayers that operate in and outside of the Enterprise Zone, total business income or loss is apportioned to the Enterprise Zone by use of a payroll, property, and sales apportionment factor. For individual taxpayers, total Enterprise Zone business income or loss is determined by adding income or loss attributed to Enterprise Zone activities. FTB Form 3805Z, Enterprise Zone Business Booklet, incorporates examples of apportioning for individuals.
The "Zone tax" is determined on this "Zone income" as if this amount was the taxpayer's total income or loss for the year.
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How are Enterprise Zone incentives claimed that are passed-through to partners, shareholders, or members?
The "Zone tax" or "Zone income" limitations apply at the individual level as well as the pass-through entity level. The individual must first determine their Enterprise Zone business income from ALL business activities they conduct in the Enterprise Zone to determine the amount of Enterprise Zone credits they can claim in the current year. To determine the individual Enterprise Zone income from pass-through investments, the apportionment factor determined at the pass-through entity level is applied to the distributive share of the individual investor's income or loss. For example, if Partnership A operates 80 percent in the Enterprise Zone and the partner's distributive share of partnership income is $100,000, the individual's Enterprise Zone income from this activity is $80,000. Wages paid by the pass-through entity also are considered business income and are apportioned to the Enterprise Zone based on the percentage of services performed in the Enterprise Zone.
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Are Enterprise Zone's Beneficial?
The California Association of Enterprise Zone's (CAEZ) commissioned
an independent cost benefit study on Enterprise Zone's. See
the findings here
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RELATED FTB FORMS AND PUBLICATIONS
FTB Pub.1047 - Guidelines for Enterprise Zone
Tax Incentives
FTB Form 3553 - Enterprise Zone Employee Credit
2003
FTB 3805Z - Booklet Enterprise Zone Business
Booklet 2003
FTB Manual - Economic Development Areas Manual
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