Business Location Is The Key To Tax Success

Locating a Business in an Enterprise Zone Can Make a Difference

Business owners everywhere weigh the pros and cons of traffic flow, competitive presence, and even parking availability to help determine the best location for their business. However many more business owners are completely unaware of a nationwide incentive program that could equate to thousands of dollars worth of annual tax savings, available by simply choosing the "right" business site.

California business owners, in particular, need all the help they can get. "It's no secret that business in the state is at risk. Record increases in workers' compensation costs, an unprecedented state budget shortfall and rising energy and health care costs are affecting business growth and retention" says Michael Beck, Deputy City Manager of Riverside. His sentiments are mirrored by Long Beach restaurateur, John Sangmeister of Gladstone's restaurant. "California is still a challenge. We have very high worker comp rates. We have a lot of challenges that discourage development."

To encourage new business development and to reduce the cost of operating a business within the state, California has created the Enterprise Zone program. Enterprise Zone programs, or EZs, offer substantial state tax credits and deductions to businesses located within these 39 (soon to be 42) designated areas. Benefits include hiring credits, sales and use tax credits, deductions for qualified equipment used exclusively within the Zone, a net operating loss carryover for up to 15 years, and net interest deductions for lenders making loans to EZ businesses.

Even though businesses may initially be attracted to these EZ's for the numerous benefits, very few businesses actually take full advantage of this program. In fact, Holthouse Carlin & Van Trigt, LLP (HCVT) a Southern California certified public accounting firm, claims to have identified over $12 million in state and federal credits that were overlooked by California businesses in just the past two years.

Many businesses are simply too busy or confused about the somewhat complex credit qualification criteria for certain employees and assets. Due to the State's financial challenges, promotional funds for the EZs are limited. Sangmeister admits he was ignorant of the EZ qualification test and documentation requirements when he first pinpointed Long Beach's Pike for Gladstone's latest franchise locale. "We were not aware of the testing procedures and paperwork involved with the Enterprise Zone program. We just thought Long Beach itself represented a great opportunity and the EZ benefits made our decision even better." There are 13 different ways an employee can qualify for the credits including, home address, age, family income level, armed services history, unemployment history, government assistance, etc.

Dr. Charles Swenson, University of Southern California tax professor, attributes the failure of businesses to fully capture the program's benefits to "general confusion among business owners and their tax preparers, and a belief that their employee base does not fit the EZ qualification criteria. In fact, we generally find that a minimum of 15 percent of white-collar workforces are eligible and up to 45 percent of manufacturing employees are eligible. These results are consistent with the intent of the EZ program." To complicate matters, Dr. Swenson adds, "California alone has 39 Enterprise Zones and although each zone is administered by the Department of Housing and Community Development, the specifics of eligibility criteria and program benefits varies from zone to zone."

Another reason for non-participation may be that some businesses are not aware that one or more of their owned or leased facilities is located within an Enterprise Zone. This is an even more common problem when their corporate headquarters are outside the EZ, or even outside the state. Since EZ's do not generally share boundaries with common geographic areas such as census tracts, ZIP codes, municipalities or counties, it is not always obvious if a business is located within an Enterprise Zone. For example in Long Beach, the Enterprise Zone includes most of the city's commercial, manufacturing, and retail corridors-26 square miles out of 50 for the entire city. An article in the Long Beach Business Journal stated that the city's Enterprise Zone hosts more than 7,000 businesses "though many do not participate in the program." Blake Christian, Holthouse Carlin & Van Trigt, LLP conservatively estimates 60 percent to 70 percent of eligible businesses are not claiming these credits even though the city actively promotes the program.

Occasionally, businesses believe they are too small to qualify for EZ program benefits. A Spidell's California Taxes On-line article indicates that most participants are small to mid-sized businesses. "Roughly 60 percent of tax returns with EZ credit claims are filed by businesses with assets under $5 million and almost 30 percent are filed by businesses with assets under $1 million", the April 2004 article reads.

Another Long Beach business owner, Jeannine Shearing, claims although she was aware of the Enterprise Zone program, "we didn't know how beneficial the hiring tax credit was at the time." She called to receive free Enterprise Zone brochures and counseling services offered through the City of Long Beach's Business Development Center. "But now that we understand, we will definitely qualify future employees through this program." Jeannine's business, Harbor Custom Canvas, has calculated tax savings of over $10,000 in a two-year span.

It has also been suggested that some businesses may feel that participation in such a tax-savings program may target them for tax audits. The California Franchise Tax Board denies this. With over 17,000 credit vouchers issued since 1992, Ray White, Community Development Analyst with the City of Long Beach, has not seen any evidence to substantiate that belief.

Regardless of the excuses that businesses have for not participating in the past, the EZ program's benefits warrant a serious re-examination of one's business location, hiring policies, and tax filing practices on their own merit. A primary objective of the program is to create jobs. The most prevalent incentives are tax credits for increased hiring, especially for employees located within the TEA (Targeted Employment Area) who represent an economically disadvantaged labor pool.

Often confused for a deduction which only reduces your total taxable income, a tax credit is a direct one-to-one reduction off your annual state tax bill. The EZ program allows for up to $10,000 credit or more per qualified employee per year and as high as $32,000 or more per employee for a five-year period.

With the Los Angeles County Economic Development Corporation forecasting some dreary predictions for the 2005-2006 economic outlook, it may be up to these Enterprise Zone credits to help off-set operational costs. "I believe that in this economic climate employers need all the help possible to reduce their cost of doing business. The EZ program is one way to help achieve that goal", summarizes White.

In addition to California's EZ program, 37 other states have programs with varying levels of tax breaks. There are also a number of federal programs that offer wage credits ranging from $1,500 to $8,500 per qualified employee.

In order to streamline the analysis of business facilities and employees eligible for these numerous federal and state programs, National Tax Credit Group, LLC (NTCG) has developed a patent-pending software solution, TaxOvation™, which enables companies to quickly and accurately identify numerous state and federal tax credits.
National Tax Credit Group is so confident in its ability to identify incremental federal and state credits they promise guaranteed results. "If we don't save you money, you don't pay for the screening," says Richard Perez, Co-Founder of NTCG.

"I thought that it was going to be much more of an arduous system. What we found has been a wonderful surprise and upside. We're thrilled that we'll be able to utilize some of these credits," stated Sangmeister after HCVT unearthed thousands of dollars of state tax credits.

As for the ultimate future of California's Enterprise Zones, the future is tenuous. Some California programs are in jeopardy.

The problem may lie in the Enterprise Zones' established 15-year term limits. Those programs established prior to 1990 were allowed to apply for a five-year extension; however, EZs established after 1990 or later have yet to be afforded that same opportunity.

State bill SB6, sponsored by California Senator Ducheny, would allow those EZs established after 1989 to apply for 5-year extensions to all participating Enterprise Zone programs, including Long Beach. Loretta Schlosser, President of the California Association of Enterprise Zones, has launched a letter campaign to drum up support for SB6. "We have lots of educating to do if we want it to pass out of this committee," says Schlosser. The next phase of approval has SB6 scheduled for presentation to the Revenue and Tax Committee sometime in April.

Proponents of SB6 point to the many EZ success stories. The success of Enterprise Zone programs to encourage business growth and development is evidenced by the number of states and even foreign countries with similar programs. A study funded by the California Association of Enterprise Zones in 2003 showed that "California Enterprise Zones have grown jobs twice as fast as they would have without the zone incentive." Additionally, Spidell's California Tax letter stated "the number of returns filed with EZ credits has multiplied by six times in the last 10 years and has doubled in the last three."

To learn more about Enterprise Zones, contact your CPA, your local zone administrator, or National Tax Credit Group. To become involved in the continuation of the Enterprise Zone benefits in your area, please forward your letters of support to Senator Denise Ducheny. Her e-mail address is: senator.ducheny@sen.ca.gov.

     
   CPA
   Holthouse Carlin & Van Trigt
   CA,    USA
   562 590-9535 (phone)
   blakec@hcvt.com