As we head into the tax filing season, taxpayers are always looking for ways to lower their tax burden. As Judge Learned Hand once wrote: “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”
A simple way to lower one’s taxes is to explore the California tax incentives that are available for businesses. Businesses located in San Joaquin County should pay particular attention to the tax incentives that are available.
In San Joaquin County, many businesses are eligible for various Enterprise Zone (EZ) tax incentives. EZs were created by the California Legislature to promote economic and employment development in designated areas. In California, there are 40 Enterprise Zones. The EZ in San Joaquin County encompasses 656 square miles. Given the size of the EZ in San Joaquin County, do not be too quick to think that your business does not reside in the EZ.
The EZ tax incentives encompass five different tax benefits. The most popular or widely known EZ tax incentive is a tax credit for qualified wages. However, there are additional EZ tax incentives such as tax credits for sales tax paid on machinery; a current property deduction for the purchase of qualified property within an EZ rather than capitalization of the property; an interest received deduction for lenders who facilitate loans to businesses located in EZs; and a greater benefit with respect to the deduction of net operating losses.
The most popular EZ tax incentive is the tax credit for qualified wages. The credit is equal to 50 percent of the qualified wages paid to the qualified employees in the first year of employment, 40 percent in the second year, 30 percent in the third year, 20 percent in the fourth year, and 10 percent in the fifth year. The credit can equal up to $37,440 over the five-year period per qualified employee. A qualified employee is someone who, immediately before hire by the taxpayer was one of the following: (1) eligible for services under the Federal Job Training Partnership Act (29 U.S.C. §1501, et seq) and could receive subsidized employment, training, or services funded by the Act; (2) eligible as a registrant under the Greater Avenues for Independence Act; (3) an economically disadvantaged individual 14 years old or older; (4) a dislocated worker who meets certain requirements; (5) disabled and eligible for a state rehabilitation plan or is a service-connected disabled veteran, a Vietnam veteran, or a veteran recently separated from military service; (6) an ex-offender; (7) eligible for or a recipient of federal supplemental security income benefits, Aid to Families with Dependent Children, food stamps, or state and local general assistance; a member of a federally recognized Indian tribe, band, or other group of Native American descent; or (8) a resident of a targeted employment area as defined in California Government Code §7072. This last one means your employee lives in a targeted area. Many employers are confused by the above descriptions but an investigation by a knowledgeable professional schooled in this area will usually find that the employees qualify.
According to Steve Dougherty, CPA, owner of the Stockton accounting firm of Dougherty CPAs, Inc., the qualified wage credit is “a tremendous incentive to business owners. If they have sat on the fence over hiring an employee, here is a no-brainer business decision because the State is going to basically sponsor that employee for the first five years. We have people from the old enterprise zone that probably won’t pay any State tax for the rest of their lives!”
The next most popular EZ tax incentive is the tax credit for sales tax paid on machinery. This EZ tax incentive is a tax credit equal to the sales and use taxes paid or incurred by a qualified taxpayer that purchases qualified property, up to $20 million, for property to be used exclusively in the EZ. Qualified property includes machinery and machinery parts used for fabricating, processing, assembling and manufacturing; for the production of renewable energy resources; or for air or water pollution control measures.
Another EZ tax incentive is a tax deduction equal to 40 percent of the cost of a specified amount of property located in an EZ rather than requiring the taxpayer to capitalize and depreciate the expense. Qualified property is IRC §1245 property eligible for ACRS depreciation under IRC §168 purchased and placed in service for exclusive use in the business in the EZ.
The next EZ tax incentive is an indisloterest received deduction whereby a taxpayer may deduct the amount of interest received on debt owed by a qualified business located in an EZ. To qualify for this deduction, the qualified business must be located solely in the EZ; the indebtedness is created solely in connection with business in the EZ; and the taxpayer (i.e., lender) has no equity or other ownership interest in the borrower. The above requirements have to be present when the debt is created. Lastly, California provides a further EZ tax incentive by allowing businesses operating within an EZ to carry forward net operating losses attributable to their business operations within the EZ without regard to the former 50 percent limitation applicable to other California taxpayers.
Business owners should specifically ask their tax professional whether or not they qualify for any of the EZ tax incentives. If your tax professional does not handle EZ tax incentive calculations, there are many accountants or businesses that have set up niche side businesses to handle this specific issue.
You do not have to change accountants to obtain the tax incentives available from the EZs. In fact, our law firm used the services of Steve Dougherty to calculate the EZ tax incentives we were eligible for even though Steve does not handle the preparation of our tax return. We saved thousands of dollars and so could you.