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State Enterprise Zone (EZ) and Tax Incentive

The California Technology, Trade and Commerce Agency have designated economically depressed areas in California as Enterprise Zone to encourage and stimulate growth, development, and investment in the area. Taxpayers who invest, operate, or locate a trade or business within an Enterprise Zone may be eligible for special tax incentives, known as EZ credit. For example, Enterprise Zone covers broad area in Los Angeles downtown specifically from Alameda St. to Figueroa St. It is presumed that most Korean-owned businesses in that area are qualified for such incentives. A new zone called “Los Angeles-Hollywood Zone” was designated at the end of 2006. This new zone covers pretty much every corner of Korea town in Los Angeles, California. It is expected that Korean business in the zone will also benefit from tax savings.    Please visit the following link (L.A. City web site) and find out whether your business is located in an EZ zone.

http://www.lacity.org/cdd/bus/_statecred.html

Among several tax credits available, following two credits are mostly applicable.

1. Employer Hiring Tax Credit

1) To Be Applicable, both of your business must be located inside one of the designated EZ zones and your employees (full & part time) must reside inside the EZ zone.    EZ zone designated for employees is the broader area than the area for employers. There is a verifying process to determine whether a particular employee can be selected for claiming tax credit.

2) The tax incentive is subject to two followings:

  1. Lower of actual wage paid or 150% of minimum wage ($12 in 2008) in a given year. And
  2. Length of employment. Wages multiplied by the percentage by the number of years worked are claimed as tax credit. No credit is available for employee who has worked over 5 year.
Number of Years 1st 2nd 3rd 4th 5th
Tax Incentives 50% 40% 30% 20% 10%

2. Sales & Use Tax Credit

1)  Sales & Use tax paid to acquire machinery & equipments for a manufacturing company inside a designated EZ Zone can be claimed as credit.
2)  Tax incentive is varied by entity types and there is maximum acquisition price for this credit can be applied to.

Entity Type Acquisition Price
Corporation $20,000,000.00
Sole Proprietorship $1,000,000.00

The total of all Enterprise Zone credits that you can take in any taxable year may not exceed the less of the Enterprise Zone tax limitation or the:

  • “net tax” limitation for individuals, or
  • “tax” limitation for corporations

All unused Enterprise Zone credits are carried forward.
Subchapter S corporations can only take 1/3 of EZ credit calculated.

Federal Empowerment Zone & Renewal Community

1. Federal Empowerment Zone Tax Incentive
Your business must be located inside the Empowerment Zone designated by Federal government and employees also must be residing inside the Empowerment Zone.    The most common credit is employer wage credit. Federal tax credits of up to $3,000 (20% of $15,000) can be claimed by an Empowerment Zone Business on each new and existing employee. The employee must live and work within the zone boundaries.

2. Renewal Community Zone Tax Incentive
Business can take an annual tax credit of up to $1,500 for each employee who lives and works for the business in a Renewal Community.

Above credits were enacted as of January 1, 2002 and lasts until December 31, 2009. You may find out for yourself by visiting following links whether your business as well any of your employees are located inside Empowerment Zone or Renewal Community. Restriction applies to the wages paid to:

1) Employees who have worked less than 90 days
2) Employees of Golf courses
3) Employees of Massage Parlors
4) Employees of Liquor Stores