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Government and People
DC: A Capitalist City?
A Preliminary Analysis of the New Federal Tax Incentives for the District of Columbia
PART III: MAKING THE MOST OF THE NEW TAX INCENTIVES: ITEMS FOR CONSIDERATION BY THE DISTRICT OF COLUMBIA TAX REVISION COMMISSION
It is too soon to tell if the new Federal tax incentives for the District of Columbia will be able to substantially improve the economy of the District of Columbia. There is no doubt, however, that these incentives--estimated to cost the Federal government of $1.2 billion over ten years--have potential for some positive impact on the District. Moreover, it is likely that their potential can be enhanced by complementary actions by the District government, the federal government, business organizations, and community groups. Whether or not these incentives are considered good policy--and irrespective of whether they could be improved--it is up to the District to make the most of the unique opportunity that Congress has put at its doorstep. This concluding chapter explores some possible next steps for the District of Columbia.
A. Marketing the New Incentives
The new federal tax incentives will be most beneficial to the District economy if current District businesses and residents are aware of them and if businesses and individuals who might migrate into the District are aware of them. Furthermore, the District will get maximum benefits if awareness is raised as soon as possible.
One place to begin marketing efforts is with businesses and individuals already in the District. For example, it would be a shame if middle-income District residents that do not own their own home are moving out of the District unaware that the $5,000 first-time homebuyer credit has been in effect since August 5, 1997. But it is not just important to raise awareness of incentives as they come into in effect. It may take months or years for businesses and residents to respond to tax incentives. Although the wage credit does not become effective until January 1, 1998, employers aware of the credit could start planning to expand employment. If District employers are slow in learning about the wage credit (e.g., their accountant informs them at the end of 1998 as they are beginning to prepare 1998 tax returns), employers may enjoy the substantial benefits of the credit in 1998 without making any effort to increase employment in 1998 in response to the credit.
Besides getting current District businesses to increase employment and current residents to buy more homes, another source of growth for the District is attracting newcomers to the District. This probably requires an entirely different marketing effort than that for raising the awareness of current DC businesses and residents: these potential newcomers are spread out over the nation or maybe even abroad; in most cases they are unfamiliar with business conditions in the District; and the nature of their response is much larger than it is for those currently in DC: they would be physically moving into the District rather than just expanding and modifying their current activities in the District.
The importance of moving quickly on these types of marketing efforts is heightened by the relatively short life span of these incentives. As noted previously, unlike other federal empowerment zone where tax incentives are available for ten years, tax incentives available in the DC enterprise zone are generally available for five years (and even a shorter period for the first-time homebuyer credit and the "brownfields" provision. If, for example, it takes two years of study and planning to relocate to a business into the District, and this process began on January 1, 1998, a business would only get wage credits for three years. Because there is date-certain expiration date, every day of delay in the process of business expansion into the District works against a favorable outcome for the District.
It is important to not only give businesses and individuals a general awareness of these tax benefits but to educate them on the intricacies of the new provisions. As the previous chapters indicate, these new tax incentives are complex, and in many cases details are exceedingly important in determining whether a taxpayer qualifies. In addition, a detailed knowledge of the geography of these new tax incentives is necessary. Detailed maps of the District Columbia indicating the borders of census tracts and the level of poverty inside those census tracts are a prerequisite for understanding the scope of these incentives. Making this information available at a reasonable costs will be particularly important to individual taxpayers and small business who may not be able to afford expert tax advisors.
To market these new DC incentives, a variety of media can be used. Information pamphlets could be distributed to the public. A new web site could be created. A easily remembered phone number (perhaps "1-800-DC-EZONE") could also serve as a first-stop for business and individuals with more questions. Press briefings can be held, and press releases made available. Finally, in addition to the provision of detailed maps, the District might consider putting up signs at the borders of the zones or actually painting lines around the areas qualified for different tax incentives
B. The Role of Federal Agencies
The Department of Housing and Urban Development has been a major promoter of existing urban empowerment zones and has served as an important clearinghouse for information about the zones. HUD has a large site on the world wide web. This site provides general background information on zones as well as details about each individual zone. Through this web site and through a variety of other means HUD provides a variety of resources useful to business and individuals that may qualify for zone benefits. HUD is also important source of information for local governments, consumer groups, and business groups that are trying to promote the empowerment zones in their own areas. In addition to HUD, other federal agencies help urban empowerment zones. For example, the Census Bureau provides detailed maps of empowerment zones and enterprise communities. Also, the Small Business Administration has established "One Stop Capital Shops" in empowerment zones to bring together at one location the SBA's business development and capital resources along with other federal, state, local and private sector resources.
It is unclear what degree of support HUD and other federal agencies will provide to fostering growth in the new DC enterprise zone. In the case of existing urban empowerment zones, HUD role in designating and monitoring existing urban zones is required by statute. But the promotional and educational functions performed by HUD relating to empowerment zones and enterprise communities are not required. Therefore, there does not seem to be anything to preclude HUD from assuming a major role as facilitator, promoter, and technical advisor. Given HUD's experience with empowerment zones and enterprise communities, this would be a valuable resource for the District.
C. Treasury Regulations
Details matter, but many of the details of the new tax incentives for the District of Columbia remain unsettled. The District of Columbia should give serious consideration to lobbying the Treasury Department and the Internal Revenue Service so that regulations may be formulated in a manner most favorable to the District. First of all, the District should press the IRS to provide guidance as quickly as possible. Just eliminating uncertainty has its benefits. Secondly, the District should attempt to convince Treasury and IRS attorneys to draft rules that provide the most generous tax benefits allowed within the statutory language.
For some tax provisions, there is no need for any significant guidance from the Internal Revenue Service. For example, the expensing provision is a minor modification of existing law and, as noted above, is of relatively little financial consequence.
In other cases, rules applying to the District will piggyback on existing and new rules applying to empowerment zones. Detailed temporary regulations have been written with respect to the wage credit. The District--along with other cities that have empowerment zones where a wage credit is available (New York, Chicago, Atlanta, Detroit, Philadelphia, and Baltimore)--may wish to review these regulations to ascertain if any changes should be suggested. New regulations regarding enterprise zone facility bonds may be required and the District may wish to work with other jurisdictions that currently--or will soon--have an empowerment zone or enterprise community to how the new statutes should be interpreted.
The District's greatest challenges with respect to Treasury regulations are the new provisions which are unique to the District: the first-time homebuyer credit and the zero-percent capital gains rate. There are two reasons the District needs to be especially vigilant about these regulations. First of all, because these provisions only apply to the District of Columbia, the resource-strapped IRS might be tempted to give consideration of these rules somewhat lower priority than it might give to issues regarded all empowerment zones. Secondly, because these are entirely new provisions, there is greater uncertainty about the operation of these rules in practice.
The operation of the rules regarding the zero-percent capital gains rate is particularly uncertain for several reasons. First of all, the issues are complex. Second, a taxpayer investing in January 1998 will not be able to "cash in" his gains until January 2002 at the earliest. On the numerous issues where interpretation of the law is not clear, a taxpayer runs considerable risk undertaking any investment without the guidance of Treasury regulations.
The District may wish to consider requesting that the IRS set up a procedure--similar to the so-called "advance pricing agreements" used to resolve international transfer pricing issues--where an investor in a new District business may be able to meet with the IRS and explain the plans for that investment. The IRS then could give some preliminary assurances to the investor that-- as long as certain conditions were met--the IRS would not challenge the investor's use of a zero capital gain rate when that investment is sold.
D. Further Congressional Action
At any time Congress may amend the legislation which created the DC enterprise zone. The first item for congressional consideration is whether any technical amendments or clarifications are required to the new legislation. As practitioners and businesses get more familiar with the legislation, these issues will become apparent. For example, the new legislation does not specify what census information should be used in determining poverty levels of census tracts. A technical correction may be needed. Such an amendment might say that the most recently available census data at the time of designation (i.e., January 1, 1998) should determine the qualified areas of the District and that these areas will remain unchanged though the life of the zone. One way to communicate items for consideration as technical corrections is to communicate them to the staffs of the congressional tax writing committees. As for the timing of when such a technical corrections bill might occur, the outlook is highly uncertain.(1)
Another concern for the District might be the possibility that a revenue-hungry Congress might scale back some tax benefits for the District before the zone designation terminates at the end of 2002. In general, this seems unlikely. Out of concerns for fairness, the tax-writing committees historically have loathed pulling the rug out from taxpayers that in good faith have responded to incentives that Congress has previously enacted. There are some rare exceptions. Congress sometimes repeals transition relief granted to some taxpayers. And when Congress feels there has been some sort of violation of fair play, as in the tax benefits provided to thrift institutions in the later 1980s, Congress has tried to take back tax benefits it previously granted.
An immediate concern for the District of Columbia in general and with respect to the DC enterprise zone is extension of the work opportunity tax credit which is currently scheduled to expire on June 30, 1998. It is in the District's interests to see that this credit is extended in its current form. In order that business may fully utilize this credit and hopefully respond to the credit by increasing employment, the credit would be most effective if this action were taken as soon as possible and if the credit were extended permanently. Unfortunately, despite some statements by some Congressional leaders that it is their intention to cut taxes to eliminate any projected budget surplus, it is not at all certain that there will be any tax bill in near future. And the chances of one occurring before June 30, 1998 are minuscule.
On a more positive note, it is possible that Congress could be persuaded to amend the DC enterprise zone statutes in a manner that is favorable to the District, particularly if these changes are done in a revenue neutral manner. For example, if it is discovered that tax-exempt financing is a much more attractive development tool that expensing, District officials might propose a trade where expensing was reduced and tax-exempt financing was increased in such a manner that did not increase the overall cost of enterprise zone tax breaks.
Of course the better outcome for the District would be for Congress to consider expanding some zone benefits without reducing any others. A preliminary list of possibilities might include:
But probably the most important expansion of the current incentives for the District of Columbia would be an extension of the life of the zone beyond its current five years. Other empowerment zones general have a ten-year life. Business simply may be unwilling or unable to respond to tax incentives that provide benefits over the relatively short horizon for the DC enterprise zone.
If Congress provided such an extension, it would be much more beneficial if it is was provided as soon as possible as opposed to at the end of the life of the zone. Again, in order to get the most economic benefit from the incentives, it is important that businesses and individuals can have certainty over long horizons.
E. Reallocating District Resources and Modifying District Policies
In addition to tax reductions, better public education, less crime, infrastructure improvements, and less regulation are all ways to help improve the attractiveness of the District to residents and businesses. This report has not discussed an overall economic development strategy for the District of Columbia. Even the most strident advocates of tax incentives for economic development acknowledge that it takes more than tax cuts to develop a local economy. The District may wish to consider its own set of local tax incentives to complement the new federal tax benefits. An alternative view is that the availability of federal tax incentives may allow the District to instead use non-tax measures to promote economic development.
Whatever type of local incentives the District provides, federal and local and tax and non-tax policies to promote growth should be coordinated. For example, marketing of the new federal tax incentives should be part of a general plan for promoting economic development in the District. To maximize utilization of economic incentives, efforts should be made to keep the plan simple and avoid unnecessary complication.
For example, to not further complicate issues for District residents and taxpayers, the District should as much as possible try to coordinate new District rules with the new Federal rules. It would be terribly perplexing to taxpayers if the District has its own enterprise zone program of tax incentives with different boundaries than the new federal zone. If the District officials felt strongly that their borders for economic development zones make more sense than those drawn by the federal government, they might ask Congress to redraw the boundaries to be consistent with their own.
Similarly, the District may want to complement federal tax incentives with some tax incentives of their own. As much as possible, the District should think about piggybacking on federal rules. For example, instead of offering an investment tax credit (an entirely new incentive), the District may wish to consider a five-percent wage credit that has exactly the same qualifications as federal rules.
The District might also want to fine tune federal tax incentives by overlaying some local tax incentives. For example, within the new DC enterprise zone the District may consider some areas more in need of economic development than others. For example, parts of both Georgetown and Anacostia are part in the DC enterprise zone. The District may wish to focus its own economic development incentives in the areas more in need of economic development.
Finally, drawing upon the discussion of the prior chapter, there may be particular non-tax policies that might particularly complement the new federal tax incentives. For example, in order to be eligible for the wage credit an employee must be a District resident. The District might be able to establish an employment service that informs businesses in the DC enterprise zone of available workers who are eligible for the wage credit. Another possibility the District may wish to consider is establishing industrial parks or business incubators in the DC enterprise zone. Such incubators may be attractive to businesses concerned about security, infrastructure, and the availability of business services.
F. Conclusion: From a "Capitol City" to a "Capitalist City"?
This report includes a lot of technical legal and economic analysis necessary to begin understanding how the new District of Columbia tax incentives can affect the local economy. But, as always, it is important to not allow attention to details be an excuse for neglecting the big picture. It is true that the new tax incentives put dollars in the pockets of residents and businesses who decide to participate in the District economy. But it is possible that the most important effect may not be the dollars spent but the signal sent to residents and businesses. The new tax incentives can be used not only as a financial incentive but as a focal point of promotion for all the benefits of investing in the DC economy.(2)
It is no secret that businesses consider the District business climate unfavorable. The new federal tax incentives offer a unique opportunity for the District to shed this reputation.
APPENDICES AND BIBLIOGRAPHY
APPENDIX A. LEGISLATIVE BACKGROUND
A. Flat Tax Proposals for the District of Columbia
Many members of Congress have expressed support for some version of a "flat tax" for the District of Columbia. On February 5, 1997 District of Columbia Delegate Eleanor Holmes Norton introduced the District of Columbia Economic Recovery Act (DCERA) of 1997 (H.R. 549). This bill greatly simplifies and reduces federal taxes paid by District residents by capping the top rate on income earned by District residents in the District at 15 percent and by providing large standard deduction ($15,000 for individuals and $25,000 for married couples). Senator Connie Mack of Florida introduced his own version of DCERA (S. 753) in the Senate on May 15, 1997. In addition to the 15 percent and the large standard deduction contained in the Norton bill, the Mack bill also provided a zero-percent capital gains tax rate for certain assets in the District of Columbia, a first-time homebuyer credit, and write-offs for environmental clean-up expenses incurred in the District. Both of these bills were supported by the Republican leadership in Congress.
The flat tax bills introduced by Delegate Norton and by Senator Mack are intended to promote job creation in the District and increase the population (and the tax base) in the District through private sector economic development. But the new DC tax incentives are a far cry from the flat tax proposals. According to the Joint Committee on Taxation, the ten-year revenue cost of each of the flat tax proposals is more than ten times the $1.2 billion ten-year revenue loss of the package of incentives enacted into law. The main reason for the large difference in cost is that the new tax incentives are narrowly targeted, while the flat tax is generally available to all residents of the District regardless of their level of income, the location of their residence, or the location of their workplace.
B. The President's Tax Proposals for the District
On March 11, 1997, President Clinton proposed his own package of tax incentives for the District of Columbia. The plan included a new "District of Columbia Economic Development Corporation" to oversee a comprehensive economic development strategy for the District of Columbia. The proposal provided four new tax incentives: (1) a new employment credit and extension of the proposed welfare-to-work credit; (2) more first-year write-offs of purchases of business equipment; (3) expanded availability tax-exempt development bonds; and (4) tax credits for certain equity investments in and loans to District businesses. The new Economic Development Corporation would be authorized to allocate $95 million in tax credits to taxpayers that make certain equity investments in, or loans to, businesses conducting business activities in the District. The revenue cost of the President's package was modest in comparison to the package that eventually became law (and minuscule compared to the flat tax proposals). The staff of the Joint Committee estimated that the tax proposals would reduce federal budget receipts by just over $300 million in the ten-year budget period from fiscal year 1998 to fiscal year 2007.
C. 1997 Legislative History
At each stage of the legislative process, the Taxpayer Relief Act included special tax relief for the District of Columbia. Rep. Bill Archer of Texas, the Chairman of the Ways and Means Committee, proposed a plan for the District of Columbia with four parts: (1) treatment of the most impoverished areas of DC like an empowerment zone (i.e., wage credit, additional expensing, and tax exempt bonds); (2) a reduction in the 15-percent tax bracket for individuals to 10 percent; (3) some capital gains relief for businesses in high poverty areas; and (4) a 25-percent equity credit to be administered by a new "economic development corporation" (similar to the President's plan). This proposal remained unamended as the Taxpayer Relief Act was passed by the Ways and Means Committee and subsequently by the House of Representatives. Prodded by the House leadership, Chairman Archer was a reluctant supporter of radical changes in federal taxes just for the District of Columbia. As much as possible, Archer tried to provide tax relief to the District by using the empowerment zone model.
The Senate took a different approach to providing tax relief for the District of Columbia. Sen. William Roth of Delaware, Chairman of the Senate Committee on Finance, adopted Archer's empowerment zone model and the President's proposal for an equity credit administered by an economic development corporation, but also added much broader capital gains relief than the House bill. Before the bill was approved by Roth's committee, his proposal was significantly modified. The empowerment zone provisions were dropped and replaced by a first-time homebuyer credit, like that proposed by Senator Mack in the flat tax legislation that he had introduced earlier in the year. The full Senate further amended the District's tax relief package. It reduced the President's equity credit and proposed the creation of a trust fund for District schools financing by earmarking federal taxes paid by DC residents.
The bill agreed to by the conference committee, and subsequently approved by both houses and signed into law by President Clinton on August 5, had elements of both the House and Senate bills. At a ten-year cost of $582 million, the bill included the basic empowerment zone structure included in the House bill (and in Chairman Roth's proposal). For $502 million, the bill also included the capital gains relief that figured so prominently in all the Senate versions. Finally, for $74 million, the bill included a first-time homebuyer credit like that proposed by Senator Mack, but with one significant modification: the credit would no longer available to home buyers with high income.
The final bill did not include a trust fund for District schools. The final bill also dropped entirely the idea originally proposed by the President for an equity credit administered by an economic development corporation. This was somewhat surprising because all prior official versions of the legislation had included this provision. Figure A-1 summarizes the different versions of the District tax relief package as it moved through Congress.
APPENDIX B. COMPARISON OF THE DC ENTERPRISE ZONE TO EMPOWERMENT ZONES
There has been a rapid evolution in geographically targeted federal tax incentives. Prior to 1993, with minor exceptions, there were none. The authority granted by Congress in 1993 to create federal empowerment zones and enterprise communities was first exercised at the end of 1994. In 1997 Congress changed the rules governing existing zones. In addition, Congress also gave authority for the creation of 20 additional empowerment zones with tax rules significantly different tax from existing empowerment zones. The DC enterprise zone represents the most advanced stage of this evolution in geographically targeted incentives.
The District of Columbia enterprise zone is basically an empowerment zone with numerous modifications. Because the new law defining the District of Columbia enterprise zone extensively cross references the statutes defining empowerment zones, a good understanding of existing empowerment zones is a prerequisite for understanding the new zone for the District. Unfortunately, even though they have a short history, the empowerment zone statutes are long and complex. The 1993 legislation created a whole new subchapter of the Internal Revenue Code just for empowerment zones and enterprise communities. The new rules for the District of Columbia encompass most of this subchapter and more.
A. 1993 Empowerment Zone Legislation
The Omnibus Budget Reconciliation Act of 1993 authorized the creation of nine empowerment zones and 95 enterprise communities. In accordance with the 1993 legislation, the Secretary of the Department of Housing and Urban Development (HUD) designated six empowerment zones and 65 enterprise communities on December 21, 1994. On that same day, the Secretary of the Department of Agriculture designated three rural empowerment zones and 30 rural empowerment communities. All these areas must meet eligibility criteria, including specified poverty rates and population and geographic size limitations.(1)
By statute, the aggregate population for the six designated urban empowerment zones is limited to 750,000.
In empowerment zones, there are three tax incentives available for qualified businesses: (1) a 20-percent wage credit for the first $15,000 of wages paid to a zone resident who works in the zone; (2) an additional $20,000 of section 179 expensing; and (3) special tax-exempt financing for certain zone facilities located in the zones. In enterprise communities, special tax-exempt financing is the only tax benefit available.
By far the most important of these three incentives is the wage credit. As discussed in more detail below, enterprise zone facility bonds have not been widely used because they are subject to each state's volume cap on issuance of private activity bonds, because of the substantial credit risks in the underlying investments, and because of the numerous geographic restrictions in the statutes and regulations governing the issuance of these bonds. Also, as discussed below, expensing may be at most worth a couple of thousand dollars to businesses that qualify. In contrast, the wage credit is worth $3,000 per qualified employee.
Because the only tax incentive available in enterprise communities is tax-exempt enterprise facility bonds, the tax incentives available in enterprise communities are a small fraction of those available in empowerment zones.
The six urban empowerment zones are in (1) Atlanta, (2) Baltimore, (3) Chicago, (4) Detroit, (5) New York, and (6) Philadelphia. The 1997 Taxpayer Relief Act authorizes the Secretary of Housing and Urban Development to designate two more urban empowerment zones before February 2, 1998. The designations of these two new zones will not take effect before January 1, 2000, and generally will remain in effect for ten years.
B. 1997 Amendments to Original Empowerment Zone Rules
The 1997 Act also authorizes the Secretary of Housing and Urban Development to designate an additional 15 urban empowerment zones and the Secretary of Agriculture to designate an additional five rural empowerment zones. In these "additional" zones, enterprise zone businesses are eligible to receive up to $20,000 of additional expensing, but the major incentive in regular empowerment zones--the employer wage credit--is not available. Offsetting this lack of employment incentives is the substantial relaxation of restrictions on enterprise facility bonds. In the 20 additional empowerment zones, enterprise zone facility bonds are not subject to the state private activity bond volume caps. The maximum amount of these bonds that can be issued is limited to $60 million per rural zone, $130 million per urban zone with a population of less than 100,000, and $230 million per urban zone with a population of 100,000 or more. The 20 additional zones must be designated before 1999, and the designations generally will remain in effect for 10 years.
C. The District of Columbia Enterprise Community
Under authority granted by Congress in 1993, the Department of Housing and Urban Development has already designated portions of the District of Columbia as an enterprise community. The District of Columbia enterprise community consists of twenty census tracts in three noncontiguous areas. The three areas are:
It is important to note that prior to the 1997 legislation, businesses in these areas would have been eligible for enterprise zone facility bond financing through the year 2004. Although more valuable tax incentives are available to this area under the new special tax rules for the District of Columbia, all of these incentives--including the ability to issue tax-exempt enterprise zone facility bonds--expire at the end of 2002.
D. Comparison of New DC Enterprise Zone to Other Zones
1. Advantages Over Other Zones
Although there are a lot of similarities between urban empowerment zone and the new DC enterprise zone, there are also some important differences:
Taken together, these rules represent a package of tax incentives that provide District residents and businesses significantly greater tax incentives than are generally available in regular empowerment zones.
(1) Five-year life span.--There is one major shortcoming of the tax incentives in the DC enterprise zone compared to other empowerment zones. In general, empowerment zone designations generally are in effect for ten years--which means businesses can expense equipment, obtain tax exempt financing, and earn wage credits for a ten-year period. In the District of Columbia enterprise zone these same tax incentives are only available for five years. (Similarly, the extra incentives only available in the DC enterprise zone--i.e., the zero capital gains rate and the homebuyer credit--also have short life spans. The zero capital gains rate is only available for investments made before 2003. And the homebuyer credit expires at the end of the year 2000.) The lack of long-term tax incentives could seriously undermine the ability of the new tax incentives to attract business into the District of Columbia.
(2) Bonds are subject to the volume cap.-- All enterprise zone facility bonds issued in the DC enterprise zone are subject to the District's volume cap on private activity bond issuance. Under the current federal law, the District generally not allowed to issue more than $150 of private activity bonds each year. Enterprise zone facility bonds issued in the new "additional" zones are not subject to the private activity bond volume cap. (Enterprise zone facility bonds issued in regular empowerment zone--like bonds issued in the new DC enterprise zone--are subject to a state volume cap.) Currently, like many small states also subject to the $150 annual cap on bond issuance, the District does not use its entire private activity bond allocation.
c. Summary of Differences
The different tax provisions available in all the different types of zones are summarized in Table A-1. Except for the shorter life span for the DC enterprise zone (five years) compared to other zone (ten years), and except for the ability of "additional" empowerment zones to issue exempt facility bonds outside the volume activity cap, the DC tax incentives are more generous than those available to enterprise communities and to other empowerment zones.
APPENDIX C. GENERAL BACKGROUND ON THE DC ENTERPRISE ZONE
Even by the standards of the Internal Revenue Code, the rules governing the new tax incentives for the District of Columbia are complex. The starting point for these rules is the 1993 statutory language that brought empowerment zones into existence. The Taxpayer Relief Act of 1997 amended these already-cumbersome rules and made them more complex. The new rules for the District of Columbia extend the empowerment zone rules as modified by the 1997 Act.
Even if the new DC tax incentives did not include any incentives beyond those available in empowerment zones, the new tax benefits for the District would impose significant compliance costs on taxpayers in the District of Columbia--particularly business taxpayers. But there are other significant provisions. In addition to all the incentives present in empowerment zones, the DC enterprise zone has two new tax incentives--the homebuyer credit and the zero-percent capital gain rate on new investment in areas of the District with significant poverty. The rules pertaining to the capital gains incentive are particularly complex.
To make understanding of these rules more palatable to non-specialists, this appendix explains some of the more befuddling aspects of these new tax rules for the District of Columbia. (A detailed explanation of the tax incentives is provided in Appendix D.) In particular, this appendix address two concepts:
A. Three Types of Qualified Property
1. Property Qualified for Additional Expensing
An additional $20,000 of expensing is available for expenditures on "enterprise zone property." Enterprise zone property is depreciable tangible property, but does not include any buildings or their structural components. Some examples of the types of property qualified for additional expensing are machinery and equipment, including trucks, automobiles, furniture, computers, and copiers. In addition, to qualify as District of Columbia enterprise zone property: (1) the property must be acquired (from an unrelated party) after December 31, 1997; (2) the original use of the property in the zone must commence with the taxpayer; and (3) substantially all of the use of the property must in the DC zone in the active conduct of a trade or business by the taxpayer.
These first two requirements may be waived in the case of property which is substantially renovated. Property is considered substantially renovated if, during any 24-month period after December 31, 1997, the property owner makes an additional investment in the property of at least $5,000 and that investment is equal to or greater than the cost (net of depreciation) of the property at the beginning of the two-year period.
2. Property Qualified for Exempt Facility Bond Financing
Only "exempt facility property" may be financed with exempt facility bonds. Exempt facility property is the same as qualified enterprise zone property (defined above for the additional expensing) except that real estate--including buildings, structural components, and any land which is functionally related and subordinate to such property--is also eligible.
The general rules governing the issuance of tax-exempt private activity bonds--of which enterprise zone facility bonds are one types--do not allow acquisition of used property with bond proceeds. One exception is substantially renovated property in empowerment zones. This exception was expanded by a provision in the 1997 Taxpayer Relief Act that modifies the definition of "substantially renovated" property for the purposes of defining facilities eligible for enterprise zone financing. Under the modified rule, to be "substantially renovated," additional investment over a 24-month period need only equal 15 percent (or $5,000, if more) of the cost of the property (net of depreciation) at the beginning of the period. (The general rule that applies for additional expensing, described above, requires that the additional investment equal 100 percent of the net cost at the beginning of the period.)
Also, as a general rule, no more than 25 percent of the net proceeds of any issue of private activity bonds can be used to purchase land. But in the case of exempt facility bonds generally and of DC exempt facility bonds in particular, there are no is no such 25-percent limit on the amount of land.
3. Property That Qualifies for Zero-Percent Capital Gains Relief
Investors may qualify for a zero-percent capital gains rate for both their ownership interests in certain District businesses as well as their direct ownership of tangible business property (e.g., as sole proprietor). For tangible property to be eligible for the zero-percent capital gains rate, it must be "DC zone business property." DC zone business property is the same as qualified DC Zone property (defined above for purposes of eligibility for additional expensing) except that buildings and structural components are also eligible. As with property that qualifies for expensing, DC Zone Business Property must be used in the conduct of an active trade or business. In addition, and only for the purposes of determining the availability of the zero capital gains rate, the District of Columbia enterprise zone is defined with respect to a 10 percent poverty rate (instead of the 20 percent rate used more generally).
B. Four Types of Qualified Business
1. Business that Qualifies for the Wage Credit (and for Immediate Write-Offs of Environmental Expenses )
The employer wage credit provides a tax credit of up to 20 percent of the first $15,000 of an employee's annual wages. This incentive is available to almost any business that employs any resident of the District of Columbia as long as that employee performs his or her services in District census tracts with poverty rates greater than 20 percent (i.e., in the "DC Enterprise Zone"). Unlike the other new tax incentives for businesses operating in the District, there are no requirements that the business in question have most of its operations in DC neighborhoods with significant poverty. So, for example, any Fortune 500 company could earn wage credits as long as it has employees performing services in the DC Enterprise Zone. The only restriction is that the employee may not perform services at a facility that is a private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or a liquor store. (Similarly, immediate expensing of environmental clean-up expenses is available to any businesses--even golf courses--as long as the contaminated site is located in a census tract with a poverty rate of at least 20 percent.)
2. Business Qualified for Additional Expensing
A "DC Enterprise Zone Business" is a corporation, partnership, or sole proprietorship that generally meets the following requirements each year: (1) the sole trade or business of the corporation or partnership is the active conduct of a qualified business within the DC Zone; (2) at least 50 percent of the total gross income is derived from the active conduct of that business within the District enterprise zone; (3) a substantial portion of the business's tangible property is used within the District enterprise zone; (4) a substantial portion of the business's intangible property is used in, and exclusively related to, the active conduct of such business; (5) a substantial portion of all of the services performed by employees are performed within the District enterprise zone; and (6) no more than 5 percent of the value of the property owned by the business is attributable to (a) certain financial property, or (b) collectibles not held primarily for sale to customers in the ordinary course of an active trade or business. Also, a DC enterprise zone business may not be a private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or a liquor store.
A District of Columbia enterprise zone business may not be engaged in trade or business that consists predominantly of the development or holding of intangibles for sale or license. In addition, the leasing of real estate that is located within the District enterprise zone to others is treated as a qualified business only if (1) the leased property is not residential property, and (2) at least 50 percent of the gross rental income from the real estate is from an enterprise zone business.(2)
A business that rents tangible property other than real estate also must make at least 50 percent of its rentals to DC enterprise zone businesses or to residents of the DC zone.
The 1997 Taxpayer Relief Act clarifies that an enterprise zone business that leases to others commercial property within a zone or community may rely on a lessee's certification that the lessee is an enterprise zone business. Also, a new rule in Taxpayer Relief Act of 1997 allows business with real estate that straddles the border of an empowerment zone to treat all of the business on that real estate as an enterprise zone business as long as the amount of the property inside the zone is "substantial" relative to the property outside the zone.
3. Business Qualified for Exempt Facility Bond Financing
Exempt facilities financed by exempt facility bonds must be used by enterprise zone businesses. In the context of exempt bond financing, however, a broader definition of enterprise zone business applies than it does for additional expensing. In general, to be eligible for exempt financing, an enterprise zone business is allowed to have much more of the overall business's operation outside of the zone. A business with substantial operations outside the DC zone may qualify as DC business (but only for purposes of qualifying for exempt financing) if those operations located in the DC zone--if incorporated separately--would meet the requirements (described above for expensing) defining a DC Enterprise Zone Business. Under this rule, a new business establishment inside the District of Columbia enterprise zone that is part of a national chain may qualify for exempt financing (but not for additional expensing). Similarly, a business that began with all of its operations in the DC zone may still qualify for exempt financing even if it opens significant new facilities outside the zone.
4. Business Whose Owners Qualify for a Zero-Percent Capital Gains Rate
A qualified enterprise zone business eligible for the zero-percent rate is the same as the definition of enterprise zone business eligible for additional expensing, except that the definition of DC enterprise zone is expanded to include all DC census tracts with at least a 10 percent poverty rate (as opposed to a 20 percent poverty rate generally required for additional expensing and expanded tax exempt bond financing). At the same time, however, the gross receipts test is tightened: the requirement that otherwise applies to enterprise zone businesses that 50 percent of gross receipts be derived from business conducted in the Zone is increased to 80 percent. (Also, the "national chain" rule that is used in the exempt facility bond rules--i.e., the requirement that an establishment that is part of a large business may qualify if the establishment in the zone would qualified if it were separately incorporated--does not apply in the definition of enterprise zone business qualified for a zero capital gains rate.)
5. Note About Employers of High-Risk Youth and Summer Youth Employees Eligible for the Work Opportunity Tax Credit
The work opportunity tax credit is available to an employer of a District resident who is either a high-risk youth or a summer youth employee as long as the resident lives in a census tract with a 20 percent poverty rate. Thus, employers eligible for this credit may conduct business anywhere in the District of Columbia or even outside of the District.(3)
Unlike most other federal tax rules, the availability of tax incentives in empowerment zones and in the District of Columbia depends on location. Before the enactment of empowerment zone legislation in 1993, federal tax law did not contain general rules that targeted specific geographic areas for special federal income tax treatment.(4) As is the case with existing empowerment zones and enterprise communities, maps of these new areas will be in high demand. The Department of Housing and Urban Development has made zone maps as well as other location software available on the World Wide Web. Mapping for the District of Columbia tax incentives is particularly complex. Borders must be demarcated between three types of tax regimes (for census tracts with less than 10 percent poverty, for census tracts with between 10 and 20 percent poverty, and those with more than 20 percent poverty) where other zones just had borders between two regimes (i.e., zone and non-zone). Moreover, other zones were smaller in size and could be made of no more than three non-contiguous areas. For the southeastern portion of the District alone (whose western border is formed by the Potomac River and the Anacostia River), there are 14 different areas whose entire borders are adjacent to waterfront, the District border, or census tracts with different tax regimes.
The numerous related but different definitions of qualified property and qualified business eligible for the federal tax incentives for the District of Columbia are exceedingly complex. These rules represent an example of federal lawmaking at its worst: layer after layer of complexity added to achieve political compromises and revenue objectives. There may be some underlying policy justifications for all these special rules. If they do exist, Congress has not stated them, and in any case achieving these amorphous objectives hardly seems worth the effort. One thing is clear, the complexity of these new provisions reduces their effectiveness. Taxpayers may not be able to understand these new provisions and if they do, they may have to incur substantial costs--both out-of-pocket and of their own time--to comply.
Note: "n.a." means "not applicable".
APPENDIX D. A DETAILED DESCRIPTION OF THE NEW TAX RULES FOR THE DISTRICT OF COLUMBIA
A. The 20-Percent Wage Credit
a. General Rule
The Taxpayer Relief Act of 1997 provides a 20-percent wage credit for wages paid to residents of the District of Columbia as long as they work in the DC enterprise zone. Only the first $15,000 of wages paid during a calendar year is eligible for the credit. Therefore, the maximum credit per employee is $3,000 per year. This credit is available for five calendar years--for wages paid or incurred after December 31, 1997 and before January 1, 2003. The credit is available for the employment of existing as well as new employees.
b. Available to Most Businesses Operating in the DC Zone
Unlike the other special tax incentives for businesses in the District of Columbia, a business does not have to be a "enterprise zone business" to qualify. In general, to a be a qualified DC enterprise zone business, most of the activities of that business must be performed in the zone. In contrast, for the wage credit, a business is not required to have most of its operations in the DC enterprise zone. The only geographical requirement is that employees whose wages earn tax credits must perform substantially all employment services within the DC enterprise zone. Thus, any existing business with significant operations outside the DC zone could open a facility in the DC zone and earn wage credits. Conversely, any business with significant operations in the DC zone that expanded its operations to areas outside the DC zone would still be eligible for wage credits.
2. Qualified employees
a. Available for Employment of All DC residents
This wage credit is similar to the credit provided under current law to businesses operating in existing empowerment zones. For wages to be eligible for the empowerment zone wage credit, employees must be residents of the high poverty areas that comprise the zone. To qualify for the special wage credit for the District of Columbia, however, employees may reside anywhere in the District of Columbia. Thus, employees whose wages qualify for the credit may have high incomes and live in affluent areas of the District.
b. Available for Part-Time Employees
The credit is available for part-time as well as for full-time employees as long as the individual has been employed by the business claiming the credit for a minimum of 90 days. This 90-day rule is not violated if there is change in ownership (or a change in the form of ownership) and the new employer continues in the same business. The 90-day rule also is not violated if an employee becomes disabled (unless the employer fails to offer reemployment to the disabled person) or if the employee is considered under District law to be due to misconduct on part of the employee.
c. Available for Employees Who Only Work Part of the Time in the DC Zone
If an employer uses certain accounting techniques described in proposed regulations issued by Internal Revenue Service, employers may get tax credits for the wages of employees who work only part of the year in the DC enterprise zone. Under the statutory rules for empowerment zone and DC employment credits, an employee must perform "substantially all" of his services in the zone in order to be eligible for the credit.(5)
Under proposed Treasury regulations, there are two methods of determining whether the so-called "location-of-services requirement" is met: the calendar-year method and the pay-period method.
An employer must use either the calendar-year method or pay-period method with respect to all its employees in each year. But the employer may switch methods from year to year.
d. Place-of-Abode Requirement
The principal place of abode of such employee when performing services eligible for the wage credit must be within the District of Columbia. The proposed regulations for the empowerment zone employment credit do not elaborate on the definition of "place of abode." Elsewhere, however, the regulations explain that in order for a residence to be a place of abode for a person that person must occupy the residence and that it is not sufficient merely to maintain a house without occupancy.(6)
Temporary absences due to special circumstances for reasons of education, illness, business, vacation, and military service are allowed.
3. Deduction Disallowance Significantly Reduces the Value of the Credit
As is the case with most other tax credits in the Internal Revenue Code, available deductions are reduced by the amount of the credit.(7)
For every dollar of the DC employment tax credit claimed, the employer must reduce eligible deductions by the same amount. This reduction in the deduction for wages means that the $3,000 per-employee credit is generally worth much less than $3,000.
The negative impact on the value of the credit from the deduction disallowance depends on the employer's federal tax rate. The higher the rate, the larger the impact. In the prior example, the employer is a relatively large corporation and the value of the credit is reduced by more than a third. If the employer were in a lower bracket, the impact of the deduction disallowance would be less.
4. Definition of Wages
a. Expanded Definition of Wages.--Tax-free Undergraduate Education Assistance.
For purposes of determining the amount of wage credit, wages include the payment by the employer of an employee's undergraduate education expenses. These expenses are defined by cross reference to undergraduate assistance payments that are tax-free under Section 127 of the Internal Revenue Code. Every few years Congress extends Section 127 on a temporary basis. Most recently, the Taxpayer Relief Act of 1997 renewed the exclusion of these benefits from employee's income through May 31, 2000. If this provision were to expire as currently scheduled, employers would no longer be able to include this assistance in the amount of wages qualified for the wage credit after May 31, 2000.
One of the benefits of excluding education assistance payments from income under current law is that employers do not have to report these benefits. The inclusion of tax-free education assistance in wages qualified for the credit therefore adds a new reporting burden for some employers. Of course, if an employee earns over $15,000 in cash wages from services performed in the DC zone--the annual maximum amount of qualified wages--there is no need to determine the amount of employer-provided educational assistance.
b. Expanded Definition of Wages--Expenses for Youth Training Program
For employees who are age 18 or under, the definition of qualified wages includes any amounts paid or incurred by an employer for any youth training program that the employer operates in conjunction with local education officials.
5. Coordination with Other Wage Credits
The empowerment zone wage credit, the work opportunity tax credit, and the newly created welfare-to-work tax credit all provide incentives for employers to hire disadvantaged individuals. In many cases, an employee's wages may qualify for more than one than of these credits. In general, it is not Congress's intention that employer's receive more than one of these incentives with respect to any one employee in any one year.(10)
a. Coordination with the Work Opportunity Tax Credit
The Taxpayer Relief Act of 1997 modified the structure of the work opportunity tax credit and extended it through the first half of 1998. Wages eligible for the work opportunity tax credit are not also eligible for the empowerment zone employment credit. For employers with wages eligible for both credits, the relative value of each of the credits depends on circumstances. One rule of thumb is that the work opportunity tax credit is generally more favorable for part-time employees while the empowerment zone wage credit is more generally more favorable for full-time employees. (See Section II.F and Figure 5 in the main body of this report.)
b. Coordination with the New Welfare-to-Work Tax Credit
The Taxpayer Relief Act of 1997 provides employers a new tax credit on the first $20,000 of eligible wages paid to welfare recipients during the first two years of employment. The credit is 35 percent of the first $10,000 of eligible wages in the first year of employment and 50 percent of the first $10,000 of eligible wages in the second year of employment. The maximum credit is $8,500 per qualified employee. The provision is effective for wages paid or incurred to a qualified individual who begins work for an employer on or after January 1, 1998 and before May 1, 1999. Because this credit is far more generous than the empowerment zone employment credit or the work opportunity tax credit, any employer should use the welfare-to-work tax credit before using the empowerment zone employment credit.
6. Other Restrictions
a. Relatives of Owners Not Qualified
The wage credit is not available for wages paid to a relative of a business owner with more than a 50 percent ownership in a business or a to a owner of more than 5 percent of the business.
b. Employees Engaged in Certain Businesses Not Qualified
The wages of an employee working at any private or commercial golf course, country club, message parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or liquor store. Also, any individual employed by a farm with more than $500,000 in assets is not eligible for wage credit.
c. Anti-abuse Rules for Related Businesses
A controlled group of businesses is treated as single employer to prevent related businesses from circumventing the $15,000 per year limit by moving employees between businesses in a controlled group.
7. Unused Credits and Minimum Tax
a. Alternative Minimum Tax
Under a complex set of rules of current law, both individuals and businesses may be subject to an alternative minimum tax (AMT). Because the exemption amount under the individual AMT is not indexed for inflation, and because of the new child credit in the 1997 legislation, many analysts believe the individual AMT will become much more common over the next decade. The DC wage credit can be used dollar-for-dollar to eliminate the first $25,000 of a business or individual's AMT in any taxable year. It can be used to reduce only 25 percent of AMT liability in excess of $25,000.
b. Carryforward and Carrybacks of Unused Credits
As with other business tax credit, DC wage credits not used in the year earned may be carried back and applied to reduce tax liability in the three prior years. If all tax liability from the current and prior three years is exhausted, the credit may be carried forward to reduce tax liability in any of the following 15 years. No portion of the unused wage credit may be carried back to a taxable year ending before August 5, 1997. So businesses using the calendar year as their taxable year can carry back unused wage credits to 1997.
B. DC Enterprise Zone Exempt Facility Bonds
1. In General
The Taxpayer Relief Act of 1997 designates the area composed of all census tracts in the District of Columbia with a poverty rate of 20 percent or more as the District of Columbia Enterprise Zone. In general, the rules applying to the existing six federal empowerment zone apply to the DC Enterprise Zone. Accordingly, the government of the District of Columbia, subject to its $150 million volume limitation on the annual issuance of private activity bonds,(11)
may issue enterprise zone facility bonds. The proceeds of these bonds are used to provide low-cost financing for private sector business investment in high-poverty areas of the District of Columbia. Bonds may be issued while the District enterprise zone designation is in effect, i.e., after December 31, 1997 and before January 1, 2003.(12)
b. Definition of Enterprise Zone Facility and Enterprise Zone Business
A qualified zone facility is any depreciable tangible property (including buildings and their structural components) and any land which is functionally related and subordinate to such property. An enterprise zone business (as defined for purposes of determining eligibility for exempt facility bonds) must be the principal user of the property. The property must be used in the active conduct of a trade or business in the DC enterprise zone. The original use of the property in the DC enterprise zone must be by a qualified enterprise zone business. (See Appendix C for more details.) If the property has been vacant (except for incidental uses) for any one-year period including January 1, 1998, the original use requirement does not have to be met.
2. Special Rules
a. Definition of Principal User
In general, the principal user of the property is the owner of the property. But in the case of commercial real estate, the principal user may be the lessee of the property. Only expenditures for the space allocable to qualified lessees (including common areas) can be financed with qualified enterprise zone facility bonds.
b. The "National Chain" Rule
For purposes of defining qualified enterprise zone facility bonds, the definition of enterprise zone businesses is modified such that trade or business means trade or business as if such trade or business were separately incorporated. Under this rule, as noted in the 1993 conference report explanation of the enterprise zone provisions, an establishment that is part of a national chain would qualify for the tax exempt financing if that establishment could meet the definition of enterprise zone business if it were separately incorporated. Treasury regulations finalized in 1996 require that reasonable allocations be used in determining whether the portion of the business inside the enterprise zone would meet the definition of a qualified enterprise zone business if it were separately incorporated.
Under the general rules pertaining to tax exempt financing in empowerment zones and enterprise communities, no single business may receive more have more than $3 million in tax-exempt financing with respect to any single empowerment zone (or enterprise community) or $20 million from all empowerment zones and enterprise communities. The Taxpayer Relief Act raises the $3 million per business limitation to $15 million for enterprise zone business operating in the DC zone (and retains the overall $20 million limitation).
d. Relaxation of Some Private Activity Bond Rules for Enterprise Zone Facility Bonds
Enterprise zone facility bonds are a type of private activity bond, and in general all the rules that apply to private activity bonds (e.g. on the computation of the volume cap on outstanding bonds, on limitations on maturity of bonds, on arbitrage, on bond registration, on advanced refundings) apply to enterprise zone facility bonds. There are three exceptions. Qualified enterprise zone facility bonds are exempt from the requirements (1) that private activity bonds may not be used for the acquisition of existing property, (2) that private activity bonds may not be part of an issue where 25 percent of more of the proceeds are used for the acquisition of land, and (3) that private activity bonds may not be used to finance office space unless the office is on the premise of the exempt facility and most of the functions performed at the office relate to the operation of the facility.(13)
3. Mechanics of Satisfying the Enterprise Zone Business and Enterprise Zone Property Requirements
a. In general
In 1996, the Internal Revenue Service issued detailed regulations delineating the procedures for satisfying the requirements of a enterprise zone business and enterprise zone property qualified for exempt facility bond financing. These rules in the 1996 regulations have been significantly revised by new rules contained in the 1997 legislation. The new legislation divides the life of the bonds into three periods: (1) the start-up period; (2) the testing period; and (3) the period after the testing period.(14)
b. Start-up Period
Under prior law, 95 percent of the net proceeds of a bond issued had to be used by a qualified enterprise zone business over the life of the bonds. Under the new 1997 rules, this requirement need not be met until the end of the start-up period. In addition all the requirements for an enterprise zone business (e.g. with regard to the proportion of gross receipts, service performed by employees, intangible property, and tangible property in the zone) are suspended during the start-up period. This waiver is only available if (1) at the beginning of the start-up period, there is a reasonable expectation the use by a qualified enterprise zone business would be satisfied at the end of the start-up period and (2) the business makes a good faith effort to satisfy the enterprise zone business definition. The end of the start-up period coincides with the end of the second complete taxable year after the date of issuance. If the property being financed with the bonds is placed into service after issuance, the end of the start-up period coincides with the end of the second complete taxable year after the placed-into-service date or, if earlier, after the date three years after the date of issuance.
c. The Testing Period
The testing period is the three taxable years after the start-up period. All requirements (except the requirement not applicable to DC enterprise businesses--that at least 35 percent of an enterprise zone business's employees be zone residents) are waived after the testing period.
d. Special Rule for Prohibited Activities
Throughout the entire term of the enterprise zone facility bonds--and not just during the compliance period--enterprise zone businesses may not be engaged in any trade or business involving a private or commercial golf course, a country club, massage parlor, hot tub facility, suntan facility, a racetrack or any other gambling facility, or a liquor store. Some requirements must still be met after the testing period: (1) that business may not predominately engaged in the business of holding intangibles, and (2) that the business not be a hot tub facility, golf course, or various other specific types of business disqualified under the statute.
e. Testing using a Five-Year Moving Average
The 1996 regulations give the principal users of the enterprise facility some flexibility in meeting requirements by allowing each of the requirements to be tested in each taxable year on an average basis using the current year and the four prior taxable years (disregarding any taxable year less than 90 days). Although the new legislation has substantially changed the rules for qualified exempt financing by reducing the number of years that requirements must be met, it is likely the five-year averaging rule--or some similar rule--will be retained.
f. "Substantially All" Changed to "A Substantial Portion"
The requirements of a qualified enterprise zone business and qualified enterprise zone facilities were described previously in Appendix C. The 1996 Treasury regulations clarified that for the regulations pertaining to tax exempt financing "substantially all" means "85 percent." Thus, for purposes of qualifying for tax exempt financing in the DC Enterprise Zone, qualified zone property must have 85 percent of its use in the DC zone in the active conduct of a trade or business. Furthermore, to meet the definition of a qualified enterprise zone business, 85 percent of all of the business's tangible property must be used within the DC Zone; 85 percent of all of the business's intangible property must be used in, and exclusively related to, the active conduct of such business; and 85 percent of all of the services performed by employees are performed within the DC Zone. The Taxpayer Relief Act of 1997 overrides and liberalizes the final regulations promulgated in 1996. Under the new legislation, now only a "substantial portion of" tangible property, intangible property, and employee services must be in the zone for an enterprise zone business to qualify for exempt facility bonds.
g. Penalty For Not Meeting Requirements
If an enterprise zone business fails to meet the requirements, and after the one-year grace period the principal user of the enterprise zone facilities bonds has not remedied the shortcoming, the enterprise zone business is denied any deductions for interest payments on enterprise zone facility bonds. Interest deductions are denied with respect to these bonds to the extent interest accrues during the period beginning on the first day of the calendar year when substantially all of the enterprise zone facility ceases to be used in the DC zone, or the principal user of such facility ceases to be an enterprise zone business.
4. Special Loan Programs
a. Pooled Financing Programs
In a pooled financing bond program, the issuer lends proceeds of enterprise zone facility bonds to a bank (or a similar financial institution) and this "intermediary lender" then relends the proceeds to two or more enterprise zone businesses. Within 42 months of the issue of these bonds, proceeds must be loaned to one or more enterprise zone businesses or be used to redeem the bonds. The intermediary lender is not considered a principal user of the enterprise zone facility bonds. In pooled financing programs, the $15 million limitation (for all DC zone facility bonds) and the $20 million limitation (for all enterprise zone facilities bonds) applies to each enterprise zone business to whom the intermediary lender makes a loan. Similarly, requirements regarding the definition of qualified enterprise zone property, qualified enterprise zone business requirements, and any penalties for failure to meet these requirements are determined on a loan-by-loan basis. If a loan fail to meet requirements, and the one year grace period has expired and shortcomings are not corrected, the principal user must repay the loan within six months and the issuer must either reloan the amount of prepayment or redeem a portion of the amount of outstanding enterprise zone bonds equal to the amount of the loan that no longer meets requirements.
b. Loan Recycling Programs
A loan recycling program is a program where the issuer of enterprise zone facility bonds uses loan repayments to make new loans within six months after the receipts of payments (or payments must be used to redeem the bonds.) After the end of the zone designation period (for the DC zone, December 31, 2002) repayments may only be used to redeem the enterprise zone facility bonds. The maturity of the bonds issued to finance a loan recycling program cannot exceed 30 years. As in the case of a pooled financing program, requirements regarding the definition of qualified enterprise zone property, a qualified enterprise zone business, the per business limitation on the amount of outstanding enterprise zone bonds, and any penalties for failure to meet these requirements are determined on a loan-by-loan basis. The (average) maturity of each loan cannot exceed 120 percent of the (average) economic life of the facility being financed with the proceeds of the issue.
C. $20,000 of Additional Expensing
1. General rules for expensing
a. What is "Expensing"?
In general, costs of buildings and equipment purchased by a business must be deducted over the life of those assets according to depreciation schedules. When the purchase price of a business asset is deducted entirely in the year the asset placed into service (instead of over the life of the asset), the business is said to "expense" the cost of that asset.
b. General Availability
As an incentive for small businesses to invest in equipment, and to simplify compliance with the tax law, many small businesses are eligible to elect expensing for up to $18,000 of their purchases of equipment. Under the legislation enacting in 1996, the $18,000 amount is scheduled to increase to $18,500 in 1998, $19,000 in 1999, $20,000 in 2000, $24,000 in 2001 and 2002, and $25,000 in 2003 and after.
c. Phase-Out of Benefit for Larger Businesses
Businesses with more than $200,000 of equipment purchases in any year are subject to reduction in the amount they may expense. The amount that may be expensed in any year is reduced dollar-for-dollar by the amount that equipment purchases in that year exceed $200,000. So, for example, in 1998 (when the maximum amount that can be expensed is $18,500) a business with $210,000 of new equipment purchases may only expense $8,5000 of those costs. And a business with more than $218,500 cannot expenses any of equipment purchases.
2. Expensing in Empowerment Zones and the DC Enterprise Zone
An enterprise zone business is allowed an extra $20,000 of expensing for property (depreciable property not including buildings) which is also qualified enterprise zone property. Thus, for 1998, an enterprise zone business may be eligible for up to $38,500 in expensing of qualified enterprise zone property. In general the available of expensing for qualified businesses is the same for the new DC enterprise zone as it is for empowerment zones generally, except that additional expensing is only available in the DC enterprise zones in the first taxable year beginning in 1997 and the four succeeding taxable years. The maximum amount of expensing generally and for enterprise zone businesses operating empowerment zones is summarized in the following table.
b. Qualifications for Additional Expensing
An additional $20,000 of expensing is available for expenditures on "DC business property" by a "DC business." The definitions of DC business property and DC business are complex and are discussed in greater detail in Appendix C. In general, DC business property eligible for expensing is depreciable tangible property--but not real estate--that was originally purchased by a DC enterprise zone for use in the DC enterprise zone starting after December 31, 1998 and before January 1, 1998. A qualified DC enterprise zone business is a business that conducts most of its business inside the DC enterprise zone.
c. Phase-out for larger enterprise zone businesses
For enterprise zone business located in empowerment zones and in the new DC enterprise zone, the phase-out for property placed in service in excess of $200,000 is 50 cents for every dollar of qualified enterprise zone property. (This modified phase-out does not apply for property that is expensed by the taxpayer that is not qualified enterprise zone property.) Figure A-2 illustrates the phase-out range for maximum expensing in general and for enterprise zone businesses operating in empowerment zone and the DC enterprise zones.
Example.--In 1998, if an enterprise zone business had $250,000 of qualified zone property, the amount of property eligible for expensing would be $13,500. This amount is calculated by subtracting from $38,500 one-half of the excess of $250,00 over $200,000.
d. Alternative Minimum Tax
Both individual and corporate taxpayer could use this additional expensing to calculate their alternative minimum tax liability. Thus, additional expensing provides relief for taxpayers subject to the AMT as well as taxpayers paying regular income tax.
e. Recapture of Tax Benefits.
To the extent that expenses provides more deductions than depreciation, this excess would be subject to tax in the year expensed property was no longer used predominantly in enterprise zone business.
D. First-Time Homebuyer Credit
Taxpayers that have not recently owned a home in the District of Columbia may be eligible for a tax credit of up to $5,000 of the amount of the purchase price a principal residence in the District of Columbia . Households with high incomes receive reduced credits or no credits all. For single individuals, the credit is reduced by 25 cents for each dollar that adjusted gross income exceeds $70,000. Therefore, no credit is available for single individuals with incomes in excess of $90,000. For married couples, the credit is reduced by 25 cents for each dollar than adjusted gross income exceeds $110,000. Therefore, no credit is available for married couples with incomes in excess of $130,000. The credit is available for home purchases after August 5, 1997 and before January 1, 2001. Any credit not used because the taxpayer has insufficient tax liability in the year of purchase may be carried forward and used to reduce income tax in any following year.
2. Definition of "First-Time" Homebuyer
The definition of "first-time" homebuyer is broad. A first-time homebuyer is an individual (and if married, that individual's spouse) who has no ownership interest in a principal residence in the District of Columbia during the one-year period ending on the date of acquisition of the principal residence. So a qualified purchaser can currently be a home owner just as long as that purchaser's principal residence prior to the acquisition is not in the District of Columbia. A qualified purchaser can be a current resident of the District of Columbia. Moreover, a qualified purchaser can have previously owned a home in the District as long as there has been no ownership interest in a principal residence in the District one year prior to purchase. These means that suburbanites who are former District homeowners can qualify for the credit. Even current District homeowners--if they rent for one year and then purchase a new home in the District--can qualify for the credit. No District resident may receive the credit more than once.
3. Other Rules
a Definition of Principal Residence
The credit is available with respect to purchases of existing property as well as new construction. The Treasury regulations do not have a "bright-line" definition of "principal residence." The regulations state that all relevant facts and circumstances of each particular case will be taken into account.
b. Definition of date of acquisition
The date of acquisition is the date on which a binding contract to purchase the principal residence is entered into or the date on which construction or reconstruction of such residence commences. It is not clear whether the date an offer by the buyer is accepted is the date of acquisition or the date of the closing is the date of acquisition. (This is an issue that may be clarified in regulations or-- if there is one-- in a technical corrections bill.) The credit is available with respect to purchases of existing property as well as new construction, and specifies that a taxpayer's basis in a property is reduced by the amount of any homebuyer tax credit claimed with respect to such property.
c. Joint Purchases
The $5,000 limit applies to married couples as well as individuals. Married individuals filing separately can claim a maximum credit of $2,500 each. Congress has directed the Treasury Department to issue regulations for allocating the credit among unmarried purchasers of a residence.
d. Adjusting the Tax Value
For purposes of computing depreciation (if, for example, the homeowner uses a portion of the residence as a home office) and for purpose of computing capital gain (for the few cases where the homeowner has more than $500,000 of capital gain) the amount of depreciation deductions is adjusted downward to account for the credit and the amount of gain is reduced by the amount of the homebuyer credit.
e. Purchases from Relatives
Purchases of principal residences from family members, or from partnerships, corporations, or trusts owned or controlled by family members, do not qualify for the homebuyer credit. This restriction applies to purchases from spouses, from any ancestors, and from lineal descendants. It does not apply to purchases from siblings, cousins, aunts, or uncles.
f. Information Reporting by Brokers
The Treasury may issue regulations requiring information reporting by buyers and sellers of residences for which buyers claim the first-time homebuyer credit to verify the eligibility of taxpayers for the credit. The statute specifies that if such regulations are issued, brokers and lenders will be required to include such information with the other information reported to the Internal Revenue Service notwithstanding the new rules that ease reporting requirements for realtors.
E. Zero-Percent Capital Gains Rate
TRA97 provides a zero-percent capital gains rate on the gain from the sale of certain investments in DC businesses made after 1997 and held more than five years. These investments are either ownership interests in--or investments in tangible property by--qualified DC businesses. In general, a qualified DC business is a new business formed after 1997 that generates at least 80 percent of its gross receipts from business conducted in DC census tracts with greater than a poverty rate of 10 percent. Investments relating to existing businesses, to business conducted primarily outside of impoverished areas, and to real estate not used in business do not qualify for the zero percent rate.
2. Eligible Assets
a. Ownership Interests in Certain New DC Businesses
Stock and partnership interests originally issued after December 31, 1997 in a domestic corporation or domestic partnership that at the time of issuance and during substantially all of the taxpayer's holding period that is engaged in an DC enterprise zone business (including business in census tracts with poverty rates as low as 10 percent) are qualified for a zero-percent rate when sold they are owned by the seller for at least five years. In general, these ownership interests must be purchased for cash and not be purchased from a relative or a related party. More details about this definition and the definition of other DC assets qualified for the zero percent rate described below are provided in Appendix C above.
b. Newly Acquired or Substantially Renovated Property Used by a DC Enterprise Zone Business
DC business property directly owned by individuals--as is the case for sole proprietors--that is used by a DC enterprise zone business and is originally placed into service in the DC enterprise zone or substantially renovated after December 31, 1997 is qualified for a zero-percent rate when sold if it is owned by the seller for at least five years. Substantially improved property means property where the value of improvements over any 24-month period beginning after December 31, 1997 equals or exceeds the value at the beginning of that period or, if greater, $5,000. No gain attributable to the period before January 1998 qualifies for the zero-percent rate.
a. Previously Redeemed Stock Not Eligible
Stock and partnership interests issued after December 31, 1997 that had been previously purchased by a corporation or partnership from its shareholders or partners are not eligible for the zero-percent capital gain rates.
b. Gain Not Qualified
The following types of capital gain do not qualify for the zero percent rate:
c. Special Treatment of Capital Gain Attributable to Depreciation
In general capital gain is calculated as the difference between the sales price of an asset and the seller's "basis" in the asset. Basis is generally the dollar amount the seller has invested in the asset reduced by any depreciation. As an exception to this rule, the amount of capital gain from the sale of real property is reduced by the excess of the actual depreciation allowances from that which would have been available under the straight-line method of depreciation. In the case of depreciable property that is not real estate, capital gain is reduced by all previous depreciation allowances. The amount of these adjustments is taxed at higher rates as ordinary income. For purposes of computing the capital gains on qualified DC assets, gain is calculated under these general rules except that gain attributable to all depreciation allowance of all assets, including real estate, is treated as ordinary income.
d. Hedged Purchases of Qualified DC Assets
Gain attributable to the sale of qualified DC asset is not eligible for the zero percent rate if the investor has hedged his investment by the purchase of an offsetting position in a substantially similar asset.
4. Other rules
a. Five-Year Safe Harbor
If an ownership interest fails to meet the definition of a qualified DC asset because the trade or business no longer qualifies as enterprise zone business during the first five years of ownership--or in the case of direct ownership of depreciable property, the property is no longer used primarily in the DC enterprise zone--no gain is eligible for the zero percent rate. If after the first five years of ownership the asset ceases to meet requirements, capital gain is still eligible for the zero percent rate, but only to extent such gain is attributable to the period when requirements were met.
b. Subsequent Purchasers
If an owner meets all the requirements except the owner is not the original investor in the new issue (in the case of other qualified stock and partnership interest) and not the first user in the DC zone (in the case of otherwise qualified depreciable property), the owner may still qualify for the zero-percent rate if the prior owner met all requirements.
c. Transfers Where Holding Period of Prior Holder is Included in New Owner's Holding Period
In the case of a transfer of a qualified DC Zone asset by gift, at death, or from a partnership to a partner that held an interest in the partnership at the time that the qualified DC Zone asset was acquired, the new owner's holding period includes that of the prior owner.
d. Treatment of Qualified Stock Held by Mutual Funds, Partnerships, and Other Pass-Through Entities
If a pass-through entity sells stock qualified for the zero-percent rate, the owners of that entity can exclude the gain attributable to the underlying qualified investment if the investor in the pass through was an investor when the qualified investment was purchased. For each shareholder of a pass-through entity with gain qualified for the zero-percent rate, the amount of gain is limited to the amount of investor's interest at the time the entity acquired the qualified DC asset.
E. Immediate Write-off of Environmental Clean-up Costs ("Brownfields")
The Taxpayer Relief Act of 1997 allows businesses to expense certain environmental remediation expenditures that would otherwise would be depreciated over the life of the asset or, in the case of clean-ups of land, could not be depreciated at all. The expenditure must be incurred in connection with the abatement or control of hazardous substances at a qualified contaminated site. A "qualified contaminated site" generally is any property that (1) is held for use in a trade or business, for the production of income, or as inventory; (2) is certified by the appropriate State environmental agency to be located within a targeted area; and (3) contains (or potentially contains) a hazardous substance (so-called "brownfields").
Targeted areas include: (1) empowerment zones and enterprise communities as designated under present law and under the bill (including any supplemental empowerment zone designated on December 21, 1994); (2) sites announced before February 1997 as being subject to one of the 76 Environmental Protection Agency (EPA) Brownfields Pilots; (3) any census tract with a poverty rate of 20 percent or more; and (4) certain industrial and commercial areas that are adjacent to tracts described in (3) above. The provision applies to eligible expenditures incurred in taxable years ending after date of enactment and before January 1, 2001. All the areas in the District of Columbia enterprise zone are treatment as "qualified contaminated sites" by virtue of their status as being part of an empowerment zone. Even without that designation, they would qualify because these areas have poverty rates of 20 percent or more.
F. Additional Work Opportunity Tax Credits in the DC Enterprise Zone
1. Overview of Rules for Work Opportunity Tax Credit
The Taxpayer Relief Act of 1997 modified the structure of the work opportunity tax credit (WOTC) and extended it through the first half of 1998. Under the new credit structure, the credit rate is 25 percent for employment of less than 400 hours of employment and 40 percent for employment of 400 or more hours. As with the empowerment zone wage credit, wage deductions are reduced by the amount of the credit.
The WOTC is only available for employees who are members of certain targeted groups. The targeted groups eligible for the credit are: (1) members of a families receiving welfare or having recently received welfare; (2) qualified ex-felons, (3) high-risk-youths, (4) certain individuals who have a physical or mental disability, (5) qualified summer youth employees, (6) qualified veterans, (7) families receiving food stamps, and (8) SSI recipients.
The WOTC can be used to reduce only 25 percent of AMT liability in excess of $25,000. As with other business tax credits, DC wage credits not used in the year earned may be carried back and applied to reduce tax liability in the three prior years.
2. Rules of Particular Importance in the DC Enterprise Zone
A high-risk youth is an individual certified as being at least 18 but not yet 25 on the hiring date and as having a principal place of abode within an empowerment zone or enterprise community. Qualified summer youth employees are individuals who: (1) perform services during any 90-day period between May 1 and September 15, (2) are certified by a designated local government agency as being 16 or 17 years of age on the hiring date, (3) have not been an employee of that employer before, and (4) who are certified by a designated local government agency as having a principal place of abode within an empowerment zone or enterprise community. Because the DC enterprise is an empowerment zone, qualified summer youth employees and high-risk youth employees residing in the DC zone qualify for the WOTC through the first half of 1998 when the credit is scheduled to expire.
INTERNAL REVENUE CODE (as amended by the Taxpayer Relief Act of 1997):
Subchapter U of Chapter I, "Designation and Treatment of Empowerment Zones, Enterprise Communities, and Rural Development Investment Areas," Code Sections 1391 through 1397C. Empowerment zone provisions. Originally enacted into law in 1993 and subsequently modified by the Taxpayer Relief Act of 1997.
Subchapter W of Chapter I, "Subchapter W -- District of Columbia Enterprise Zone," Code Sections 1400 through 1400C. Provisions specific to the District of Columbia added to the Internal Revenue Code by the Taxpayer Relief Act of 1997.
Section 51, "Work Opportunity Tax Credit." The credit was extended though June 30, 1998 by the Taxpayer Relief Act of 1997.
Section 51A. "Temporary Incentives for Employing Long-Term Family Assistance Recipients." This new code section describes the rules for the new "welfare-to-work tax credit."
Section 179."Election to Expense Certain Depreciable Business Assets." This section describes the general rules for expensing. It was most recently revised in 1996.
Section 198. "Expensing of Environmental Remediation Costs." A new code section added by the 1997 legislation.
Fisher, Peter S. and Alan H. Peters. (1997). "Tax and Spending Incentives and Enterprise Zones." State Tax Notes, June 30, p. 1959-1964.
Gravelle, Jane.G. (1992). "Enterprise Zones: The Design of Tax Incentives." CRS Report for Congress 92-476 S, Congressional Research Service, The Library of Congress, June 3.
Joint Committee on Taxation (1997) , "Written Testimony of the Staff of the Joint Committee on Taxation Regarding President Clinton's Tax Proposals for the District of Columbia," for a Hearing of the Subcommittee on the District of Columbia of the House Committee on Government Reform and Oversight, 105th Congress, presented by Kenneth J. Kies, Chief of Staff, May 22, (JCX-15-97).
Joint Committee on Taxation (1997). "Committee on Ways and Means: Estimated Budget Effects of Chairman's Mark Relating to Revenue Reconciliation Provisions," June 9 (JCX-23-97).
Joint Committee on Taxation (1997). "Estimated Budget Effects of an Amendment in the Nature of a Substitute to the Chairman's Mark Relating to Revenue Reconciliation Provisions," June 11 (JCX-28-97).
Joint Committee on Taxation (1997), 'Estimated Budget Effects of the "Taxpayer Relief Act of 1997" Scheduled for Consideration by the House of Representatives on June 26, 1997,' June 25 (JCX-35-97).
Joint Committee on Taxation (1997), "Senate Finance Committee: Estimated Budget Effects of Chairman's Mark Relating to Revenue Reconciliation Provisions," June 17 (JCX-32-97).
Joint Committee on Taxation (1997), "Estimated Budget Effects of the Recommendations to the Senate Committee on the Budget with Respect to Revenue Reconciliation Provisions Within the Jurisdiction of the Senate Finance Committee" in U.S. Senate, Committee on Finance, Senate Report 105-33 S. 949, Revenue Reconciliation Act of 1997, approved June 19, 1997.
Joint Committee on Taxation (1997), "Estimated Budget Effects of the Revenue Provisions of H.R. 2014 as Passed by the Senate on June 27, 1997," July 1 (JCX-36-97).
Joint Committee on Taxation (1997), 'Estimated Budget Effects of H.R. 2014, the "Taxpayer Relief Act of 1997," July 30 (JCX-39-97).
Joint Committee on Taxation (1997), 'Description of the Chairman's Mark of the "Tax Technical Corrections Act of 1997," October 8, (JCX-56-97).
Mark, Stephen T., Therese J. McGuire, and Leslie E. Papke (1997). "What Do We Know About The Effect Of Taxes On Economic Development: Lessons For The District Of Columbia." State Tax Notes, August 25.
McCain, John (1997), "D.C. Enterprise Zone Provision Needs Technical Correction, Writer Says," TaxBase (website: www.tax.org), 97-TNT 200-26, October 15. Letter from President of the Greater Washington Board of Trade to members of Congress.
McGuire, Therese J. (1985). "Are Local Taxes Important in the Intrametropolitan Location of Firms? An Empirical Analysis of the Minneapolis-St. Paul Metropolitan Area." Journal of Urban Economics, Vol. 18, pp. 226-234.
McGuire, Therese J. (1992). "Review of Who Benefits From State and Local Economic Development Policies? by Timothy J. Bartik." National Tax Journal, Vol. 45, No. 4, pp. 457-459.
Mofidi, Alaeddin and Joe A. Stone. (1990). "Do State and Local Taxes Affect Economic Growth?" The Review of Economics and Statistics, Vol. 72, No. 4, November, pp. 686-691.
Papke, Leslie E. (1993). "What Do We Know About Enterprise Zones?" in: James.M.Poterba, ed., Tax Policy and the Economy, Vol. 7, MIT Press, Cambridge, Mass., pp. 37-71.
U.S. House of Representatives (1997),The Taxpayer Relief Act of 1997--Conference Report to Accompany H.R. 2014, Report 105-220, order to be printed July 30. See, in particular, "Section VII--District of Columbia Tax Incentives (Secs. 701-702 of the House Bill and Sec. 601 of the Senate Amendment),"
U.S. General Accounting Office. (1988). Enterprise Zones: Lessons From the Maryland Experience, GAO/PEMD-89-2.
Wasylenko, Michael. (1997). "Taxation and Economic Development: The State of the Economic Literature." State Tax Notes, June 23, p. 1883-1888.
Wasylenko, Michael and Therese J. McGuire (1985). "Jobs and Taxes: The Effect of Business Climate on States' Employment Growth Rates." National Tax Journal, Vol. 38, No. 4, December, pp. 497-512.
Wilbur, Thomas W., (1997) "D.C. Enterprise Zone Provision Needs Technical Correction, Builder Says," TaxBase (website: www.tax.org), 97-TNT 191-30, September 10. Letter from President of District of Columbia Building Association to members of Congress.
William Julius Wilson (1997), When Work Disappears: The World of the New Urban Poor, Vintage Books.
III-1. As this report was being completed, the House of Representatives began consideration of a technical corrections bill to the Taxpayer Relief Act of 1997. In his technical corrections bill, Ways and Means Committee Chairman Rep, Bill Archer (R-TX) clarified certain aspects of the District of Columbia tax incentives enacted as part of the Taxpayer Relief Act of 1997. First, the bill clarifies that the 1990 census data will be used to determine census tracts eligible for the new tax incentives. Therefore, the 2000 decennial census will not result in a reconfiguration of the DC Enterprise Zone. Second, the bill clarifies that the August 5 effective date applies to the acquisition of title, not the date a purchase contract was entered into. The bill also clarifies other minor aspects of the homebuyer credit. On October 10, this bill was approved by the Ways and Means Committee. See, Joint Committee on Taxation (1997), 'Description of the Chairman's Mark of the "Tax Technical Corrections Act of 1997," October 8 (JCX-56-97). Senate action on technical corrections has not yet been scheduled.
III-2. Larry Summers, former Harvard economics professor and now Deputy Secretary of the Treasury has argued that it is not the financial rewards of individual retirement accounts (IRAs)--but the heavy investment by banks to advertise IRAs--that causes them to increase personal saving.
A-1. In order to create an empowerment zone and enterprise community, a local government must apply for the status, and the Department of Housing and Urban Development (in the case of urban zones) or the Department of Agriculture (in the case of rural zones) must designate an area within all of the limitations proscribed by Congress. The absence of the application (by a local government) and designation process (by HUD) is perhaps the only aspect of the rules for District of Columbia enterprise zone that is simpler than general rules for empowerment zone rules. This only simplifies matters for the District government. It does not translate into simplicity for taxpaying individuals and businesses that may qualify for the tax incentives.
A-3. It is curious that the empowerment zone wage credit is available to nonzone DC residents who work in the DC zone and the work opportunity tax credit is available to zone DC residents who work outside the DC zone.
A-4. Current law provides favorable tax treatment for U.S. corporations that operate in Puerto Rico, in the U.S. Virgin Islands, or possessions of the United States. The low income housing credit and mortgage revenue bonds are targeted to economically distressed areas. And, as discussed in the text, some groups eligible for the work opportunity tax credit must reside in an empowerment zone or an enterprise community (since 1996) and expensing of environmental clean-up expenses is available only in certain areas (as a result of provisions in the 1997 Taxpayer Relief Act.)
A-5. "Substantially all" is not defined in the statute or in the proposed regulations relating to the empowerment zone wage credit. Therefore, there is no "bright-line" test for what "substantially all" means. In practice, businesses use as a reference point the 85 percent definition of "substantially all" in a number of tests regarding the definition of a DC business and DC property in the final regulation on enterprise zone bonds issued in 1996. (New statutory rules for enterprise zone facility bonds in the 1997 legislation make these regulations largely obsolete. They may still provide some reference points for implementation of the empowerment zone wage credit.)
A-8. Under current law, the top corporate tax rate is 35 percent, but this only applies to corporations with more than $10,000,000 of taxable income. The corporate tax for the first $50,000 of taxable income is 15 percent. For taxable income between $50,000 and $75,000, the tax rate is 25 percent. For taxable income between $75,000 and $10 million, the tax rate is 34 percent. (For corporations with taxable income between $10 million and $18.33 million special rules apply which effectively vary these rates to a small degree.) Unlike the tax brackets of individual taxpayers, these brackets are not indexed for inflation.
A-9. Owners of sole proprietorships, partnerships, and Subchapter S corporations pay tax on income according individual tax rates. The brackets for 1997 for single individuals and married couples are summarized in the following table
These bracket amounts increase each year because they are indexed for inflation.
A-10. It is clear that an employee's wages do not simultaneously qualify for WOTC and the welfare-to-work tax credit. It is also clear that an employee's wages may not simultaneously qualify for both the WOTC and the empowerment zone wage credit. No statutory language can be found that precludes the simultaneous use of the empowerment zone wage credit and the welfare-to-work tax credit
A-11. Private activity bonds are obligations issued by state and local governments for nongovernmental purposes. The Tax Reform Act of 1986 placed quantitative restrictions on the amount of bonds that may be issued by any state or the District of Columbia. Enterprise zone facility bonds are a type of private activity bond.
A-12. Prior to enactment the Taxpayer Relief Act of 1997, portions of the new DC zone were an enterprise community, and enterprise zone facility bonds issued to finance enterprise zone property in the DC enterprise community could be issued through the end of 2007.
A-13. In addition, for empowerment zones and enterprise communities generally (but not for the DC enterprise zone), the requirement that 35 percent of the employees be residents does not apply during the start-up period. Qualified enterprise zone businesses in the District of Columbia are not required to employ any zone residents.
A-14. Under the rules in the 1996 regulations, the definitions of qualified zone property and qualified zone business generally must be met in any taxable year during a period of compliance that generally begins somewhere between 18 months and five years after the issue date and ends when the bonds mature or, if later, the end of the zone designation period. (For the DC enterprise zone, the end of the zone designation period is December 31, 2002.) Prior to the beginning of this period of compliance, the issuer and the principal user must reasonably expect that requirements will be met before the compliance period begins. Also, prior to the compliance period, the issuer and the principal user must exercise due diligence to meet requirements. To the issuer, the principal user must annually demonstrate monitoring of the zone property and zone business requirements. Failure to meet any requirements are allowed as long as the failure is corrected within one year of its discovery.
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