Benefits of the Enterprise Zone

The Enterprise Zone offers numerous incentives to businesses located within its boundaries. These benefits include:

All benefits are applied towards the taxpayer’s California (not Federal) tax return. All benefits except the State Contract Bid preferences may be claimed by filing FTB Form 3805Z with your California Tax Return. Detailed instructions for each of the benefits listed below may be obtained from these forms:

Hiring Credits

The Hiring Tax Credit allows employers to significantly offset the cost of hiring and training new employees. The Hiring Credit could be worth up to $37,440 per employee over a five year period.

In order to claim the Hiring Tax Credit, the business must be located within the Enterprise Zone. The employee in question must be a new hire with a start date of no earlier than January 30, 2009, must spend a minimum of 90% of their time on activities directly related to the conduct of the business within the Enterprise Zone, and must perform at least 50% of their work within the Enterprise Zone. The employee must also meet the definition of a “Qualified Employee” as defined on the “Hiring Credit Voucher” page.

The Hiring Credit is equivalent to:

50% of the employee’s salary during the first year of employment
40% of the employee’s salary during the second year of employment
30% of the employee’s salary during the third year of employment
20% of the employee’s salary during the fourth year of employment
10% of the employee’s salary during the fifth year of employment

These amounts are capped at 150% of the minimum wage. As the current minimum wage is $8/hour, the Hiring Credit may be claimed on a maximum amount of $12/hour. Employees making more than 150% of the hourly rate can still qualify for the tax credit but only for the portion of their salary which does not exceed 150% of the minimum wage. For example, an employee making $15/hour and working for 1,000 hours would entitle the employer to a tax credit for $6,000 ($6/hour cap x 1,000 hours).

There are no limits on the number of employees an employer may claim the credit for. Although the credits may not be used to reduce the employer’s tax burden below zero, unused credits may be carried forward to future years until exhausted.

For taxable years beginning in 2008 or 2009, the credits may not be used to offset more than 50% of the net tax if a corporation’s taxable income or individual’s net business income is $500,000 or more. However, unused credits may still be accrued and carried over to future years as usual.

Sales/Use Tax Credit

The Sales/Use Tax Credit allows a business to offset the sales and use taxes paid on the purchase of “Qualified Property.” The credit may be used for sales and use taxes paid for up to $1 million of qualified property for individuals, estates, trusts, and partnerships, and up to $20 million of “Qualified Property” for corporations (excluding S-Corporations). The equipment must have been purchased after January 30, 2009 and must be put into service prior to January 29, 2024.

For the purposes of the Sales/Use Tax Credit, “Qualified Property” includes the following:

Machinery or machinery-related parts used to:
- Manufacture, process, fabricate, or otherwise assemble a product;
- Produce renewable energy resources; or
- Control air or water pollution.
Data processing and communications equipment including, but not limited to, computers, computer-automated drafting systems, copy machines, telephone systems, and fax machines.
Motion picture manufacturing equipment central to production and postproduction including, but not limited to, cameras, audio recorders, and digital image and sound processing equipment.

As with Hiring Credits, the credits may not be used to offset more than 50% of the net tax for taxable years beginning in 2008 or 2009 if a corporation’s taxable income or individual’s net business income is $500,000 or more. However, unused credits may still be accrued and carried over to future years as usual.

Business Expense Deduction

The Business Expense Deduction (sometimes referred to as the “accelerated depreciation” benefit) allows the business to treat 40% of the cost of “Qualified Property” as a business expense, rather than a capital expense. In other words, when a capital good (such as a chair) is purchased, rather than depreciating it normally, the business may elect to treat 40% of the cost of the good as a business expense rather than a capital expense, allowing for the deduction for that amount to be taken immediately. Depreciation of the remaining 60% of its value would begin the following year and would be calculated normally. The Business Expense Deduction may only be used for the year the property is first placed into service.

The maximum aggregate cost of the property for which the Business Expense Deduction may be claimed in any taxable year is limited as follows:

Taxable years beginning between 1/30/09 and 1/29/10:	$100,000
Taxable years beginning between 1/30/10 and 1/29/11:	$100,000
Taxable years beginning between 1/30/11 and 1/29/12:	$75,000
Taxable years beginning between 1/30/12 and 1/29/13:	$75,000
Taxable years beginning on or after 1/30/13:	$50,000

For the purposes of the Business Expense Deduction, “Qualified Property” includes any property that is Internal Revenue Code (IRC) Section 1245 property. This includes, but is not limited to, tangible personal property (excluding buildings) and most equipment and furnishings acquired by purchase after the Enterprise Zone received its designation for exclusive use within the Enterprise Zone. Office supplies and other small nondepreciable items are not included.

15-Year Net Operating Loss Carryover

Businesses located within the Enterprise Zone may carry Net Operating Losses forward for up to 15 years. Businesses may not generate a Net Operating Loss before the first taxable year beginning on or after January 30, 2009. The Net Operating Loss deduction may only be used to offset business income attributable to operations within the Enterprise Zone, and only the portion of a businesses’ Net Operating Loss generated within an Enterprise Zone may be carried forward. The business must elect and designate the Net Operating Loss as an Enterprise Zone Net Operating Loss on the original return for the year of the loss; this election is irrevocable.

Please note that this benefit has been suspended for taxable years beginning in 2008 and 2009 for corporations and individuals with a taxable income or net business income of $500,000 or more and for taxable years beginning in 2010 and 2011 for corporations and individuals with a net income after state adjustments or modified adjusted gross income of $300,000 or more. However, businesses may continue to compute and carryover Net Operating Losses during this time period.

Net Interest Deduction for Lenders

Lenders may deduct the “net interest” earned on loans to businesses located within an Enterprise Zone. These loans may include business loans, mortgages, and loans from noncommercial sources (such as individuals).

The following requirements must be met for the lender to qualify for the Net Interest Deduction:

The lender must make the loan to a trade or business located solely within an Enterprise Zone;
The money lent must be used strictly for the borrower’s business activities within the Enterprise Zone;
The lender may not have an equity or other ownership interest in the borrower’s trade or business; and
The loan must be made between January 30, 2009 and January 29, 2024.

In addition, both of the following annual requirements apply:

The borrower must continue business activities within the Enterprise Zone; and
The borrower’s payment to the lender must be received by the lender before the Enterprise Zone expires.

State Contract Bid Preferences

Businesses located within the Enterprise Zone may receive a 5% bid preference on certain state contracts. In order to receive the bid preference, the following requirements must be met:

The contract must be a services or commodity contract (excludes construction contracts or other contracts where the provisions of the State's contract fix the worksite in a specified location);
The contract must a value of $100,000 or more;
The business work site must be located within the Enterprise Zone; and 50% of the labor for commodities contracts or 90% of the labor for service contracts is performed at the Enterprise Zone worksite.

In addition to the 5% bid preference, businesses may receive an additional bid preference if they agree to hire specified percentages of Enterprise Zone eligible employees (See the “Hiring Credit Vouchers” link for more information on eligible employees) as follows:

If 5% – 9.99% of total contract hours are performed by eligible employees, an additional 1% bid preference may be awarded;
If 10% – 14.99% of total contract hours are performed by eligible employees, an additional 2% bid preference may be awarded;
If 15% – 19.99% of total contract hours are performed by eligible employees, an additional 3% bid preference may be awarded;
If 20% or more of total contract hours are performed by eligible employees, an additional 4% bid preference may be awarded;

To request the bid preference points, the bidding party is required to complete an
Enterprise Zone Act Preference Request and submit it with the bid.

Website: DGS Website

Form: Enterprise Zone Act Preference Request Form