Capital gain exclusions expanded for empowerment zone and renewal community investments.

• Author: Nelsestuen, Linda

The Community Renewal Tax Relief Act of 2000 (the Act) significantly expanded incentives for taxpayers investing in businesses located in distressed communities. Beginning with the Omnibus Budget Reconciliation Act of 1993, empowerment zones have been the target of several tax benefits, including an employment credit, an increased Sec. 179 deduction and tax-exempt bond financing. Along with other incentives, the Act added a 60% gain exclusion on the sale of qualified small business stock (QSBS) for empowerment-zone businesses under Sec. 1202(a)(2) and, in Sec. 1400F, a 100% capital gain exclusion on the sale of certain assets located in renewal communities.

Tax legislation encouraging investment in distressed areas has been helping to revive neighborhoods and communities. Early responses to other legislation for distressed communities are encouraging. In 1996, businesses took over $15 million for empowerment-zone employment credits. The ostensible success of earlier legislation has spurred Congress to expand incentives for investors and entrepreneurs to invest in the poorest neighborhoods and communities. The expansion of benefits to empowerment zones and the creation of community renewal statutes for the most distressed areas in the Act are examples of this trend.

Empowerment Zones and Renewal Communities

The Secretary of HUD has the authority to designate empowerment zones and renewal communities. Designated empowerment zones appear in IRS Pub. 952 (June 2001). Currently, 23 urban areas and eight rural areas have this designation. The Act allows for an expansion of nine more empowerment zones and 40 renewal communities. When added together, it appears there will be 40 empowerment zones and 40 renewal communities. However, current empowerment zones also qualify for recharacterization as renewal communities. The Secretary of HUD has until Dec. 31, 2001 to determine the 40 communities based on detailed criteria set forth in Sec. 1400E. Many are interested in which renewal communities will become new targets and which ones will be reclassified from empowerment zones. Up to 20 empowerment zones can be reclassified. Sec. 1400E(e) states that when the HUD Secretary reclassifies an empowerment zone as a renewal community, he terminates the original zone designation. It is stated in the Committee Reports that once the Secretary redesignates an empowerment zone, another area can take its place.

Capital gain benefits for empowerment zones and renewal communities differ substantially. Empowerment zone businesses can exclude 60% of the gain on the sale of the stock of C corporations that qualify as an enterprise-zone business. Renewal communities can exclude 100% of the capital gain from the sale of an interest in an enterprise-zone business or a tangible asset used in one. While the 60% exclusion applies only to C corporations, the 100% exclusion applies to all forms of business as long as they qualify as an...