Community Renewal Tax Relief Act's incentives for investors: form over substance?

• Author: Madden, David

Before completing its session at year-end, Congress passed, and President Clinton signed, the Installment Tax Correction Act of 2000 (HR 3594) and the Community Renewal Tax Relief Act of 2000 (Act) (HR 5662). While the Act includes various other provisions, it essentially provides tax incentives for businesses to locate in urban and rural areas that did not experience the economic expansion enjoyed by much of the nation during the 1990s, and to hire residents of those areas. The Act also provides various tax incentives to investors. The question is whether the alternative minimum tax (AMT) will allow the realization of some of the incentives designed to encourage investment in disadvantaged communities.

Business Incentives

Briefly, the Act creates or extends and expands three vehicles to encourage business development in designated areas. First, it creates 40 renewal communities, entitling qualifying businesses to a zero capital gain rate on the sale of qualifying assets, expanded Sec. 179 expensing of fixed assets, accelerated deductions for revitalizing qualified buildings and enhanced jobs credits. Secondly, the Act creates a new markets tax credit for investment in stock in community development entities. Finally, the Act extends the life of the empowerment zones (originally created under the Omnibus Budget Reconciliation Act of 1993 and expanded under the Tax-payer Relief Act of 1997), authorizes the creation of nine additional empowerment zones and expands some of the incentives for businesses in these zones.

Benefits of Empowerment Zones

Qualifying businesses located in empowerment zones will enjoy expanded jobs credits and Sec. 179 expensing of fixed assets, deferral of gain on qualifying assets if the proceeds are reinvested in appropriate replacement assets and easier access to tax-exempt financing. For the most part, the tax incentives for operating a business in an empowerment zone function at the entity (rather than the investor) level, although if a business is a partnership or S corporation, the benefits will pass through to the owners. In addition, the deferral of gain on disposition of certain assets, followed by a reinvestment of proceeds in qualifying assets, can apply to stock and partnership interests in a qualifying business if the investor is willing to reinvest the proceeds in another qualifying business in an empowerment zone. There is one provision specifically directed at potential investors: Act Section 117...