Employment-zone empowerment and renewal-community tax Incentives.

• Author: Moore, Philip E.

An often overlooked and misunderstood tax-reduction strategy is the tax incentives associated with businesses located in economically distressed areas such as designated empowerment zones and renewal communities.

The Community Renewal Tax Relief Act of 2000 (Act) extends empowerment-zone status for existing zones through 2009, provides additional tax benefits to businesses located in empowerment zones and authorizes nine new zones.

One of the principal tax incentives is the empowerment-zone employment credit, which is up to 20% of $15,000 of qualified-zone wages paid during the year to a qualified-zone employee. The credit is available for wages paid to part-time and full-time employees, provided they have worked for the employer at least 90 days. Nonqualifying employees include related taxpayers, dependents and five-percent owners. The employee not only must work and live in an empowerment zone to qualify, but substantially all the employee's service must be performed within the empowerment zone. Businesses such as country clubs, golf courses, gambling establishments and certain farming operations do not qualify.

As the credit is a general business credit for Federal tax purposes (taken from Form 8444), passthrough entities such as S corporations and partnerships may be eligible for the credit, which in turn the owner takes on his individual returns. The "price" of the credit is that the taxpayer must reduce its salary and wage deduction on its Federal return by the amount of the employment credit.

Another tax incentive for businesses located in an empowerment zone is an increased Sec. 179 deduction. Taxpayers may be able to claim up to $20,000 ($35,000 for 2002 and later years) as an additional Sec. 179 deduction, in the year the taxpayer places the property in service. To qualify, the property must be qualified-zone property, placed in service in an empowerment zone by an enterprise-zone business. Qualified-zone property is any depreciable tangible property that:

* The taxpayer did not acquire from a related party or member of a controlled group;

* The taxpayer is the first person to use in the empowerment zone;

* The basis of which is not determined by the property's adjusted basis in the hands of the person from whom the property was acquired, and the basis cannot be determined under the stepped-up basis rules for property acquired from a decedent;

* The taxpayer acquired after the empowerment-zone designation went in effect; and

* 85%...