Identifying and Taking Advantage of Location-Based Tax Incentives Charles Swenson, PhD, CPA Professor and Leventhal Research Fellow, University of Southern California Co-Founder, National Tax Credit Group, LLC www.NTCGtax.com

Foreword: Tax Incentives as Part of Holistic Tax Planning

 Very program/ state specific  Often difficult to locate current address databases  Perceived as immaterial or inapplicable  Overlooked by 90% of tax advisors 

For those that claim the benefits:

- Reduced effective tax rates - Refunds - Competitive advantage - Lower cost of labor/ lower cost of capital outlays - Enhanced reputation for your tax department - Improved value of business and improved R.O.I. for equity holders - Possible employee bonuses and improved CPA firm billings

Major Points to Remember

 Wal Mart, Home Depot, Starbucks, Wells Fargo, Warren Buffet and other taxpayers executing “Best Practices” utilize many of these location based incentive programs – providing them a significant operating advantage  The average benefits documented are seldom less than $100,000 and can easily exceed $1,000,000 for larger companies  There is a high probability that you have locations or clients in one or more Zones. On average approximately 1 in 5 (20%) of locations in are in a federal or state Zone  This is a “blind spot” for most tax advisors, so there is a huge market opportunity over your competition  These credits are a

PERMANENT TAX BENEFIT

and are viewed by management and investors as quality earnings, and enterprise vale enhancements 

Location Based Incentives is not Rocket Science, but can make you the Hero in your bosses’ or clients’ eyes

Part 1:

Federal Location Based Hiring Credits (All States)

All States Have Some Federal and State Credits. Many have both!

 In Which State do you practice?

Federal Hiring Credits

 Empowerment Zone Hiring Credit  Renewal Community Hiring Credit  Native American Hiring Credits  GO Zones

Note: Ok to document now and claim for three prior years

Empowerment Zone Hiring Credit

 Credits claimed by employers – Form 8844  Employer locates in Emp. Zone and  Employee lives in Emp. Zone – Annual Test  Max credit = $3,000 per employee per year  There are hundreds of Empowerment Zones throughout the U.S.

 First match business address, then match employees’ addresses

FEDERAL ZONES (CONTINUED)

FEDERAL ZONES--CONTINUED

Renewal Community Hiring Credit

 Employment Credit  Employer locates in RC and  Employee lives in RC – Annual Test  Max Credit = $1,500 per employee per year  There are hundreds of Renewal Communities throughout the U.S.

 First match business address, then match employees’ addresses

Native American Hiring Credit

 Max credit is $4,000 per year for every qualified employee  Business must be located in a Tribal Land, employee must be some part (__%) Native American and live on or near Tribal Land. Native American businesses are plentiful throughout the U.S.

 Tribal Lands are everywhere; 2/3 of Oklahoma is a Tribal Land area! Arizona, California and many other states have large Tribal Lands.

 First match business address, then match employees’ addresses and Tribal membership card

GO ZONES—AMENDED RETURNS, 2006 RETURN ADDITIONS POSSIBLE

 Tax Incentives to encourage rebuilding of the areas hardest hit by three separate 2005 hurricanes — — — — — — — — 50% bonus 1 st year depreciation for acquisitions after ________ Partial expensing of demolition and cleanup costs 5-year-NOL carryback, Increased rehabilitation tax credits - ___% Boosted higher-education credits for those attending school in the GO Zone – max $ _______ Eased casualty loss rules Larger corporate charitable contribution limits for donations to hurricane aid - ___% vs. 5% Special employee retention credits (Automatic WOTC) - $2,400 (expired August 28 2007)

Employee retention credit for employers affected by Hurricanes Katrina, Rita, Wilma

 Expired August 28, 2007

Part 2: WOTC Updates

Extensions and Clarifications

WOTC Updates

 WOTC extended to 2011  Automatic Qualification for Residents of 481 Rural Renewal Counties

Part 3: State Enterprise Zones

How much are you leaving on the table?

All States Have Some Federal and State Credits. Many have both!

 In Which State do you practice?

State Enterprise Zones (EZs)

 Located throughout the U.S.

 Offer incentives for business to locate in a certain area  Create job opportunities  Stimulate growth and development in economically depressed areas  Benefit both the business and the community

Part 4: 2006-2007 UPDATES: STATE ENTERPRISE ZONES

National Landscape?

Other State EZ Changes

 Kentucky: EZs expired; KREDA Program added  North Carolina: Article 3J Program added  New York: new Empire Zones added  Florida: new EZs added; some boundary changes to existing zones; some EZs expired  California: 5 New Zones Added, Existing Zones Greatly Expanded

Tier-Based States

 Arkansas, Georgia, Mississippi, North Carolina  Tiers change on January first of every year (Arkansas changes every June), based on economic status of related county  Tax incentives vary by county (tier)

California Changing Zones – Issues and Opportunities

 California has over 126 distinct Enterprise Zone related databases containing “eligible” business and employee addresses, which contain error factors as high as 10%. Cities are slow in releasing data.

 Each Zone maintains their own database and there is no consolidated database.

 Street names (e.g. First vs. 1 st , Martin Luther King vs. MLK, etc.) directionals (North, South, etc.) create additional errors when Zone Coordinators, taxpayers and consultants attempt to manually check addresses.

Old (pre-1/8/07) Long Beach Zone (44%)

New (1/8/07) Long Beach Zone (71%)

Net Change in CA Zones (24) -

Expired Area Old EZ Area Extended Area New EZ Area

Part 5: Focus on California

4 Years Amended Return Potential

CA Enterprise Zone Incentives



EZ Hiring Credit - $10,000+ per yr



Sales and Use Tax Credit – up to 8.75%



Net Interest Deduction for Lenders –

CA EZ - Hiring Credit

 Employer must be located in an EZ  Credit can be claimed for up to 5 years  Unused credit carryovers  Each qualified employee = $35,000  Vouchering form example

CA EZ - Sales & Use Tax Credit

 Any sales/use tax paid or incurred to purchase up to $1M of qualified property in an EZ is eligible for credit  C Corp. is eligible for up to $20M of qualified property. Flow-Thru’s - $1M.

CA EZ - Net Interest Deduction for Lenders

 Deduction to lenders for the amount of “net interest” earned on loans made to a business located in an EZ

Part 6: Tools For Location Based Credits

What’s Available?

Option 1: Do It Yourself Without Tools

 Secure Credits and Incentives Autonomously — Locate Tax Incentive Zones In Your Area — Research for Tax Credit Details and Information — Contact Appropriate Government Administrators for Approvals — File Tax Returns OR Amend Returns — Issues – Who within your company/ firm will handle the screening and documentation?

- Human Resources?

- Accounting?

- Tax Staff/ Audit Staff?

NTCG has developed the only national database of location-based federal and state incentive Zones. The total number of Zones exceeds over 7,500 distinct Zones and include:  State Enterprise Zone Programs (39 States) - $500 - $11,000 per employee  Federal Empowerment Zones (41 Nationally) (768 Census Tracts) $3,000 per employee/ yr.  Federal Renewal Community (39 Nationally) (1114 Census Tracts) - $1,500 per employee/ yr.

 Federal Indian Tribal Lands (4476 Nationally) - $4,000 per employee/ yr.

 Federal Free Trade Zones (612 Nationally) – Deferred Custom Duty Payment

California Changes



The EZ Challenges

— 42 CA Zones — 24 Recently Revised EZs — 24 Recently Revised or Pending TEAs — Specific street ranges/ census tracts vs. zip codes or entire cities — Different EZ and TEA boundaries and effective dates — 126 different databases for CA EZ/ TEA only — Errors in public databases — No consolidated database

Option 2: Hire Someone

 Turn-key Solutions — Contact Firms Experienced in Securing Tax Credits & Incentives Nationally  Big 4 and Other National Accounting Firms  Employment Screening Firms  Non-CPA Firms  ADP/ Paychex – Hiring Credits only/ limited states and limited testing — Contact Local Boutique Firms Specializing in Regional Tax Credits & Incentives

Option3: Do It Yourself With Tools

 Federal Zones: HUD Web-Based Lookup (www.hud.gov) — Some issues with 1990 versus 2000 census tracts — State EZs: go city by city searching for web-based software (e.g.,Santa Clarita, CA) — Use NTCG Tax Zone Locator (TZL)

NTCG TZL’s Process/ Output

 Easy to Use Input Screen  Web-Based, so accessible anywhere and constantly updated,  Concurrently identifies state, federal and TEA matches  State-of-the-Art address “clean-up” function when user misspells address, or enters non-existent address,  Fully documented output for audit trail, Zone/ California Franchise Tax Board (FTB) compliant, FAS 109/ FIN 48 support. DeLuxe case heard in 2006 confirmed that CA FTB has the right to audit “behind” the voucher and confirm that taxpayer’s employees meet one or more of the EZ “qualification” criteria. Therefore, thorough documentation process is key.

Batch Analysis Sample Summary

Batch Analysis Sample Output

Consultants: So What Are You Waiting For?

 Create a lucrative niche for your practice  Avoid losing clients and getting sued!

 Become a hero! Provide better service by helping your clients to claim what they are entitled to, and minimizing their tax liability  Acquire and retain more clients because of this expertise

And What About You, Company Tax Director?

 Increase your company’s permanent earnings, lower its effective rate  Show your CFO your department can be a revenue center!

 And credits are FAS 109/FIN 48 Friendly

Contact Information

NTCG 1.800.791.3589

Chuck Swenson: [email protected]