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QUESTION 1: Can the CRD apply to construction that started before January 1, 2002?
ANSWER: Yes, provided an allocation was made
to the building not later than December 31 of the calendar year in which the
building was placed
in service.
QUESTION 2: If a business constructed a building beginning in 2002 without getting
certification first to receive the CRD, can it still get part of the deduction?
ANSWER: Yes, provided an allocation was made
to the building not later than December 31 of the calendar year in which the
building was placed in service.
QUESTION 3: Is the depreciation in the CRD based on straight-line accounting?
ANSWER: Yes. The deduction is allowed
ratably over a 120-month period.
QUESTION 4: Can a business in the Renewal Community take both the CRD and the general
credits available for the rehabilitation of historic buildings?
ANSWER: Yes. However, the expenditures
used to figure the rehabilitation credit may not also be used to figure the CRD
(IRS section 14001(b)(2)(B)(ii).
QUESTION 5: How does the CRD apply to mixed-use buildings? What is the amount of
residential space that is allowed? Are there any other limits on the mix of
uses?
ANSWER: The CRD applies to any nonresidential
real property. Nonresidential real property is any real property other
than (a) residential rental property or (b) property will a class life of less
than 27.5 years. Residential rental property is a building or structure
for which at least 80% of the gross rental income is rental income from dwelling
units. Therefore, if less than 80% of a building's gross rental income is
rental income from dwelling units, the building would qualify for the CRD.
QUESTION 6: When an award is made for a project, is the total CR deduction amount for
that project counted against the city's available allocation for the year that
it is awarded, regardless of its deduction method (50% in 1st year or 10% over
10 years), or is the amount of CR deduction for a project counted against the
city's total annual allocation depending on what the annual deduction for that
project would be?
ANSWER: The amount of the award is counted
against the available allocation for that year. The amount or method
chosen by the business to claim the CRD has no effect on the amount of the
allocation for any year.
QUESTION 7: Are awards made only after projects are placed into service so that actual
costs are used, or can awards be made for proposed projects? If proposed
projects are also eligible, how will any potential discrepancies between actual
qualifying expenses versus estimated qualifying expenses be reconciled?
ANSWER: The allocations will be made according
to the qualified allocation plan. There is no federal requirement that
allocations be made based on either actual or estimated costs. However,
once an allocation is made, there is no provision for
"recapturing" any amount which the project is ultimately unable to
use.
QUESTION 8: If an RC is not able to award the total of $12 million in deductions in
any given year, is there a carry forward provision?
ANSWER: No.
QUESTION 9: What type of forms/documentation are required to claim the deduction?
ANSWER: If the 50% deduction is claimed, it
will be claimed under "other deductions" or "other expenses"
on the taxpayer's income tax return or business schedule (e.g., Schedule
C). If amortization over a 120-month period is claimed, the deduction is
claimed on line 42 of Form 4562 (for the first tax year) and also on the
"other deductions" or "other expenses" line of the
taxpayer's income tax return or business schedule. For partners and S
corporation shareholders, the deduction will be included in the net income or
loss claimed in Part II of Schedule E (Form 1040). Form 8582 must also be
used to claim the special $25,000 allowance if the CRD is from a passive rental
real estate activity. The $25,000 allowance for the CRD applies to all
taxpayers regardless of the AGI.
QUESTION 10: If a business has a net operating loss as a result
of using this deduction, is it treated in the same manner as a net operating
loss under the current tax code?
ANSWER: Yes.
QUESTION 11: The CRD states that a company can exercise one of
two options for taking accelerated deductions, (1) a 50% write off, or (2) a
100% write off of "all of its investment over a 10 year period."
Is the stipulation under (2) limited to the $10 million per project cap, or if a
company had an expense of, for example, $38 million, could it write off
(depreciate) this entire amount over a 10-year period?
ANSWER: No. Under either method, the
company cannot take accelerated deductions in excess of the expenditure amount
allocated to the building by the Commercial Revitalization Agency (or $10
million, if less). The remaining expenditures must be capitalized and
depreciated under the applicable MACRS recovery period 9generally 39 years).
QUESTION 12: Does the tax code require Renewal Community states
to adopt the CRD (and other Renewal Community incentives) for state tax purposes
-- so that when a business determines their federal taxable basis with use of RC
deductions, that taxable basis is carried over to the state tax return?
(This pertains to a state's recognition of federal tax incentives for the
state's taxable basis.)
ANSWER: No. No provision of the Internal
Revenue Code requires any state to follow federal income tax law for state
purposes.
QUESTION 13: It is understood that, in most cases, a qualified
allocation for the Commercial Revitalization Deduction must be made not later
than the close of the calendar year in which a building is placed in
service. What about early allocations? Is it possible to make a
qualified allocation for a project that may not be placed into service until a
future calendar year?
ANSWER: Yes. If an allocation is made
prior to the date the building is placed in service, the building will qualify
for the CRD provided it is placed in service by December 31, 2009. If a
Renewal Community makes a CRD allocation during one year and then places a
building in service in a later year, the allocation will count against the CRD
amount available during the year of the allocation, not the later year when the
building is placed in service.
QUESTION 1: Can a business benefiting from the Renewal Community tax credits
available in Burlington transfer those credits to another business entity, i.e.,
a flow-through entity?
ANSWER: No. There is no provision in the
Internal Revenue code that allows one entity to transfer an unused RC employment
credit to another entity.
QUESTION 2: With respect to the employment tax credit, can an employer count the
time an employee is on a tour boat in Lake Champlain that starts and stops its
tours in the Renewal Community?
ANSWER: To qualify for the credit,
substantially all of the services performed by the employee for the employer
must be performed within the Renewal Community. Any services that are
performed outside of the Renewal Community's geographic boundaries would not
count under this test.
QUESTION 3: Can real estate professionals qualify as Renewal Community
Businesses?
ANSWER: Yes, provided the property owned by
the real estate professional is not residential rental property and at least 50%
of the gross rental income from the lessees is from Renewal Community
businesses. Note that property is residential real estate only if at least
80% of the gross rental income from the property is from dwelling units.
QUESTION 4: Can a bank, located in a Renewal Community with more than
35% of it's employees being in the RC and doing more than 50% of its business in
the RC, meet the definition of an RC business? This question arises since the
provision stating that less than 5% of the aggregate adjusted bases of the
property of the business be attributable to "non qualified financial
property" is unclear. What type of business is this provision referring to?
ANSWER: No, unless less than 5% of the bank's
average aggregate unadjusted bases are attributable to nonqualified financial
property. Nonqualified financial property includes debt and other similar
property (other than accounts or notes receivable from sales or services). There
is no explanation in the Congressional Committee Reports as to the types of
businesses targeted by this provision.
QUESTION 5: A company is located in a Renewal Community and leases
employees from a third party employer (which is located outside the RC). The
company pays the third party employer a fee that includes gross wages, payroll
taxes and administrative fees. These leased employees are residents of the RC
and work 100% of their available time at the company. Who can take advantage of
the RC Employment Credit - the company or the third party employer?
ANSWER: Only the employer for Federal employment
tax purposes is eligible for the credit. See IRS Publication 15-A for more
information on the treatment of leased employees for employment tax purposes.
QUESTION 6: Can an employer receive the RC Employment Credit for an
employee who lives in one Renewal Community and works in another?
ANSWER: No. Wages must be paid to a qualified zone
employee to qualify for the credit. To be a "qualified zone employee,"
the employee must live in the same Empowerment Zone or Renewal Community in
which substantially all of the services are performed for the employer. (IRC
section 1396(d)(1)).
QUESTION 7: To qualify as an Empowerment Zone or Renewal Community
business, based on the percentage requirements, can investments and employees be
in multiple designated RCs or EZs?
ANSWER: Yes, except that the tests for Empowerment
Zones and Renewal Communities must be figured separately (i.e., you can
aggregate RCs with other RCs, but not with Empowerment Zones, and vice versa). (IRC
sections 1397C and 1400G).
QUESTION 8: In what manner can national or international conglomerates
participate in this program if they have a plant or plants located in the
Renewal Community?
ANSWER: To qualify as a Renewal Community business,
a large business can set up a separate legal entity (e.g., a subsidiary or
partnership). Activities of legally separate (even if related) parties are not
aggregated for purposes of determining whether an entity qualifies as an
Enterprise Zone [or Renewal Community] business. (P.L. 103-66, House Committee
Report).
And, of course, the RC wage credit is available for
employees who live and work in the Renewal Community, regardless of whether the
employer qualifies as a "Renewal Community business."
QUESTION 9: With respect to the RC Employment Credit, is the 90-day
period calculated based on the calendar, or on days worked?
ANSWER: The 90-day test is based on calendar days,
not days worked.
QUESTION 10: Do you count family members as employees in determining
if the business is considered a Renewal Community Business? For example, if a
business located in the Renewal Community has ten employees, four of whom are
family members who live in the RC, how many employees need to live in the RC in
order to be considered a Renewal Community Business? Would it be 35% of 10
employees or 35% of 6 employees? If the answer is a fraction, do you round
up or down to determine the correct number of employees?
ANSWER: Yes, employees who are also family members
count for purposes of the 35% test. So, in the example, you would base the test
on 10 employees. You would not round at all. At least 35% of the employees
must be residents of a Renewal Community. For any percentage less than 35%, the
employer would fall below the 35% threshold and would fail to meet the test.
QUESTION 11: Are tips considered Qualified Wages in order to determine
the Renewal Community Employment Credit?
ANSWER: No. Wages are defined in IRC section 1397
by reference to IRC section 51, which in turn defines them by reference to IRC
section 3306(b). Because tips are counted as wages under IRC section 3306(s),
not IRC section 3306(b), tips do not count as wages for figuring the Renewal
Community employment credit.
QUESTION 12: The 0% capital gains benefit is available to
"Renewal Community businesses". What happens if, during the 5-year
period that the asset must be held, the status of the business changes? For
example, a business buys a building 1/1/2002 and meets the RC Business
definition during 2002, 2003, 2004, but doesn't meet the definition in 2005 and
2006. The business sells the property in 2007 after holding it five years. Does
the business still get the 0% capital gains tax rate on the profits?
ANSWER: No. To qualify for the capital gain
exclusion, substantially all of the use of the property during substantially all
of the taxpayer's holding period must have been in a Renewal Community business.
Although "substantially all" is not defined in the Code for this
purpose, it seems clear that qualifying as an RC business for only 3 of 5 years
would not be considered "substantially all" of the taxpayer's holding
period.
QUESTION 13: What about a scenario where the business meets the
criteria for a Renewal Community business in 2002 and '03, doesn't meet it in
'04, but regains the status for '05 and '06, and sell in '07 while it still
meets the criteria. Does the business get the 0% capital gains tax rate on the
profits?
ANSWER: To qualify for the capital gain exclusion,
substantially all of the use of the property during substantially all of the
taxpayer's holding period must have been in a Renewal Community business.
Because "substantially all" is not defined in the Code for this
purpose, it is unclear if qualifying as an RC business in 4 of 5 years would be
considered "substantially all" of the taxpayer's holding period.
QUESTION 14: Based on the 1990 Census Tract data, one major employer's
address is located in the Renewal Community. The firm has several adjacent
buildings connected by pedestrian walkways that are physically located outside
the RC, simply by the demarcation lines of the census tract. If all the
connected buildings have one central address, however, that is located in the
RC, can all the buildings be considered to be inside the RC?
ANSWER: Under IRC section 1397C(f), if a business
uses real property located both within and outside an RC, and the amount of the
real property located within the RC is "substantial" when compared to
amount of the real property located outside the RC and contiguous to the real
property within the RC, the contiguous property is treated as being within the
RC. However, this rule applies only for purposes of defining a "Renewal
Community business." For any other purpose, the taxpayer can get an answer
by submitting a private letter ruling request to the IRS.
QUESTION 15: If the tax year for a business is other than the calendar
year, when would the business claim the Renewal Community wage credits? For
example, if the business's fiscal year runs from October 1, 2001 through
September 30, 2002, should it claim all credits earned during this period when
it files its 2002 tax return or should it claim the October - December 2001
credits in its 2001 tax return and then claim the January - September 2002
credits in its 2002 tax return?
ANSWER: The credit is based on the qualified wages
paid or incurred during the CALENDAR YEAR that ENDS DURING the taxpayer's FISCAL
YEAR.
EXAMPLE: For a taxpayer with a fiscal year ending on
September 30, the credit for CALENDAR YEAR 2002 wages is claimed on Form 8844
for the FISCAL YEAR that begins October 1, 2002 and ends on September 30, 2003.
That's because December 31, 2002 falls within the fiscal year ending September
30, 2003.
Therefore, for the wages paid or incurred from January 1 -
December 31, 2001 (Renewal Community/Empowerment Zone employment credit only),
the credit would be claimed on the return for the fiscal year that begins on
October 1, 2001, and ends on September 30, 2002. For the wages paid or incurred
from January 1 - December 31, 2002, the credit would be claimed on the return
for the fiscal year that begins on October 1, 2002, and ends on September 30,
2003. Therefore, even though the taxpayer's DEDUCTION is for fiscal year wages,
the CREDIT is for calendar year wages.
NOTE: This rule applies ONLY to the Empowerment Zone and
Renewal Community employment credit. The work opportunity credit,
welfare-to-work credit, and Indian employment credit all use FISCAL YEAR wages.
QUESTION 16: Can a building construction site in a Renewal Community
qualify for Renewal Community employment credits?
ANSWER: The RC employment credit is available for
any employee that performs substantially all of its services during the period
in the RC and also lives in the RC. The IRS has interpreted the language
"the period" to include pay periods. So if an employee is working at a
construction site for substantially all of specified pay periods, the wages paid
during those pay periods would be qualified wages eligible for the 15% credit up
to $10,000 per year in wages. The employee must live the in the RC that same
time period.
QUESTION 17: To qualify for the zero-percent capital gains rate, what
percentage of a business's gross income must come from the active conduct of
business within the Renewal Community, is it 50% or 80%?
ANSWER: The 80% rule is an Enterprise Zone benefit
that applies only to businesses operating in the District of Columbia. For
Renewal Community businesses, at least 50% of gross income must come from the
active conduct of business within the RC. That does not mean that the customers
or products of the business must come from the RC; it means that the business
must perform its business in the RC. For the purposes of determining what is
gross income, this income would be the same figure that a business would use for
other federal tax purposes.
QUESTION 18: Are the employers and employees that use the Renewal
Community and Empowerment Zone tax incentives required to be residents of the
United States?
ANSWER: For purposes of figuring the RC and EZ
credits and deductions, neither the owner nor the employees are required to be
U.S. citizens.
QUESTION 19: When will the IRS tax forms be ready for Renewal
Communities that use the available tax incentives?
ANSWER: Some - such as IRS
Form 8844 to report the wage credit - are already available. The
IRS is developing additional forms and plans to release them in the fall of
2002.
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