Publication 954 Tax Incentives for Distressed Communities

 

a) You terminate the employee because of misconduct as determined under the state unemployment compensation law that applies.

b) The employee becomes disabled before the 90th day. However, if the disability ends before the 90th day, you must offer to reemploy the former employee.

 

a) Private or commercial golf course,

b) Country club,

c) Massage parlor,

d) Hot tub facility,

e) Suntan facility,

f) Racetrack, or other facility used for gambling, or

g) Store whose principal business is the sale of alcoholic beverages for off-premise consumption.

 

a) The larger of the unadjusted bases or fair market value of the farm assets you own.

b) The value of the farm assets you lease.

 

a) Nonqualified financial property (generally, debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, and annuities), or

b) Collectibles not held primarily for sale to customers.

 

1) You acquired the property after December 21, 2000,

2) The original use of the property in the empowerment zone began with you, and

3) Substantially all of the use of the property, during substantially all of the time that you held it, was in your enterprise zone business; and

 

1) You acquired the stock or partnership interest after December 21, 2000, solely in exchange for cash, from the corporation at its original issue (directly or through an underwriter) or from the partnership;

2) The business was an enterprise zone business (or a new business being organized as an enterprise zone business) as of the time you acquired the stock or partnership interest; and

3) The business qualified as an enterprise zone business during substantially all of the time during which you held the stock or partnership interest.

 

a) Nonqualified financial property (generally, debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, and annuities), or

b) Collectibles not held primarily for sale to customers.

 

1) The cost of acquiring a building that you substantially rehabilitate, to the extent that cost is more than 30% of the total qualified revitalization expenses for the building (not counting the cost of the building itself).

2) Expenditures you use to figure any allowable credit (such as the rehabilitation credit).

 

• An allocation made during the calendar year in which a qualified revitalization building is placed in service.

• A binding commitment to make an allocation of a specified dollar amount to a qualified revitalization building during the calendar year in which the building is placed in service. A binding commitment is not, in and of itself, an allocation.

• A carryover allocation for a single-building project or a multi-building project.

 

• Name, address, and taxpayer identification number of the commercial revitalization agency making the commercial revitalization expenditure.

• The name, address, and taxpayer identification number of the taxpayer receiving the allocation.

• The address or specific location of each qualified revitalization building.

• The date of the allocation of the expenditure amount.

• The commercial revitalization expenditure amount allocated to each qualified revitalization building on that date.

• A certification under penalties of perjury by an authorized official of the commercial revitalization agency that the official has examined the document, and to the best of the official's knowledge and belief, the information in the document is true, correct, and complete. A carryover allocation document must include the following additional information:

• The taxpayer's reasonably expected basis in the project (land and depreciable property) as of the end of the second calendar year following the calendar year during which the allocation was made.

• The date that each qualified revitalization building is expected to be placed in service.

 

1) Qualified community stock.

2) Qualified community partnership interest.

3) Qualified community business property.

 

1) You acquired the stock after 2001 and before 2010 at its original issue solely in exchange for cash. (This requirement is also met if you acquired the stock at any time from another person in whose hands it was qualified community stock.)

2) The corporation was a renewal community business (or was being organized as a renewal community business) at the time the stock was issued.

3) The corporation qualified as a renewal community business during substantially all of your holding period for the stock. (This requirement is also met if the corporation ceased to qualify as a renewal community business after the 5-year period beginning on the date you acquired the stock. However, your qualified capital gain cannot be more than what it would have been if you had sold the stock on the date the corporation ceased to qualify.)

 

1) You acquired the partnership interest from the partnership after 2001 and before 2010 solely in exchange for cash.

2) The partnership was a renewal community business (or was being organized as a renewal community business) at the time the partnership interest was acquired.

3) The partnership qualified as a renewal community business during substantially all of your holding period for the partnership interest. (This requirement is also met if the partnership ceased to qualify as a renewal community business after the 5-year period beginning on the date you acquired the partnership interest. However, your qualified capital gain cannot be more than what it would have been if you had sold the partnership interest on the date the partnership ceased to qualify.)

 

1) You acquired the property after 2001 and before 2010.

2) You did not acquire the property from a related person or member of a controlled group of which you are a member.

3) Your basis in the property is not determined either by its adjusted basis in the hands of the person from whom you acquired it or under the stepped-up basis rules for property acquired from a decedent.

4) You were the first person to use the property in the renewal community.

5) Substantially all of the use of the property was in your renewal community business during substantially all of your holding period for that property. (This requirement is also met if you stopped using the property in your renewal community business, or your business ceased to qualify as a renewal community business, after the 5-year period beginning on the date you acquired the property. However, your qualified capital gain cannot be more than what it would have been if you had sold the property on the date you stopped using it in your renewal community business or on the date your business ceased to qualify.)

 

1) 100% of the adjusted basis of the property at the beginning of the 24-month period.

2) $5,000.

 

• Gain attributable to periods before 2002 or after 2014.

• Ordinary (section 1245) gain. See chapter 3 in 1250 gain figured as if section 1250 applied to all depreciation rather than the additional depreciation.

• Gain attributable to real property or an intangible asset that is not an integral part of a renewal community business.

• Gain attributable, directly or indirectly, in whole or in part, to a transaction with a related person. For the definition of a related person, see chapter 2 in  

Other rules. Rules similar to certain rules in section 1202 of the Internal Revenue Code apply to interests in pass-through entities, certain tax-free transfers, contributions to capital after the original stock issuance date, and short positions.

More information. For more information, see section 1400F of the Internal Revenue Code.

Enterprise Communities

There are currently 49 urban areas that were designated as urban enterprise communities by the Secretary of Housing and Urban Development (HUD) on December 21, 1994. There are also currently 28 rural areas that were designated as rural enterprise communities by the Secretary of Agriculture (USDA) on December 21, 1994. These designations will remain in effect until the end of 2004. The 20 additional rural enterprise communities designated by USDA on December 24, 1998 ("Round II" enterprise communities) are not treated as enterprise communities for Federal tax purposes.

Urban areas. Parts of the following urban areas are enterprise communities. You can find out if your business or an employee's residence is located within an urban enterprise community by using the RC/EZ/EC Locator at http://www.hud.gov/crlocator.

 

Rural areas. Parts of the following rural areas are enterprise communities. You can find out if your business or an employee's residence is located within an urban enterprise community by using the RC/EZ/EC Locator at http://www.hud.gov/crlocator.

 

New York Liberty Zone

The tax incentives described below apply to the parts of New York City damaged in the terrorist attack on September 11, 2001. This area is referred to as the New York Liberty Zone.

Area defined. The New York Liberty Zone is the area located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with East Broadway) in the Borough of Manhattan.

New York Liberty Zone Business Employee Credit

The New York Liberty Zone business employee credit is part of the work opportunity credit (discussed later). You can claim the credit if you pay or incur "qualified wages" to a "Liberty Zone business employee." The credit is for wages paid or incurred to new and existing employees for work performed during 2002 or 2003.

Caution. This credit is set to expire for wages paid to employees for work performed after 2003. However, at the time this publication was issued, Congress was considering legislation that would allow this credit with respect to work performed by qualified employees during 2004. See What's Hot in Tax Forms, Pubs, and Other Tax Products at http://www.irs.gov/formspubs to find out if this legislation was enacted.

The credit is 40% (25% for employees who worked for you at least 120 hours but fewer than 400 hours) of the qualified wages for the year. The amount of the qualified wages you can use to figure the credit cannot be more than $6,000 for each employee for each calendar year. As a result, the credit can be as much as $2,400 (40% of $6,000) for each employee each year.

Liberty Zone business employee. A Liberty Zone business employee is generally any employee who performs 80% or more of his or her services:

 

Limit on number of employees located outside the Liberty Zone. The number of employees described in (2) above that are treated as Liberty Zone business employees on any day is limited to the excess of:

 

Limit for large businesses. You cannot claim the credit for any tax year in which you employed an average of more than 200 employees on business days during the tax year.

Qualified wages. Qualified wages are wages you pay or incur to a Liberty Zone business employee (defined earlier) for work performed during 2002 or 2003. Wages are generally defined as wages (excluding tips) subject to the Federal Unemployment Tax Act (FUTA) without regard to the FUTA dollar limit, but not more than $6,000 each calendar year for each employee. Qualified wages for any employee must be reduced by the amount of any work supplementation payments you received under the Social Security Act.

Nonqualified wages. See Form 8884 for a complete list of wages that do not qualify for the credit. Some of the most common wages that do not qualify include wages you pay or incur to an employee who:

 

Claiming the credit. Use Form 8884 to claim this credit.

Effect on work opportunity credit and welfare-to-work credit. Wages you use to figure this credit cannot be used to figure the work opportunity credit or welfare-to-work credit.

Effect on salary and wage deduction. In general, you must reduce the deduction on your income tax return for salaries and wages by the amount of your current year credit (before applying the tax liability limit).

More information. For more information about this credit, see Form 8884.

Special Liberty Zone Depreciation Allowance

You can take a special Liberty Zone depreciation allowance for qualified Liberty Zone property you place in service during the tax year. The allowance is an additional 30% deduction and it applies for the year you place the property in service. You can take the additional 30% deduction after any section 179 deduction and before you figure regular depreciation under MACRS for the year you place the property in service. To figure the depreciable basis, you must first multiply the property's cost or other basis by the percentage of business/investment use and then reduce that amount by any section 179 deduction and certain other deductions and credits for the property.

The allowance is deductible for both regular tax and alternative minimum tax (AMT) purposes. There is no AMT adjustment required for any depreciation figured on the remaining basis of the property.

You can claim the allowance only for the year the property is placed in service. In the year you claim the allowance, you must reduce the basis of the property by the allowance before figuring the regular depreciation deduction.

Special depreciation allowance. A special 30% or 50% depreciation allowance is allowed for qualified property placed in service after September 10, 2001, and before 2005 (2006 in certain cases), even if not in the Liberty Zone. If you place in service property that is eligible for that allowance, you cannot claim the special Liberty Zone depreciation allowance for the same property.

Qualified Liberty Zone property. Property qualifies for the special Liberty Zone depreciation allowance if it meets all the following requirements.

 

Qualified leasehold improvement property. Generally, this is any improvement to an interior part of a building that is nonresidential real property, provided all of the following requirements are met.

 

• The improvement is made under or pursuant to a lease by the lessee (or any sublessee) or the lessor of that part of the building.

• That part of the building is to be occupied exclusively by the lessee (or any sublessee) of that part.

• The improvement is placed in service more than 3 years after the date the building was first placed in service.

 

However, a qualified leasehold improvement does not include any improvement for which the expenditure is due to any of the following.

 

• The enlargement of the building.

• Any elevator or escalator.

• Any structural component benefiting a common area.

• The internal structural framework of the building.

 

Generally, a binding commitment to enter into a lease is treated as a lease and the parties to the commitment are treated as the lessor and lessee. However, a lease or a binding commitment between related persons is not treated as a lease.

Related persons. For this purpose, the following are related persons.

 

More information. For more information, see Publication 547, Casualties, Disasters, and Thefts.

New Markets Credit

You can claim a tax credit for a qualified equity investment in a qualified community development entity (CDE) made after April 19, 2001. This is called the new markets credit.

Amount of credit. You claim the credit over a period of 7 years until 2007. To find the amount of your credit each year, multiply the amount you paid the qualified CDE for your qualified equity investment by a percentage. The percentage is:

 

Thus, the credit can be up to 39% of your investment over a 7-year period.

To claim the credit for a year, you must hold the qualified equity investment on the credit allowance date for that year. The credit allowance date is the date you make the initial investment and each of the next 6 anniversary dates.

How the new markets credit (NMC) works. Qualified CDEs apply to the U.S. Department of Treasury's Community Development Financial Institutions (CDFI) Fund for an allocation of the new markets credit. A CDE will seek taxpayers to make qualifying equity investments in the CDE. The CDE will be required to use substantially all of the qualified equity investments to make qualified low-income community investments in qualified active low-income community businesses (QALICBs), discussed later. After the CDE is awarded a tax credit allocation, the CDE is authorized to allocate the tax credits to private equity investors in the CDE.

Qualified CDE. A qualified CDE is any U.S. corporation or partnership that meets the following requirements.

 

Qualified CDEs also include specialized small business investment companies and community development financial institutions. For more information, see section 45D(c)(2) of the Internal Revenue Code.

Qualified equity investment. Generally, this is the cost of any stock in a corporation or any capital interest in a partnership if the following requirements are met.

 

Qualified low-income community investment. Generally, this means one of the following.

 

Tip. Any equity investment in, or loan to, any CDE may include a primary and second CDE to the extent that the second CDE uses the proceeds of the investment or loan. For details on the requirements that apply to CDEs making investments through multiple tiers of CDEs, see http://www.irs.gov/pub/irs-irbs/irb03-39.pdf.

QALICB. This is any corporation (including a nonprofit corporation), partnership, or sole proprietorship, if all the following requirements are met for the tax year.

Also, a sole proprietorship that would qualify if it were separately incorporated is treated as a qualified active low-income community business.

Qualified business. This is generally any trade or business except one that consists primarily of developing or holding intangibles for sale or license. However, the rental to others of real property located in a low-income community is a qualified business only if the property is not residential rental property and there are substantial improvements located on the property. Also, a qualified business does not include any business listed earlier in item (5) or item (6) under Nonqualified employees in the Empowerment Zone Employment Credit section.

Low-income community. A low-income community generally means any population census tract if any of the following apply.

 

CDE designations of qualified equity investments. Generally, a qualified CDE can designate an equity investment as a qualified equity investment only if it applied for and received a new markets credit allocation and entered into an allocation agreement with the CDFI Fund before the investment was made.

Exceptions. An equity investment in an entity is eligible to be designated as a qualified equity investment if made prior to an allocation agreement only if one of the following applies.

 

NMC Allocations. NMCs are allocated annually by the CDFI Fund to CDEs under a competitive application process. The maximum amount of qualified equity investments designated by the qualified CDE cannot exceed the amount of the allocation received from the CDFI Fund. The U.S. Department of Treasury awarded to 66 entities on March 14, 2003, the first $2.5 billion in tax credit allocations under the NMC program. These entities are listed in Table 4, below. For information about future NMC allocations, see the CDFI fund website at http://www.cdfifund.gov/programs/nmtc.

 Table 4. 2002 New Markets Credit Allocation Awardees

 

                                           City               Credit

 

  Name of Awardee                          and State          Allocation

 

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  Alaska Growth Capital BIDCO, Inc.        Anchorage, AK      $  5,000,000

 

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  Advantage Capital Community

 

   Development Fund, L.L.                  New Orleans, LA    $110,000,000

 

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  ASB Community Development Corp           Portsmouth, OH     $  2,000,000

 

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  Bethel New Life, Inc.                    Chicago, IL        $  4,000,000

 

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  Border Communities Capital Company, LLC  Solana Beach, CA   $ 50,000,000

 

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  Cahaba Community Development, LLC        Birmingham, AL     $ 40,000,000

 

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  Campus Partners for Community Urban

 

   Redevelopment                           Columbus, OH       $ 35,000,000

 

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  CBSI Development Fund, Inc.              New Albany, IN     $  3,000,000

 

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  Central Ohio Loan Services, Inc.         Waverly, OH        $  6,000,000

 

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  CFBanc Corporation                       Washington, DC     $ 73,000,000

 

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  Citizens Business Development Company,

 

   LLC                                     Jackson, KY        $  3,000,000

 

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  Citizens Tri-County Development

 

   Corporation                             Dunlap, TN         $  1,000,000

 

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  Clearinghouse CDFI                       Lake Forest, CA    $ 56,000,000

 

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  Cleveland New Markets Investment

 

   Fund LLC                                Cleveland, OH      $ 15,000,000

 

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  CNC Development Foundation, Inc.         Paintsville, KY    $  2,000,000

 

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  Coastal Enterprises, Inc.                Wiscasset, ME      $ 65,000,000

 

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  Community Development Funding, LLC       Clarksville, MD    $ 25,000,000

 

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  Community Development New Markets I LLC  Cleveland, OH      $150,000,000

 

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  Community Economic Redevelopment

 

   Corporation                             Chicago, IL        $  6,000,000

 

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  Community Loan Fund of New Jersey, Inc.  Trenton, NJ        $ 15,000,000

 

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  Community Trust Community Development

 

   Corporation                             Pikeville, KY      $  7,000,000

 

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  Community Ventures Corporation, Inc.     Lexington, KY      $ 12,000,000

 

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  Delaware Community Investment

 

   Corporation (DCIC)                      Wilmington, DE     $ 15,000,000

 

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  Eclypse Development Partners I LLC       Atlanta, GA        $ 22,000,000

 

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  Empowerment Reinvestment Fund, LLC       New York City, NY  $ 10,000,000

 

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  Enterprise Corporation of the Delta      Jackson, MS        $ 15,000,000

 

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  ESIC New Markets Partners Limited

 

   Partnership                             Columbia, MD       $ 90,000,000

 

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  First State Development Corp.            Union City, TN     $  7,000,000

 

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  Greater Jamaica Local Development

 

   Company, Inc.                           Jamaica, NY        $ 21,000,000

 

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  GS New Markets Fund                      New York, NY       $ 75,000,000

 

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  HEDC New Markets, Inc.                   New York, NY       $ 30,000,000

 

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  Illinois Facilities Fund, The            Chicago, IL        $ 10,000,000

 

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  Impact Community Capital CDE, LLC        San Francisco, CA  $ 40,000,000

 

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  Impact Seven, Inc.                       Almena, WI         $ 21,000,000

 

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  KHC New Markets CDE, LLC Series A        Carlsbad, CA       $134,000,000

 

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  LA Charter School New Markets CDE LLC    Santa Monica, CA   $ 36,000,000

 

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  Lenders for Community Development        San Jose, CA       $ 25,000,000

 

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  Liberty Bank and Trust Company           New Orleans, LA    $ 50,000,000

 

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  Local Initiatives Support Corporation

 

   (LISC)                                  New York, NY       $ 65,000,000

 

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  MetaFund Corporation                     Oklahoma City, OK  $ 54,000,000

 

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  MHIC, LLC                                Boston, MA         $ 25,000,000

 

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  Mid-City Community CDE, LLC              Silver Spring, MD  $ 36,000,000

 

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  National Community Capital               Philadelphia, PA   $  8,000,000

 

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  National New Markets Tax Credit

 

   Fund, Inc.                              Minneapolis, MN    $162,500,000

 

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  National Trust Community Investment

 

   Corporation                             Washington, DC     $127,000,000

 

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  Neighborhood Bancorp                     National City, CA  $  5,000,000

 

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  New Markets Community Capital, LLC       Los Angeles, CA    $ 30,000,000

 

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  Norfolk Redevelopment & Housing

 

   Authority                               Norfolk, VA        $ 15,000,000

 

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  North Coast Community Development

 

   Corporation                             Lorain, OH         $  9,000,000

 

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  Northside Community Development Fund     Pittsburgh, PA     $    500,000

 

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  Nuestra Development Fund                 Roxbury, MA        $  1,000,000

 

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  Ohio Community Development Finance Fund  Columbus, OH       $ 15,000,000

 

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  Paramount Community Development Fund,

 

   LLC                                     Granville, OH      $ 75,000,000

 

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  Phoenix Community Development and

 

   Investment Corporation                  Phoenix, AZ        $170,000,000

 

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  Prince George's Community Capital

 

   Corporation                             Largo, MD          $ 10,000,000

 

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  REI New Markets Investment, LLC          Durant, OK         $ 80,000,000

 

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  Rural Community Assistance Corporation   West Sacramento,CA $  8,000,000

 

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  Self-Help Ventures Fund                  Durham, NC         $ 75,000,000

 

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  Southeast Indiana Community Development  Dillsboro, IN      $  3,000,000

 

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  Southern Appalachian Fund                Oak Ridge, TN      $  2,000,000

 

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  The Association For Theater-Based

 

   Community Development                   Columbus, OH       $  6,000,000

 

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  Urban Development Fund, LLC              Chicago, IL        $ 15,000,000

 

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  Wachovia Community Development

 

   Enterprises, LLC                        Charlotte, NC      $150,000,000

 

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  West Virginia Community Development

 

   Loan Fund, Inc.                         Barboursville, WV  $  4,000,000

 

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  WNC National Community Development

 

   Advisors, LLC                           Costa Mesa, CA     $ 50,000,000

 

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  123 New Market Investors LLC             Washington, DC     $ 13,000,000

 

 

Recapture. The credit is recaptured if, within the 7-year credit period, the CDE is no longer qualified, substantially all of the proceeds of the investment are no longer used for a qualifying purpose, or the investment is redeemed.

Claiming the credit. Use Form 8874 to claim this credit.

More information. For more information about the new markets credit, see section 45D of the Internal Revenue Code and the regulations under that section.

Tax-Exempt Bond Financing

State or local governments can issue enterprise zone facility bonds (a type of exempt facility tax-exempt bond) to raise funds to provide an "enterprise zone business" with "qualified zone property." At least 95% of the net proceeds from the bond issue must be used to finance:

 

Tax-exempt bonds generally have lower interest rates than conventional financing.

Tip. Contact the appropriate state or local government agency to find out if this type of financing is available in your empowerment zone or enterprise community.

Enterprise zone business. For tax-exempt bond financing, a corporation, partnership, or sole proprietorship is generally an enterprise zone business if all the following statements are true for the tax year.

For a sole proprietorship, the term "employee" in (5) and (6) includes the proprietor. Also, a business located in a zone or community that would qualify if it were separately incorporated is treated as an enterprise zone business. For example, a business that is part of a national chain could qualify, providing it would meet the definition of an enterprise zone business if it were separately incorporated.

Qualified business. A qualified business is generally any trade or business except one that consists primarily of the development or holding of intangibles for sale or license.

However, the rental to others of real property located in an empowerment zone or enterprise community is a qualified business only if the property is not residential rental property and at least 50% of the gross rental income from the property is from enterprise zone businesses.

The rental to others of tangible personal property is a qualified business only if at least 50% of the rentals of the property are to enterprise zone businesses or zone or community residents. (For bonds issued before August 6, 1997, at least 85% of the rentals of the property must be to enterprise zone businesses or zone or community residents.)

Also, a qualified business does not include any business listed earlier in item (5) or item (6) under Nonqualified employees in the Empowerment Zone Employment Credit section.

Relaxed requirements during start-up period. For bonds issued after August 5, 1997, a business will be treated as an enterprise zone business during a start-up period if both of the following apply.

 

The start-up period is the period that ends with the start of the first tax year beginning more than 2 years after the later of the following two dates.

 

Requirements during and after testing period. For bonds issued after August 5, 1997, a business that qualifies as an enterprise zone business at the end of the start-up period must continue to qualify during a testing period that ends 3 tax years after the start-up period ends.

After the 3-year testing period, a business will continue to be treated as an enterprise zone business as long as it meets an employee residency requirement. To meet this requirement, at least 35% of its employees must be residents of an empowerment zone or enterprise community. However, the following businesses are not treated as enterprise zone businesses even if they meet the employee residency requirement.

 

A business in the DC Zone does not need to meet the employee residency requirement to continue to be treated as an enterprise zone business after the testing period.

Qualified zone property. For tax-exempt bond financing, qualified zone property is any depreciable real or tangible personal property if all the following are true.

 

Used property may be qualified zone property if it has not previously been used within an empowerment zone or enterprise community.

Special rule for substantially renovated property. Property will be treated as having met requirements (1) and (4) if you substantially renovate the property. You substantially renovate property if, during any 24-month period beginning after the zone or community designation takes effect, your additions to the property's basis are more than the greater of the following amounts.

 

Special rule for bonds issued after July 30, 1996. Generally for bonds issued after July 30, 1996, property that you reasonably expect by exercising due diligence to be qualified zone property by an initial testing date will be treated as qualified zone property for the period before that date.

The initial testing date is generally the date that is 18 months after the later of the following dates.

 

However, the issuer of the bonds can choose to use any earlier date that comes after the bond issue date as the initial testing date.

Interest not deductible. No deduction will be allowed for interest on any financing provided from a bond if the interest accrues during the period beginning on the first day of the calendar year in which either of the following occurs.

 

This rule does not apply if the use of the facility ceases to qualify because of bankruptcy or the termination or revocation of the designation as an empowerment zone or enterprise community.

In addition, interest will remain deductible if the issuer and principal user try in good faith to meet the requirements and any failure is corrected within a reasonable period after discovery.

More information. For more information, see section 1394 of the Internal Revenue Code and the regulations under that section.

Qualified Zone Academy Bonds

Beginning in 1998, state or local governments can issue qualified zone academy bonds to raise funds for the use of a "qualified zone academy." However, these bonds require a private business contribution. Certain banks, insurance companies, and corporations actively engaged in the business of lending money can receive a tax credit as an incentive to hold these bonds. For more information about claiming the credit, see Form 8860.

Caution. The national qualified academy zone bond limit for 2003 was $400 million, but is zero for 2004 (excluding any carryover limitation). However, at the time this publication was issued, Congress was considering legislation that would establish a national limitation amount for 2004. See What's Hot in Tax Forms, Pubs, and Other Tax Products at http://www.irs.gov/formspubs to find out if this legislation was enacted.

Tip. Contact the appropriate state or local government agency to find out if qualified zone academy bonds are available in your area.

Qualified zone academy. A qualified zone academy is a public school (or academic program within a public school) at the secondary level or below that meets certain requirements. It must be located in either an empowerment zone or an enterprise community, or there must be a reasonable expectation when the bonds are issued that at least 35% of the school's students (or program's participants) will be eligible for free or reduced-cost lunches under the school lunch program established under the National School Lunch Act. A qualified zone academy must also meet other requirements.

Private business contribution requirement. Before qualified zone academy bonds can be issued, the local educational agency (as defined in section 14101 of the Elementary and Secondary Education Act of 1965) must obtain written commitments from private entities for qualified contributions with a present value (as of the bond issue date) of not less than 10% of the proceeds of the bond issue.

A qualified contribution is a contribution made with the approval of the local educational agency of any property or service from the following list.

 

More information. For more information about qualified zone academy bonds, see section 1397E of the Internal Revenue Code and the regulations under that section.

Work Opportunity Credit

The work opportunity credit provides businesses with an incentive to hire individuals from groups that have a particularly high unemployment rate or other special employment needs. Your business does not have to be in an empowerment zone, enterprise community, or renewal community to qualify for this credit. You can claim the credit if you pay or incur "qualified first-year wages" to a "targeted group employee."

The work opportunity credit includes New York Liberty Zone business employees. This part of the work opportunity credit is called the New York Liberty Zone business employee credit. It has a different tax liability limit and is figured separately on Form 8884. For details, see New York Liberty Zone Business Employee Credit, earlier.

Caution. This credit is set to expire for individuals who begin work for you after December 2003. However, at the time this publication was issued, Congress was considering legislation that would allow this credit with respect to employees who began work for you in 2004. See What's Hot in Tax Forms, Pubs, and Other Tax Products at http://www.irs.gov/formspubs to find out if this legislation was enacted.

Targeted group employee. A targeted group employee is any employee who has been certified by your state employment security agency (SESA) as a:

 

The employee must meet the requirements explained in the instructions to Form 8850.

State certification required. An employee is not considered a targeted group employee without SESA certification. To receive certification, submit Form 8850 to your SESA.

You must either:

Qualified first-year wages. Qualified first-year wages are qualified wages you pay or incur for work performed by a targeted group employee during the 1-year period beginning on the date the individual begins work for you. Qualified wages are generally wages (excluding tips) subject to the Federal Unemployment Tax Act (FUTA) without regard to the FUTA dollar limit, but not more than $6,000 each tax year for each employee ($3,000 each tax year for a summer youth employee).

If the work performed by the employee during more than half of any pay period qualifies under FUTA as agricultural labor, the first $6,000 of that employee's wages subject to social security and Medicare taxes are qualified wages. For a special rule that applies to railroad employees, see section 51(h)(1)(B) of the Internal Revenue Code.

Nonqualified wages. See Form 5884 for a complete list of wages that do not qualify for the credit. Some of the most common wages that do not qualify include wages you pay or incur to an employee who:

 

Successor employer. If you are a successor employer, the 1-year period begins on the date the employee first began work for the previous employer and any qualified first-year wages paid by the successor employer are reduced by the qualified first-year wages paid by the previous employer. You are a successor employer if you acquire substantially all of the property used in a trade or business (or a separate unit thereof) of another employer (previous employer) and immediately after the acquisition you employ in your trade or business an individual who was employed immediately prior to the acquisition in the trade or business of the previous employer.

Amount of credit. The following table shows the rate you apply to qualified first-year wages you pay or incur each tax year to a targeted group employee who works for you for the number of hours shown. The table also shows the maximum credit you can claim each tax year for each targeted group employee.

 Table 5. Rate and Maximum Credit Each Tax Year for Each Targeted Group Employee                                             Maximum

 

                                              Qualified

 

                                              First-Year    Maximum

 

  Hours Worked For You               Rate     Wages         Credit

 

  -----------------------------------------------------------------

 

  At least 400                       40%      $6,000 *      $2,400

 

  Fewer than 400 but at least 120    25%        6,000 *      1,500

 

 

  * $3,000 for a summer youth employee

 

 

Claiming the credit. Use Form 5884 to claim this credit.

Effect on salary and wage deduction. In general, you must reduce the deduction on your income tax return for salaries and wages by the amount of your current year work opportunity credit (before applying the tax liability limit).

Effect on empowerment zone and renewal community employment credits. Wages you use to claim the work opportunity credit cannot be used to figure the empowerment zone or renewal community employment credits. In addition, they reduce the maximum wage amount you can use to figure either of those credits.

Effect of welfare-to-work credit. You cannot claim both the work opportunity credit and the welfare-to-work credit for the same employee during the same tax year.

Effect on New York Liberty Zone business employee credit. Wages you use to claim the work opportunity credit cannot be used to figure the New York Liberty Zone business employee credit.

More information. For more information about the work opportunity credit, see Form 5884.

Welfare-to-Work Credit

The welfare-to-work credit provides businesses with an incentive to hire long-term family assistance recipients. Your business does not have to be in an empowerment zone, enterprise community, or renewal community to qualify for this credit. You can claim the credit if you pay or incur "qualified wages" during the first 2 years of employment to a "long-term family assistance recipient."

Caution. This credit is set to expire for individuals who begin work for you after December 2003. However, at the time this publication was issued, Congress was considering legislation that would allow this credit with respect to employees who began work for you in 2004. See What's Hot in Tax Forms, Pubs, and Other Tax Products at http://www.irs.gov/formspubs to find out if this legislation was enacted.

Long-term family assistance recipient. A long-term family assistance recipient is an individual who has been certified by your state employment security agency (SESA) as a member of a family that:

 

State certification required. An individual is not considered a long-term family assistance recipient without SESA certification. To receive certification, submit Form 8850 to your SESA.

You must either:

Qualified wages. Qualified wages are generally wages (excluding tips) subject to the Federal Unemployment Tax Act (FUTA) without regard to the FUTA dollar limit, but not more than $10,000 each tax year for each employee.

If the work performed by the employee during more than half of any pay period qualifies under FUTA as agricultural labor, the first $10,000 of that employee's wages subject to social security and Medicare taxes are qualified wages. For a special rule that applies to railroad employees, see section 51A(b)(5)(C) of the Internal Revenue Code.

For this credit, qualified wages also generally include the following amounts paid or incurred by the employer that are normally excludable from the employee's gross income.

 

Nonqualified wages. See Form 8861 for a complete list of wages that do not qualify for the credit. Some of the most common wages that do not qualify include wages you pay or incur to an employee who: Amount of credit. The following table shows the rate you apply to the qualified wages you pay or incur during each year of employment. The table also shows the maximum credit you can claim each tax year for each qualified employee.

 Table 6. Rate and Maximum Credit Each Tax Year for Each

 

 Long-Term Family Assistance Recipient

 

 

                Maximum

 

                                          Qualified    Maximum

 

                                 Rate     Wages        Credit

 

  ------------------------------------------------------------

 

  Qualified first-year wages     35%      $10,000      $3,500

 

  Qualified second-year wages    50%      $10,000      $5,000

 

 

Qualified first-year wages. Qualified first-year wages are qualified wages you pay or incur for work performed by a long-term family assistance recipient during the 1-year period beginning on the date the individual begins work for you.

Qualified second-year wages. Qualified second-year wages are qualified wages you pay or incur for work performed by a long-term family assistance recipient during the 1-year period beginning on the day after the last day of the first-year wage period.

Successor employer. If you are a successor employer, the 1-year period for qualified first-year wages begins on the date the employee first began work for the previous employer. The 1-year period for qualified second-year wages begins on the day after the last day of that first-year wage period. Any qualified first-year wages paid by the successor employer are reduced by the qualified first-year wages paid by the previous employer. Also, any qualified second-year wages paid by the successor employer are reduced by the qualified second-year wages paid by the previous employer. You are a successor employer if you acquire substantially all of the property used in a trade or business (or a separate unit thereof) of another employer (previous employer) and immediately after the acquisition you employ in your trade or business an individual who was employed immediately prior to the acquisition in the trade or business of the previous employer.

Claiming the credit. Use Form 8861 to claim this credit.

Effect on salary and wage deduction. In general, you must reduce the deduction on your income tax return for salaries and wages by the amount of your current year welfare-to-work credit (before applying the tax liability limit).

Effect on empowerment zone and renewal community employment credits. Wages you use to claim the welfare-to-work credit cannot be used to figure the empowerment zone or renewal community employment credits. In addition, they reduce the maximum wage amount you can use to figure either of those credits.

Effect of work opportunity credit. You cannot claim both the welfare-to-work credit and the work opportunity credit for the same employee during the same tax year.

Effect of New York Liberty Zone business employee credit. You cannot claim both the welfare-to-work credit and the New York Liberty Zone business employee credit for the same employee during the same tax year.

More information. For more information about the welfare-to-work credit, see Form 8861.

Indian Employment Credit

The Indian employment credit provides businesses with an incentive to hire certain individuals who live on or near an Indian reservation. Your business does not have to be in an empowerment zone, enterprise community, or renewal community to qualify for this credit. You can claim the credit if you pay or incur "qualified wages" to a "qualified employee."

Caution. At the time this publication was printed, this credit was set to expire for tax years beginning after 2004.

Qualified employee. A qualified employee, for any tax period, is any employee who meets all the following tests.

 

Also, more than 50% of the wages you pay or incur to the employee during the year must be for services performed in your trade or business.

Nonqualified employees. The following individuals are not qualified employees.

 

Qualified wages. Qualified wages are any wages you pay or incur for services performed by an employee while the employee is a qualified employee (defined earlier). Wages are generally defined as wages (excluding tips) subject to the Federal Unemployment Tax Act (FUTA) without regard to the FUTA dollar limit.

Also treat as qualified wages any qualified employee health insurance costs you pay or incur on behalf of a qualified employee. However, do not include any amount you pay or incur for health insurance under a salary reduction arrangement.

The total amount of qualified wages (including qualified employee health insurance costs) you can use to figure the credit cannot be more than $20,000 for each employee each tax year.

Effect of work opportunity credit. Qualified wages do not include any amount you pay or incur for work performed by a qualified employee during the 1-year period beginning on the date the individual begins work for you, if you use any part of these wages to claim the work opportunity credit.

Amount of credit. In most cases, the credit is 20% of the excess of your current year qualified wages and qualified employee health insurance costs over the sum of the corresponding amounts you paid or incurred during calendar year 1993.

Claiming the credit. Use Form 8845 to claim this credit.

Effect on salary and wage deduction. In general, you must reduce the deductions on your income tax return for salaries and wages and health insurance costs by the amount of your current year Indian employment credit (before applying the tax liability limit).

Early termination of employee. Generally, if you terminate a qualified employee sooner than 1 year after the date of initial employment, you cannot claim a credit for that employee for the tax year the employment is terminated. Also, you may have to recapture credits allowed in earlier years.

These rules do not apply in the following situations.

 

More information. For more information about the Indian employment credit, see Form 8845.

Depreciation of Property Used on Indian Reservations

Depreciation is a loss in the value of property over the time the property is being used. You can get back your cost of certain property by taking deductions for depreciation. This includes the cost of certain buildings and equipment you use in your business.

Special depreciation rules apply to qualified property that you place in service on an Indian reservation after 1993 and before 2005. These special rules allow you to use shorter recovery periods to figure your depreciation deduction for qualified property. As a result, your deduction is larger. Your business does not have to use the property in an empowerment zone, enterprise community, or renewal community to use these special rules.

Caution. The special depreciation rules that apply to qualified Indian reservation property is set to expire for property placed in service after 2004. However, at the time this publication was issued, Congress was considering legislation that would apply the special rules for property placed in service in 2005. See What's Hot in Tax Forms, Pubs, and Other Tax Products at http://www.irs.gov/formspubs to find out if this legislation was enacted.

Qualified property. Property eligible for the shorter recovery periods is 3-, 5-, 7-, 10-, 15-, and 20-year property and nonresidential real property. You must use this property predominantly in the active conduct of a trade or business within an Indian reservation. Real property you rent to others that is located on an Indian reservation is also eligible for the shorter recovery periods.

The following property is not qualified property.

 

Qualified infrastructure property. Item (1) above does not apply to qualified infrastructure property located outside the reservation that is used to connect with qualified infrastructure property within the reservation.

Qualified infrastructure property is property that meets all the following requirements.

 

Infrastructure property includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications facilities.

Recovery periods. The following table shows the shorter recovery periods you can use to depreciate qualified property.

Table 7. Recovery Periods for Qualified Property

                                  Recovery

 

  Property Class                  Period

 

  ----------------------------------------

 

  3-year                           2 years

 

  5-year                           3 years

 

  7-year                           4 years

 

  10-year                          6 years

 

  15-year                          9 years

 

  20-year                         12 years

 

  Nonresidential real property    22 years

 

 

More information. For more information about depreciation, including the special rules that apply to property used on Indian reservations, see Capital Gain Exclusion for DC Zone Assets

If you hold a District of Columbia Enterprise Zone (DC Zone) asset more than 5 years, you will not have to include any "qualified capital gain" from its sale or exchange in your gross income. This exclusion applies to an interest in, or property of, certain businesses operating in the District of Columbia.

DC Zone asset. A DC Zone asset is any of the following.

 

Caution. In determining whether any property is a DC Zone asset, continue to treat the DC Zone as an empowerment zone for years after 2003.

DC Zone business stock. DC Zone business stock is any stock in a U.S. corporation that is originally issued after 1997, if all the following requirements are met.

 

Redemptions of business stock. Stock will not qualify as DC Zone business stock if the issuing corporation makes certain redemptions of its stock within 2 years before or 2 years after the date the stock was issued. For details, see sections 1400B(b)(2)(B) and 1202(c)(3) of the Internal Revenue Code.

DC Zone partnership interest. A DC Zone partnership interest is any capital or profits interest in a U.S. partnership that is originally issued after 1997, if all the following requirements are met.

 

Redemptions of partnership interest. A partnership interest will not qualify as a DC Zone partnership interest if the partnership makes certain acquisitions of its partnership interests within 2 years before or 2 years after the date the partnership interest was issued. For details, see sections 1400B(b)(3), 1400B(b)(2)(B), and 1202(c)(3) of the Internal Revenue Code.

DC Zone business property. DC Zone business property is tangible property acquired after 1997 that meets all the following requirements.

 

Special rule for substantially improved buildings. Buildings (and land on which they are located) will be treated as having met requirements (1) and (4) if you substantially improve the buildings before 2004. You substantially improve a building if, during any 24-month period beginning after 1997, your additions to the basis of the property are more than the greater of the following amounts.

 

DC Zone business. A DC Zone business for this capital gains exclusion is an enterprise zone business as defined earlier under Increased Section 179 Deduction in the discussion of empowerment zones, with the following exceptions.

 

Qualified capital gain. Qualified capital gain is any gain recognized on the sale or exchange of a DC Zone asset that is a capital asset or property used in a trade or business as defined in section 1231(b) of the Internal Revenue Code (generally real property or depreciable personal property). But it does not include any of the following gains.

 

Other rules. Rules similar to certain rules in section 1202 of the Internal Revenue Code apply to interests in pass-through entities, certain tax-free transfers, contributions to capital after the original stock issuance date, and short positions.

How To Get Tax Help

You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.

Contacting your Taxpayer Advocate. If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate.

The Taxpayer Advocate independently represents your interests and concerns within the IRS by protecting your rights and resolving problems that have not been fixed through normal channels. While Taxpayer Advocates cannot change the tax law or make a technical tax decision, they can clear up problems that resulted from previous contacts and ensure that your case is given a complete and impartial review.

To contact your Taxpayer Advocate:

 

For more information, see Publication 910, Guide to Free Tax Services. It contains a list of free tax publications and an index of tax topics. It also describes other free tax information services, including tax education and assistance programs and a list of TeleTax topics.

Internet. You can access the IRS website 24 hours a day, 7 days a week, at http://www.irs.gov to:

 

You can also reach us using File Transfer Protocol at ftp.irs.gov.

Fax. You can get over 100 of the most requested forms and instructions 24 hours a day, 7 days a week, by fax. Just call 703-368-9694 from your fax machine. Follow the directions from the prompts. When you order forms, enter the catalog number for the form you need. The items you request will be faxed to you.

For help with transmission problems, call 703-487-4608.

Long-distance charges may apply.

Phone. Many services are available by phone.

 

Walk-in. Many products and services are available on a walk-in basis.

 

Mail. You can send your order for forms, instructions, and publications to the Distribution Center nearest to you and receive a response within 10 workdays after your request is received. Use the address that applies to your part of the country.

 •   Western part of U.S.:

 

 Western Area Distribution Center

 

 Rancho Cordova, CA 95743-0001

 

 

 •   Central part of U.S.:

 

 Central Area Distribution Center

 

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 Bloomington, IL 61702-8903

 

 

 •   Eastern part of U.S. and foreign addresses:

 

 Eastern Area Distribution Center

 

 P.O. Box 85074

 

 Richmond, VA 23261-5074

 

 

CD-ROM for tax products. You can order IRS Publication 1796, Federal Tax Products on CD-ROM, and obtain:

 

Buy the CD-ROM from National Technical Information Service (NTIS) on the Internet at http://www.irs.gov/cdorders for $22 (no handling fee) or call 1-877-233-6767 toll free to buy the CD-ROM for $22 (plus a $5 handling fee). The first release is available in early January and the final release is available in late February.

CD-ROM for small businesses. IRS Publication 3207, Small Business Resource Guide, is a must for every small business owner or any taxpayer about to start a business. This handy, interactive CD contains all the business tax forms, instructions and publications needed to successfully manage a business. In addition, the CD provides an abundance of other helpful information, such as how to prepare a business plan, finding financing for your business, and much more. The design of the CD makes finding information easy and quick and incorporates file formats and browsers that can be run on virtually any desktop or laptop computer.

It is available in early April. You can get a free copy by calling 1-800-829-3676 or by visiting the website at http://www.irs.gov/smallbiz.