Empire Zones Cultivating New York Businesses

By Emily N. Spiegel

In Brief

Making New York Ripe for Business

Two years ago, New York State overhauled its former Economic Development Zone program, establishing Empire Zones: specific geographic areas in which the state wants to foster certain types of business growth and is offering various tax credits and incentives to make it happen.

The eligibility requirements are straightforward, and although some of the incentives and credits are governed by complicated rules, the benefits—many of which extend out for 14 years—are considerable, including credits on investment taxes, wage taxes, and property.

More information on New York State’s Economic Development Zones/Empire Zones program is available online at www.empire.state.ny.us or by contacting Empire State Development at (800) STATE-NY or (800) 782-8369.

The Empire Zone (EZ) program is part of the former Economic Development Zone program that was expanded and redeveloped in 2000. The key aims of the EZ program are to revitalize and develop certain economically depressed areas of New York State, encourage business investment, create employment opportunities, and improve the New York economy. There are currently 56 EZs throughout the state. These geographic areas generally have large vacant land areas, existing industrial and commercial infrastructure, a skilled workforce, and plentiful power and water resources.

New York State offers numerous tax incentives and rebates for qualifying businesses located within Empire Zones. These benefits enable taxpayers in certain businesses to operate virtually free of New York State income taxes and real estate taxes for up to 15 years. Eligible business activities include manufacturing; refining; building construction and rehabilitation; investment advisory services; sales of stocks, bonds or securities; and loan origination activities. For taxpayers involved in these activities, locating to an EZ may provide the cost-savings necessary to make a business venture worthwhile.

To become eligible for benefits as a Qualified Empire Zone Enterprise (QEZE), a business must become certified and meet an annual employment test. The employment test is satisfied if the employment number within the EZ for the test year equals or exceeds the employment number within the EZ for the base period, and the employment number in New York State outside of the EZ for the test year equals or exceeds the employment number in New York State outside of the EZ for the base period. The employment number is the average number of individuals employed full-time by the business for at least one-half of the taxable year. The base period is the five taxable years immediately before the end of the year in which the business becomes certified.

A business becomes certified and eligible for benefits by filing an application with the Commissioner of Taxation and Finance, who verifies that the applicant has met the employment test for the first taxable year. For a new enterprise creating new jobs in New York State, the employment number in the base period is zero, effectively ensuring that the business satisfies the test. If an existing business is operating in a newly designated EZ, the employment numbers for the base period are determined as if the new EZ had been in existence for the base period. If a business has been in existence for less than five years, the base period is the business’ lifespan. Once the base period employment numbers are computed, the taxpayer is not required to refile information with the commissioner. However, taxpayer certification is subject to audit and the entity may be requested to provide this information.

Investment Tax Credit

Both corporate and personal taxpayers are eligible for a credit of 10% and 8%, respectively, of the cost of qualified property located in an EZ. Qualified property includes buildings and structural components of buildings that meet all of the following criteria:

• They are depreciable for federal tax purposes.
• They have a useful life of four or more years.
• They are acquired, constructed, or erected by the taxpayer during the time when the area is designated as an EZ. If property is acquired during the period in which an area is first designated as an EZ or is completed after a designation has expired, the credit is allowed only for the period of time the area is an EZ. This is usually computed by taking the ratio of total costs incurred while an EZ to total costs incurred for the acquisition, construction, or erection of the property.
• They are acquired by purchase, defined as any acquisition of property from unrelated parties in which the basis of property in the hands of the transferee is not determined by reference to the basis in the hands of the transferor. Generally, property acquired in a non-taxable exchange will not satisfy this requirement.
• They are located in an EZ
• They are—
• used for the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, or commercial fishing
• an industrial waste treatment or air pollution control facility used in the taxpayer’s trade or business
• research and development property
• principally used in the ordinary course of the taxpayer’s business as a broker or dealer in connection with the purchase or sale of stocks, bonds, or other securities or commodities or in providing lending, loan arrangement, or loan origination services to customers in connection with the purchase or sale of securities
• principally used in the ordinary course of the taxpayer’s business of providing investment advisory services for a regulated investment company
• principally used in the ordinary course of the taxpayer’s business as an exchange within the meaning of the Securities Exchange Act of 1933, or as an entity wholly owned by an exchange providing technical services to the exchange.

Property used for the last three purposes listed above must be placed in service on or after October 1, 1998, and before October 1, 2003, and all or a substantial portion of the employees performing administrative and support functions related to the qualifying uses of the property must be located in New York State. To meet this requirement, the average number of employees performing these functions in New York during the credit year must be equal to or greater than 95% of the average number of employees performing these functions during the 36 months immediately preceding the credit year. Administrative and support employees are not brokers, dealers, or investment advisors; generally, any employee whose compensation is based more than 50% on commissions will be considered a broker, dealer, or investment advisor.

Taxpayers are allowed to take the EZ Investment Tax Credit in the year that the qualified property is placed in service. This credit has some limitations. For corporate taxpayers, the tax reduction is limited to the greater of the fixed dollar minimum tax or the tax on minimum taxable income base. Personal taxpayers (i.e., individuals and resident estates and trusts) are prohibited from taking the regular Investment Tax Credit if they take the EZ Investment Tax Credit. Taxpayers that dispose of qualified property before the end of its depreciable life may be required to recapture a portion of the credit. This does not, however, apply to property that has a useful life longer than 12 years and has been in service for more than 12 years. As a rule of thumb, only real property and land improvements have a useful life longer than 12 years.

Corporate and personal taxpayers may carry forward unused credits indefinitely. However, a taxpayer that has lost its certification as a qualified EZ business by failing the employment tests may only carry forward the credit for seven years.

Employment Incentive Credit and Wage Tax Credit

The EZ Employment Incentive Credit is available to corporate and personal taxpayers that claim the EZ Investment Tax Credit. This credit is equal to 30% of the allowable EZ Investment Tax Credit and may be taken for the three taxable years immediately following the year in which the investment credit is taken. To qualify, the taxpayer’s average number of employees in the EZ must be at least 101% of the average number of employees employed in the Zone during the taxable year preceding the one in which the EZ Investment Tax Credit was allowed. If the business is in its first year, the EZ Employment Incentive Credit is allowed if the average number of employees in the EZ for the taxable year is 101% of the number of employees in the EZ during the year the investment credit was allowed.

The EZ Wage Tax Credit is available to taxpayers that employ targeted employees on a full-time basis. The credit ranges from $750 to $3,000 per full-time employee who works in the EZ. To qualify for this credit, the average number of full-time employees that the taxpayer employs in the EZ must exceed the average number of full-time workers employed in the EZ during the four years immediately preceding the first year in which the credit is claimed. In addition, certain criteria regarding income levels, public assistance programs, and employee hourly rates must be satisfied.

As with other EZ credits, the total amount of credits allowed to taxpayers has limitations. For businesses, the EZ Employment Incentive Credit cannot reduce tax below the level of the fixed dollar minimum tax. For personal taxpayers, the credit allowed cannot exceed the amount of New York State tax due. The EZ Wage Tax Credit cannot exceed 50% of the tax imposed on the business without regard to any credit or surcharge. In addition, this credit is allowed for up to five consecutive years, beginning with the year that the employment requirements are first satisfied. Disallowed EZ Employment Incentive or EZ Wage Tax credits may be carried forward to future tax years.

Credit for Real Property Taxes

Taxpayers that are QEZEs are eligible for a credit against corporate or personal income taxes for real property taxes paid on real estate located in an EZ, beginning on or after January 1, 2001. This credit is available for a 14-year period.

This credit is allowed to the QEZE, the sole proprietor of a QEZE, a shareholder of an S-corporation that is a QEZE, a partner of a QEZE partnership, or a member of a QEZE limited liability company that pays real property taxes on property located in an EZ.

In the first 10 years, the credit is equal to the product of an employment increase factor and the real estate taxes paid by the QEZE. In year 11, the taxpayer is allowed 80% of this amount, and each year thereafter the allowable credit decreases by 20%, to zero after year 14. The employment increase factor takes into account increases in the number of full-time employees during the credit years as compared to the year before the taxpayer was certified as a QEZE.

A corporation’s allowed credit is limited to the fixed dollar minimum tax for the year, and an individual taxpayer’s credit is limited to the amount of New York State tax due. Any credit not used in the current year due to these limitations may be refunded or credited to the following year.

Sales and Use Tax Incentives

Taxpayers that construct, rehabilitate, or expand industrial or commercial structures located in an EZ are entitled to a credit for sales or use tax paid on building materials. This credit applies only to building materials that become an integral part of a structure located in an EZ, and only to the 4% New York State portion of the sales or use tax, not to any local taxes.

This sales tax benefit is available to taxpayers that perform a variety of activities in an EZ, including restoration work, replacement or repair of heating and plumbing systems, removal or change of building exits and entrances, fire or structural safety work, removal or modification of structural beams, erecting a building on a vacant lot, razing old structures, and erecting new replacement structures. General maintenance work and minor repairs do not qualify.

In general, the individual liable for the applicable sales tax is eligible to claim the refund or credit (e.g., a tenant who improves leased space or a contractor hired for improvements). Taxpayers must meet the following criteria to qualify for this credit:

• Only industrial and commercial properties qualify for this credit. Industrial property is defined as property used primarily for the manufacturing, processing, assembling, or generating of goods, and may include factories, manufacturing plants, and refineries. Commercial property is defined as income-producing property, and may include hotels, restaurants, office buildings, food stores, and banks. Residential property does not qualify.
• The taxpayer’s activities must result in the construction of new industrial or commercial property, or in the rehabilitation of existing industrial or commercial property.
• Property used for retail space does not qualify for the credit if the property is used exclusively for retail sales. Mixed-use buildings do qualify, however, and the sales tax paid on the entire project’s building materials is eligible for the credit, including the portion attributable to the retail space.

Miscellaneous Provisions and Credits

New business refund. New corporations and owners of new flow-through entities may elect to treat 50% of EZ Investment Tax Credits and EZ Wage Tax Credits available for carryover as an overpayment of tax and claim a refund for that amount. Any credits available after this refund are carried forward. This refund does not apply to the EZ Employment Incentive Credit; those amounts not deducted in the current year can only be carried forward.

Utility rate savings. Businesses operating in an EZ may be eligible for reduced electricity and gas rates.

Tax reduction credit. Qualified businesses and owners of qualified flow-through entities may be eligible for a credit against income tax for a percentage of taxes attributable to the EZ. This percentage is called the zone allocation factor and represents the taxpayer’s economic presence within the EZ. It is computed by adding the following two amounts:

• The average value of the taxpayer’s real and tangible personal property in the EZ during the taxable year divided by the average value of all the taxpayer’s real and tangible personal property within the state. Average value is the adjusted basis of property for federal income tax purposes, as well as eight times the gross rents payable for rented property.
• The value of wages and salaries during the taxable year of the business’ employees in the EZ divided by the total wages and salaries of all the business’ employees within the state.

The tax reduction credit is the product of the zone allocation factor, the employment increase factor, and the tax factor. The employment increase factor takes into account increases in the number of full-time workers employed by the taxpayer between the credit years and the year before the taxpayer was certified as a qualified zone enterprise, and the tax factor is equal to the New York State tax paid by corporations, individuals, or estates. The credit is available for a 14-year period and phases out along the same schedule as the credit for real property taxes described above.

Capital tax credit. Taxpayers may qualify for a credit of 25% of the investments and contributions to certain EZ corporations and community development projects.

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