Companies that hire and expand their operations in distressed markets can take advantage of several tax credits.
Contractors who are interested in doing business in a distressed market may be able to take advantage of several tax saving strategies. The key is to plan for the growth or expansion in advance to determine what opportunities may be available and to establish the best practices required to take advantage of these incentives.
What is a distressed market?
The first question most construction businesses address is: “What is a distressed market and how do I know if my business is located within one?” Distressed markets are typically identified either by county or by census tract, and have higher levels of unemployment, lower average wage per capita, and greater unemployment. They can be urban or rural areas, and determining whether a business or a new hire resides in one of these areas depends on the parameters of the program for which they are applying.
Federal Empowerment Zones, Urban Renewal Communities, and Indian Reservations
There are a variety of employment credits related to the location of either the construction business or the employees (or both).
- Federal Empowerment Zone Employment Credit: This credit provides businesses with an incentive to hire individuals who both live and work in an empowerment zone. The credit is 20 percent of the qualified wages paid or incurred during a calendar year (not to exceed $15,000 in wages or $3,000 in credit).
- Work Opportunity Tax Credit: A tax credit is allowed of up to $9,600 per eligible employee one time per business for hiring employees who are members of targeted groups. One such group requirement is that the employee is under the age of 40 and lives in an Empowerment Zone or Renewal Community. There are eight other categories under which a person can qualify for the credit, including certain veteran groups.
- There are also incentives to contractors that hire individuals who live on or near an Indian reservation. This credit applies to businesses that pay “qualified wages” to “qualified employees.” The employees are either enrolled members of an Indian tribe; performing substantially all of his or her services within an Indian reservation; or while performing those services, the employee has his or her main home on or near that reservation.
New market tax credits
Credits are also available for certain equity investments in a qualified community development entity. For purposes of the credit, a low-income community generally means any population census tract meeting two criteria:
- The poverty rate is at least 20 percent
- The median family income is not more than 80 percent of the greater of the statewide median family income or the metropolitan area median family income (if in a metropolitan area)
State and local governments also have designated enterprise zones. Depending on the state or locality, tax credits, bond financing, and other incentives and tax abatements may be available to a business investing in an enterprise zone.
Timing is key
Many contractors interested in these distressed community incentives only find out that they are in a distressed community after they have either made hiring decisions or capital expenditures in those communities. At that point, it is usually too late for a business to benefit from the incentives because the legislation allowing the benefits are driven by a “but for” clause saying that “but for” the incentive, the business would not locate in the distressed community.
For the hiring incentives, there is a legislated time frame during which a construction business needs to report to the various administrating agencies that they have hired a person who is eligible to generate the credit. Often, with the exception of tax extender legislation and associated transition relief, the business must report within a month of hiring a designated community resident.
How we can help
The lesson to be learned is that it is important to research these issues and discuss them with your tax consultant prior to making any substantial human or tangible capital investment. In many cases, a business can move across the street from a planned location into a designated “distressed community” and offset the cost of its investment substantially. Planning is important, and the earlier business owners can have these conversations with a consultant, the more time they will have to thoroughly consider all of the options and arrive at the strongest strategic decision.