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Location, Location, Location

Where your business is located may make you eligible for federal, state and local tax breaks.

Thinking of relocating your business? Expanding to another location? You may qualify for both federal and state tax benefits designed to encourage business growth in economically–challenged areas.

Federal breaks

The federal government has several different designations for which a business may be eligible. Each designation has its unique tax benefits.

  • Empowerment zones in urban and rural areas throughout the country. Note: There is a special zone for parts of the District of Columbia and the Borough of Manhattan within the area of the former World Trade Center (called the New York Liberty Zone).
  • Enterprise communities in 49 urban areas and 28 rural areas.
  • Renewal communities.
Pending: Congress is considering special designation of a Gulf Zone to extend tax breaks to businesses affected by Hurricane Katrina.

You may be in a designated area and are unaware of it. Use the address locator at the Department of Housing and Urban Development (HUD) web site.

Designation means tax savings

Depending on the type of designation you obtain, you may qualify for:

  • Special employment tax credits for each new employee you take on. For example, in empowerment zones, there is a 20% credit of wages up to $15,000 per employee, for a maximum credit of $3,000.
  • Additional first–year expensing of equipment. Instead of the $105,000 expensing limit in 2005 for the purchase of equipment, you can write off up to $140,000 of equipment purchased for a business in an empowerment zone or renewal community (instead of having to depreciate the cost over a number of years).
  • Full capital gain exclusion for all of the gain from the sale of assets held more than five years, including stock, a partnership interest and business property, within renewal communities and the DC Zone.
  • Increased exclusion of gain from qualified small–business stock — 60% rather than the basic 50% exclusion — for empowerment zones.

For more information about federal tax breaks for designated businesses, see IRS Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities, at www.irs.gov and HUD's Tax Incentive Guide for Businesses.

State and local breaks

Many states have their own designations for distressed areas, such as Empire Zones in New York and Keystone Opportunity Zones in Pennsylvania. You can learn about designations in your state through the commerce department or contact your local government, redevelopment departments, or industrial development corporations listed in your local telephone directory. Benefits for businesses that obtain designation may include:

  • Employment tax credits for creating jobs.
  • Sales tax abatement on purchases used in the zone.
  • Property tax credits or abatements.
  • Investment incentives (special deductions and/or credits) for purchasing equipment.
  • Technical assistance.
For more information about tax incentives under your state's program, contact your state tax, revenue or finance department.

A true tale of a small-business owner's journey to designation

Tina Raymond, the owner of Gardens, LLC, a silk flower and trim business in Mt. Vernon, New York, learned of New York's program for Empire Zone designation through her landlord. Inquiring at City Hall, she completed the application on her own and received Empire Zone designation from New York six months later. Her observations on the process:

  1. Hearing about the opportunity for designation is hit or miss (it's not well publicized).
  2. There's no government help in completing the forms (there may be some assistance through a local chamber of commerce).
  3. The breaks resulting from designation are not necessarily automatic (in some cases you need to take additional steps that aren't very clear).
  4. Using an expert attorney or accountant to help navigate the process can cost as much as the benefits to be realized.
Read more about author and tax expert, Barbara Weltman.


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