Empire Zone Benefits

Empire Zone Wage Tax Credit

The Empire Zone wage tax credit is available to an EZ certified business that creates new employment at its Zone facility. A taxpayer is considered to be certified on the first day of the taxpayer's taxable year that the taxpayer applied for certification.

To qualify for the credit, the average number of individuals (excluding General Executive Officers) employed by the employer full time in the State and the Zone must exceed the average number employed in the four years immediately preceding the first tax year the Zone wages are paid. If the business is a start up business or did not have full time employment for four years, the average would be calculated on the shorter period of time. Full time employment means a job consisting of at least 35 hours per week, or two or more jobs that together constitute the equivalent of a job of at least 35 hours per week. The employee must receive EZ wages for more than half of the current tax year, or for a seasonal job the employee must receive EZ wages for a three-month period.

Individual's employed by a related person (as related person is defined in IRC section 465(b)(3)(c), in an empire zone within the immediately preceding sixty months are not included in the calculation of average number of employees unless the related person was never allowed a wage tax credit for that employee. This provision applies to tax years beginning on or after January 1, 2002.

Taxpayers that have shifted operations or a portion thereof from an area within New York State, that is not an EZ, to an area that is an EZ, and have been certified, will be eligible to include the employees that have been shifted from the area that is not an EZ when determining the amount of the EZ wage tax credit, provided the taxpayer has also met the other eligibility requirements to claim the EZ wage tax credit.

The tax credit is $3000 for targeted employees paid at least 135% of the minimum wage, and $1500 for other individuals employed in the newly created job paying at least the minimum wage. A targeted employee may include individuals who are disabled, dislocated workers, Vietnam veterans, recipients receiving public assistance, persons whose income is below the poverty level and those who are eligible for On the Job Training programs.

The amount of the tax credit and carryovers of the credit deducted may not exceed 50% of the tax imposed under the franchise taxes (50% of the tax imposed on insurance companies subject to the limitation of Section 1505) or personal income tax. Any portion of the credit not deducted may be carried forward and deducted in the following year or years. For franchise tax, the credit or carryover of the credit also may not reduce the tax to an amount less than: (1) the tax due on the minimum taxable income base or the fixed dollar minimum, whichever is higher, for business corporations; (2) the alternative minimum tax for banking corporations; (3) the fixed dollar minimum for insurance corporations.

The EZ wage tax credit is allowable for up to five consecutive taxable years. The five consecutive taxable years (including taxable years of less than 12 months) begin in the first taxable year that EZ wages are paid and the level of employment is met. For taxpayers certified in more than one EZ, the five year period begins in the first tax year the taxpayer's business meets all eligibility requirements. Subsequent certifications in different EZ's do not extend the five-year period for claiming the wage tax credit.

A taxpayer that qualifies as a new business may elect to treat 50% of the amount of the credit available for carryover as an overpayment of tax. The election is made on the return for the taxable year that the credit was allowed (the taxable year the EZ wage tax credit was earned). The overpayment may be refunded. No interest will be paid on the overpayment. The amount of the credit available for carryover after the claiming of the refund is not available for refund in future years.

To claim the EZ wage tax credit, complete Form IT(CT)-601, Claim for EZ Wage Tax Credit, and attach it to the appropriate business corporation, banking corporation or insurance corporation franchise tax or personal income tax return.

Investment Tax Credit

The Tax Law allows an EZ investment tax credit against the tax imposed by Articles 9-A and 22, for the tax year during which qualified property is placed in service in the EZ designated area, to EZ certified companies.

Qualified property means tangible personal property and other tangible property, including buildings and structural components of the building that:

Property that qualifies for ITC based on items (4), (5) or (6) above must be property that is placed in service before October 1, 2003.

Generally property that will be leased to others does not qualify for the ITC. However, a lessee in a safe harbor lease agreement is allowed the credit as long as the property meets the eligibility rules as described.

There is no clear ruling in cases where a tenant makes leasehold improvements to the property. It is recommended that a written opinion be obtained from the NYS Dept of Taxation & Finance prior to claiming the ITC.

The credit is equal to 10% for business corporations or 8% for personal income tax.

The ITC cannot reduce the franchise tax due from business corporations for any year to less than the higher of the tax on the minimum taxable income or the fixed dollar minimum amount.

For business corporation franchise tax and personal income tax purposes, any amount of credit not used in any year may be carried forward to the following year or years and deducted from the tax for those years. However, a taxpayer that has been decertified may carry forward the tax credits for only 7 years from the taxable year that the credit is originally allowed.

A taxpayer that qualifies as an owner of a new business for purposes of the business corp franchise tax or for purposes of personal income tax may elect to treat 50% of the carryover amount as an overpayment of tax. The election is made on the return for the taxable year that the credit was allowed. No interest is paid on the overpayment. The amount of the credit available for carryover after claiming the refund is not available for refund in future years.

The Tax Law has been amended to expand and clarify the definition of an owner of a new business to include a taxpayer that has previously received a refund of the ITC. The amendment also makes it clear that a taxpayer qualifies as a new business during its first five taxable years, excluding short taxable years.

To claim the EZ Investment Tax Credit, complete Form IT(CT)-603, Claim for EZ Investment Tax Credit and EZ Employment Incentive Credit, and attach it to the appropriate business corporation or banking corporation income tax return.

Employment Incentive Credit

An Employment Incentive Credit is available to businesses that have utilized the Investment Tax Credit and creates new employment in the three years immediately following the tax year the credit was allowed. The credit each year is equal to 30% of the allowable EZ Investment Tax Credit.

To be eligible, the average number of Zone employees, excluding general executive officers, must be at least 101% of the average number of employees employed in the Zone during the year preceding the taxable year for which the EZ investment tax credit was allowed.

If the taxpayer did not have a taxable year preceding the taxable year the ITC was allowed, then 101% of employment must be met during the taxable year in which the ITC is allowed.

The employment incentive credit cannot reduce the corporate tax liability to an amount less than the higher of the tax on minimum taxable income or the fixed dollar minimum. This credit is allowed in conjunction with claiming the wage tax credit.

Personal income taxpayers (including S Corps, partnerships and beneficiaries of an estate or trust) may claim the employment incentive credit, applicable to any investment tax credit computed on property placed in service, whether or not deductible in such taxable year.

Any incentive credit that cannot be used in a current tax year may be carried over to the following year or years.

A personal income taxpayer that qualifies as an owner of a new business may elect to have 50% of the carryover refunded.

A Corporation may not claim a refund on the employment incentive credit.

To claim the Employment Incentive Credit complete Form IT(CT)-603, Claim for EZ Investment Tax Credit and EZ Employment Incentive Credit, and attach it to the appropriate tax return.

Qualified Empire Zone Enterprise Tax Credits (QEZE)

On May 15, 2000, Governor Pataki signed legislation amending the Tax Law to provide enhanced benefits under the Empire Zone program. These new benefits are referred to as the "QEZE" benefits. The benefits include a credit for eligible real property taxes, a tax reduction credit against business and personal income taxes and a sales tax exemption for purchases and uses of tangible personal property and services by the EZ business.

To achieve the QEZE benefits, a certified business must meet an employment test. To meet the employment test, the company's employment in and out of the Zone must equal or exceed the company's employment in and out of the Zone during the base period.

Each year a company must meet this test to take advantage of the QEZE credits in that taxable year.

General Definitions

Taxable year means the taxable year of the business enterprise under Article 9-A (Franchise Tax on Business Corporations), 22 (Personal Income Tax), 32 (Franchise Tax on Banking Corporations) or 33 (Franchise Tax on Insurance Corporations) of the Tax Law.

Employment number means the average number of individuals (excluding general executive officers, in the case of a corporation) employed full time by the business enterprise for at least one- half of the taxable year. The number of these individuals who are employed full-time by the business enterprise for at least one-half of the taxable year is computed by (1) determining the number of individuals so employed on March 31, June 30, September 30 and December 31 during the applicable taxable year, (2) adding together the number of such individuals determined on each of those dates, and (3) dividing the sum by the number of such dates occurring within the applicable taxable year. Employed full-time means a job consisting of at least 35 hours per week and includes two or more jobs which together constitute the equivalent of a job of at least 35 hours per week.

Effective for tax years beginning on or after January 1, 2002, any individual who was employed in the preceding sixty months by a related person to the QEZE (as related person is defined in IRC section 465(b)(3)(c) is excluded in the employment number.

Test date means the later of July 1, 2000, or the date prior to July 1, 2005, on which the business enterprise becomes certified under Article 18-B of the General Municipal Law.

Test year means the last taxable year of the business enterprise ending on or before the test date.

Base period means the five taxable years immediately before the test year. If a business enterprise has fewer than five taxable years before the test year, then the term base period means the smaller set of taxable years. In the case of a new business enterprise that is first doing business and creating jobs in New York State, the employment numbers in the base period are zero. For QEZEs that have a base period of zero years and an employment number in empire zones greater than zero, the employment test will be met only if the QEZE meet the following new business test:

• An individual who is either a sole proprietor or a partner of a partnership (including a member of an LLC, if the LLC is treated as a partnership for Federal income tax purposes), shall qualify as an owner of a new business unless the business of which the individual is an owner is substantially similar in ownership and operation to a business entity (or entities) that is:

Taxable, or previously taxable under sections 183, 184, 185, or 186 of Article 9;

Taxable, or previously taxable under Articles 9-A, 32,33, 23;

Taxable under Article 23, or would have been taxable under Article 23 as that Article was in effect on January 1, 1980; or

Had income or losses that are (or were) included in computing the personal income tax under Article 22.

A shareholder of a New York S corporation shall be treated as the owner of a new business if the corporation qualifies as a new business under Article 9-A of the Tax Law (see TSB-M-02(5)C).

The new business test applies to a taxpayer's business certified under Article 18-B of the General Municipal Law on or after August 1, 2002.

Note: The employment numbers in the base period remain constant and do not have to be recomputed each time that the employment test is determined.

Real Property Tax and Tax Reduction Benefit Period

The benefit period begins on the date that the Empire Zone certificate is issued.

The benefit period is for 15 years. For the first 10 years, a benefit period factor used to calculate the credits is 1.0 (or 100%). For years 11-14, the benefit factor decreases by 20%. Example:

QEZE Credit for Real Property Taxes

Qualified Empire Zone Enterprises (QEZE) are allowed a refundable credit against business tax equal to a percentage of real property taxes paid in the Zone. To be eligible, the QEZE must own the real property located in the Empire Zone and pay the real property taxes (or make payments in lieu of taxes) on the real property in the tax year in which the credit is being claimed. The property taxes are paid to the locality and school district and claimed as a credit on NYS income taxes. The credit is based on a formula that is the product of three factors:

(i.e., (1) x (2) x (3) = amount of QEZE credit for real property taxes.)

How to compute the factors:

Determine the employment increase factor

The greater of the following is used:

• (a) The excess of the taxpayer's employment number in the Zone for the taxable year, over the taxpayer's TEST YEAR employment in the Zone, divided by the TEST YEAR employment number in the Zone; or
• (b) The excess of the taxpayer's employment number in the Zone, over the taxpayer's TEST YEAR employment number in the Zone, divided by 100.

Note: When the taxpayer's employment number in the Zone for the taxable year exceeds the taxpayer's employment number in the zones for the test year and the test year employment number is zero, the employment increase factor will be 1.

Determine real property taxes paid

Real property taxes are taxes paid to municipal and school districts including PILOT agreements.

The QEZE must be the property owner, and must be the entity paying the taxes.

The taxes must be paid during the current taxable year.

Determine the benefit factor

Refer to the benefit period factor table and determine what year from the date of certification applies to this taxable year.

The credit is available for up to 14 years to taxpayers that continue to qualify. The credit is only available for those taxable years for which the employment test is met. For a new business who is the owner of the real property located in the Empire Zone, the credit will equal 100% of the real property taxes paid for up to 10 years, phasing out over the next 5 years by 20% per year.

The real property tax credit may reduce the QEZE's tax liability below the alternative minimum, or the fixed dollar minimum, to zero. To the extent the credit is not utilized, the credit is 100% refundable.

A limitation on the amount of QEZE Real Property Tax Credit which may be claimed in a tax year was added for businesses that are certified under Article 18-B of the General Municipal Law on or after August 1, 2002.

The credit shall be limited to the greater of the following amounts:

• The employment increase limitation, calculated by multiplying the increase in the employment number in the empire zones in which the QEZE is certified by $10,000 or
• The capital investment limitation, calculated at 10% of the cost or other basis of real property, owned by the QEZE and located in an empire zone in which the QEZE is certified, multiplied by the greater of:

The sum of the percentage of physical occupation of the real property by the QEZE and the percentage of physical occupancy of the real property by a related person to the QEZE as related person is defined in IRC section 465(b)(3)(c) or

The percentage of the cost or other basis attributable to the construction, expansion or rehabilitation of the real property (as opposed to the acquisition). If 50 percent or more of the cost or other basis is attributable to the construction, expansion or rehabilitation of the real property (as opposed to the acquisition), then the percentage of physical occupation by the QEZE shall be deemed to be 100 percent.

The cost or other basis is the greater of:

• The cost or other basis for federal income tax purposes on the later of January 1, 2001, or on the effective date of certification under Article 18-B of the General Municipal Law; or
• The cost or other basis for federal income tax purposes on the last day of the tax year.

Any business enterprise certified under Article 18-B of the General Municipal Law before August 1, 2002 is not subject to this limitation in any year of the business tax benefit period.

To claim the EZ real property tax credit, complete Form IT(CT)-604, Claim for QEZE Real Property Taxes and QEZE Tax Reduction Credit, and attach it to the appropriate business corporation, banking corporation or insurance corporation franchise tax or personal income tax return.

QEZE Tax Reduction Credit

A QEZE is allowed a tax credit against NYS corporate, personal income, banking or insurance corporation taxes based on increased business activity within the Empire Zone.

The credit is the product of the following four factors:

(i.e., (1) x (2) x (3) x (4) = amount of QEZE tax reduction credit.)

Definitions -- Zone Allocation Factor

The Zone allocation factor is the percentage that represents the taxpayer's economic presence in Empire Zones in which the taxpayer is certified.

The percentage is calculated by adding the two percentages determined in (1) and (2) below and then dividing the result by 2. Where a taxpayer has only one percentage to determine from either (1) or (2) below, that percentage should be used as the Zone allocation factor.

The tax factor is:

The credit will be available for each of the 14 taxable years next following the test year for which the employment test is met.

To claim the EZ tax reduction credit, complete form IT(CT)-604, and attach it to the appropriate business corporation, banking corporation or insurance corporation franchise tax or personal income tax return.

Note: For purposes of all the Articles listed above, any amount of the credit not deductible in the current taxable year may not be credited or refunded to the taxpayer.

EZ Sales Tax Exemption

An exemption from the 4% NYS sales and use taxes for tangible personal property sold to a qualified Empire Zone enterprise (QEZE) is available. The exemptions do not apply to any locally imposed sales and use taxes unless the county, city, or school district imposing those taxes elects to provide the exemptions. Counties, cities, and school districts may elect to provide the exemptions (or repeal them) effective March 1 of each year.

In addition to certification and meeting the employment test, every QEZE that seeks sales and use tax exemption benefits is also required to apply to the Commissioner of Taxation and Finance for a Qualified Empire Zone Enterprise Certification (Form DTF-80). The application for a QEZE certification must be approved and the certification issued before any exemption benefits may be claimed. The application must be made on Form DTF-80, Application for Qualified Empire Zone Enterprise (QEZE) Certification, and must be filed with the Department of Taxation and Finance at the address indicated in the application. Along with any other required information, the application must contain the employment test worksheet to verify that the employment test has been met for the first taxable year. A certified business may hold off applying for the sales tax exemption certificate until the employment test has been met.

The sales and use tax exemptions are available for the 10 taxable years next following the test year, provided the QEZE annually meets the employment test. The company "self determines" if it is eligible for the exemption based upon meeting the employment test on an annual basis. To meet the employment test, the business must equal or exceed its base period employment both in the Zone and outside the Zone in New York State for the taxable year immediately prior to the tax year you are in.

Once the QEZE has received a QEZE certification from the Commissioner of Taxation and Finance, the business is then required to furnish all vendors a properly completed QEZE Exempt Purchase Certificate (Form ST-121.6) in order to purchase qualifying tangible personal property and services exempt from tax.

This exempt certificate may be used as a single purchase certificate or as a blanket certificate covering future purchases.

All tangible personal property eligible for the sales and uses tax exemption must be predominately (50% or more) used or consumed by the qualified business in the EZ, including:

• Motor vehicles if they are predominately used by the qualified business or if they predominately originate and terminate at the Zone facility or a combination of both;
• All tangible personal property sold to a contractor, sub-contractor or repairman in erecting, improving or repairing, maintaining or servicing a building, structure or real property owned by a qualified business.

All services must be used directly and exclusively by the qualified business in the EZ including utilities.

Excluded from the exemption are: food, drink, hotel occupancy, and amusement charges.

Addendum

The information below represents the Internal Revenue Service's interpretation of the definition of "related person" in section 465(b)(3)(C) of the Internal Revenue Code. Section 465 concerns the limitations on deductions to the amounts at-risk and the information below is contained in IRS Publication 925, Passive Activity and At-Risk Rules - For use in preparing 2001 Returns. In future years, you should check this section to see if the definition of "related person" has been amended.

Related persons include:

• Members of a family, but only brothers and sister, half-brothers and half-sister, a spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc),
• Two corporations that are members of the same controlled group of corporations determined by applying a 10% ownership test,
• The fiduciaries of two different trusts, or the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts,
• A tax-exempt educational or charitable organization and a person who directly or indirectly controls it (or a member of whose family controls it).
• A corporation and an individual who owns directly or indirectly more than 10% of the value of the outstanding stock of the corporation,
• A trust fiduciary and a corporation of which more than 10% in value of the outstanding stock is owned directly or indirectly by or for the trust or by or for the grantor of the trust,
• The grantor and fiduciary, or the fiduciary and beneficiary, of any trust,
• A corporation and a partnership if the same persons own over 10% in value of the outstanding stock of the corporation and more than 10% of the capital interest or the profits interest in the partnership,
• Two S corporations if the same persons own more than 10% in value of the outstanding stock of each corporation,
• An S corporation and a regular corporation if the same persons own more than 10% in value of the outstanding stock of each corporation,
• A partnership and a person who owns directly or indirectly more than 10% of the capital or profits of the partnership,
• Two partnerships if the same persons directly or indirectly own more than 10% of the capital or profits of each,
• Two persons who are engaged in business under common control, and
• An executor of an estate and a beneficiary of that estate.

To determine the direct or indirect ownership of the outstanding stock of a corporation, apply the following rules.

1) Stock owned directly or indirectly by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries.

2) Stock owned directly or indirectly by or for an individual's family is considered owned by the individual. The family of an individual includes only brothers and sisters, half-brothers and half-sisters, a spouse, ancestors, and lineal descendants.

3) Any stock in a corporation owned by an individual (other than by applying rule (2)) is considered owned directly or indirectly by the individual's partner.

4) When applying rule (1), (2), or (3), stock considered owned by a person under rule (1) is treated as actually owned by that person. But, if a person constructively owns stock because of rule (2) or (3), he or she does not own the stock for purposes of applying either rule (2) or (3) to make another person the constructive owner of the same stock.

EZ-Benefits Calculator

Download the EZ-Benefits Calculator file here. This will help you calculate your QEZE benefits.