Federal Renewal Communities

In recent years, provisions have been added to the Internal Revenue Code that target specific geographic areas for special tax incentives.  The special tax incentives afforded these areas are designed to attract business and investment to distressed urban and rural areas.  As part of the Community Renewal Tax Relief Act of 2000, 40 renewal communities were designated by the Department of Housing and Urban Development.

Overview of Community Renewal Tax Relief Act of 2000:

• In recent years, provisions have been added to the Internal Revenue Code that target specific geographic areas for special tax incentives.  The special tax incentives afforded these areas are designed to attract business and investment to distressed urban and rural areas.
• State & local governments nominated areas for designation as Renewal Communities
• Secretary of HUD designated Renewal Communities by December 31, 2001
• Federal Tax Incentives will be available January 1, 2002 through December 31, 2009

Summary of Federal Renewal Community Tax Incentives

Renewal Community Employment Credit

• IRC Sec. 1400H
• Hire individuals who live and work in renewal community
• Can be used for current employees or new hires
• Maximum credit of $1,500 per qualified employee with qualified wages
• Qualified employee:
• Performs substantially all services for you within renewal community & within your trade or business
• While performing services, has main home within that renewal community
• Nonqualified employee:
• Employed for less than 90 days
• Certain related taxpayers, dependents, & 5% owner
• Employed in certain jobs
• Part of General Business Credit, but calculation for RC employment credit will be made separately and under a different formula.
• Form 8844, Empowerment Zone Employment Credit, has been revised to include RC employment credit.
• Wage deduction reduced by credit

Increased Section 179 Deduction for Renewal Communities

• IRC Sec. 1400J
• Additional $35,000 for renewal community business
• For 2002, the maximum dollar amount for a renewal community business was $59,000.
• For 2003 – 2005, the maximum dollar amount for a renewal community business will be $135,000. (In 2004 & 2005 this figure will be adjusted for inflation.)
• For 2006 – 2009, the maximum dollar amount for a renewal community business will be $60,000.
• Must be a renewal community business
• Must be a qualified business
• Must purchase qualified renewal property
• Investment limit applies

Commercial Revitalization Deduction for Renewal Communities

• IRC Sec. 1400I
• Treat expenses for qualified revitalization building either by:
• Deducting half of the expenses for tax year building is placed into service or
• Amortize all of the expenses over 120 month period beginning with month building placed into service
• Building cannot be residential rental property or property with a class life of less than 27.5 years.  Class lives listed in Appendix B of IRS Pub. 946.
• This means that to qualify, a rental building must have less than 80% of its gross rental income from dwelling units.
• Only a few buildings have a class life of less than 27.5 years.  These include farm buildings and service station buildings.
• Allowed for both regular tax and AMT
• Remaining expenditures depreciated over regular depreciation recovery period of 39 years (except Indian reservation property which is 22 years)
• Must be qualified revitalization building
• Commercial buildings located in Renewal Community that are constructed, purchased, or substantially rehabilitated
• Substantial rehabilitation expenditures must exceed greater of adjusted basis or $5,000 within a 24-month period selected by taxpayer - IRC Sec.  47(c) (1) (C)
• Unless the taxpayer substantially rehabilitates the building, the taxpayer must place the building in service and be the original user.  For substantially rehabilitated buildings, the taxpayer must place the building in service after the rehabilitation.
• Dollar limit - cannot be more than the smaller of:
• $10 million or
• The commercial revitalization amount allocated to the building by the commercial revitalization agency (CoRA) for the state in which the building is located
• Allowed for both regular tax and AMT

Capital Gain Exclusion for Renewal Communities

• IRC Sec. 1400F
• Qualified community asset
• Qualified community stock
• Qualified community partnership interest
• Qualified community business property 
• Held for more than 5 years
• Do not have to include “qualified capital gain” from sale or exchange

How Freed Maxick & Battaglia, CPAs Can Help

We offer the following Renewal Community Services:

• Tax planning and consultation re: qualifying for various Renewal Community (RC) Program benefits as well as remaining eligible for such benefits in future years
  
• Determination of employees qualifying for RC employment tax credits (- for their employer)
  
• Preparation of the annual tax form necessary to claim the RC employment credit
  
• Determine eligibility for the RC commercial revitalization deduction
  
• Preparation of the application for the RC commercial revitalization deduction
  
• Determine eligibility for the RC capital gain exclusion
  

Renewal Community Contact Information:

 

  

Don Warrant, CPA	Dave Barrett, CPA