Zone Benefits

In 1986, legislation created the Economic Development Zones Program to stimulate growth in New York State's economically distressed areas. A major feature of the program was tax incentives for employers who provided jobs in areas designated as economic development zones. In 1993, new legislation, effective for tax years beginning on or after January 1, 1994, made major revisions to the tax incentives for employers who provide jobs, and for taxpayers who invested in areas designated as Economic Development Zones (now known as Empire Zones).

Wage Tax Credit

The program allows a wage tax credit, under the Tax Law for the franchise taxes on business, bank and insurance corporations and the personal income tax, to taxpayers certified pursuant to Article 18-B of the General Municipal law, based on the number of full-time employees (limited to those who receive economic development zone wages for more than one-half of the tax year) they employ in their Empire Zone (EZ) business. This credit is $1,500 for targeted employees paid at least 135% of the minimum wage specified in section 652 of the Labor Law and $750 for other individuals employed in jobs located in an area designated or previously designated as an EZ. This credit may be taken for up to five consecutive years, beginning with the first tax year in which EZ wages are paid. (Starting on January 1, 2001, the amounts will double from $750 to $1,500 and from $1,500 to $3,000 for non-targeted and targeted employees, respectively)

To qualify for the credit, the average number of individuals (excluding general executive officers) employed full-time by the taxpayer in the state and the EZ, or an area previously designated as an EZ must exceed the average number of individuals (excluding general executive officers) employed full-time in the state and EZ, or area subsequently or previously designated as an EZ in the four years (or a shorter period, if full-time employment was for a period of less than four years) immediately preceding the first tax year in which EZ wages are paid.

The amount of the tax credit and carryovers of the credit deducted may not exceed 50% of the tax imposed under the franchise taxes (the 50% of the tax imposed on insurance corporations is subject to the limitation of section 1505) or personal income tax (with the tax being computed without regard to any credit provided by franchise tax or personal income tax provisions). Any portion of the credit not deducted by reason of the above 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.

In lieu of carrying over the unused wage tax credit, a new business taxed as a business corporation (Article 9-A), or the owner of a new business taxed under personal income tax (Article 22), located in an EZ may elect to treat 50% of the wage tax credit carryover as a tax overpayment in the tax year the credit was allowed and have the overpayment refunded or credited against any outstanding tax liability.

Example 1

In 1994, Wonder Widget Works, Inc. (Wonder), at its facility located in an EZ, employed both targeted and non-targeted individuals. In the first year that Wonder qualified to claim the wage tax credit, it hired and paid EZ wages to 10 individuals who were targeted employees paid at least 135% of the minimum wage and 30 non-targeted individuals paid the minimum wage. Its first year credit is $37,500 computed as follows:

  • 1. $1,500 x 10 targeted employees paid at least 135% of the minimum wage = $15,000
  • 2. $750 x 30 non-targeted employees paid the minimum wage = 22,500 Total Credit Available $37,500
The first year credit is deducted as follows:
  • Tax imposed pursuant to section 209 (computed without regard to any credits) $10,000
  • Credit deductible (limited to 50% of the tax imposed pursuant to section 209) 5,000
  • Carryover of credit to following year or years ($37,500 less $5,000) $32,500.

**If Wonder Widget qualifies as a new business it may claim 50% of the carryover credit as an overpayment in the tax year in which the credit was earned and have that amount refunded or credited against any outstanding tax liability.

Investment Tax Credit

Production property, industrial waste treatment facilities, and air pollution control facilities, and research and development property acquired or built in an EZ may qualify for the EZ Investment Tax Credit (EZ-ITC) of 10% for business corporations (Article 9-A) or 8% for personal income tax (Article 22). However, this credit 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 base or the fixed dollar minimum. For franchise tax and personal income tax, any amount of the credit that cannot be used in a given year may be carried forward to the following year or years until used up. A new business may elect to treat 50% of the EZ-ITC carryover as an overpayment in the year in which the credit was allowed and have the overpayment refunded or credited to any outstanding tax liability. This credit does not apply to property leased by a taxpayer to someone else.

Example 2

Wonder Widget Works, Inc. (Wonder), which has met all the criteria for claiming the Empire Zone Investment Tax Credit (EZ-ITC), is expanding its operations in an EZ in 1994. Its new facility will cost $1,000,000 to build, and the necessary machinery and equipment will cost another $500,000. Wonder's EZ investment tax credit for 1994 is as follows:

  • Building cost $1,000,000
  • Machinery and equipment cost $500,000
  • Total investment $1,500,000
  • EZ-ITC (10% for 1994) $150,000

If Wonder were a sole proprietorship or partnership, the credit would be $120,000 ($1,500,000 multiplied by 8%).

Employment Incentive Credit

The franchise tax on business corporations (Article 9-A) provides that an additional 3% credit (30% of the EZ Investment Tax Credit) may be allowed in each of the three years following the year in which the EZ Investment Tax Credit was taken. To qualify for this second credit, known as the EZ Employment Incentive Credit (EZ-EIC), the taxpayer must employ in the EZ (excluding general executive officers) at least 101% of the average number of people employed in the year before the EZ Investment Tax Credit was claimed.

Like the Investment tax credit, the EZ-EIC may not reduce the tax due to less than the higher of the tax on the minimum taxable income base or the fixed dollar minimum, but any amount of unused credit may be carried forward to the following year or years.

Example 3

Using the information from Example 2 and assuming in addition that Wonder Widget Works, Inc. {Wonder) will hire new employees in 1994 and meet the 101% test described previously, Wonder's EZ-EIC is computed as follows:

  • EZ Investment Tax Credit (EZ-ITC) for 1994 $150,000
  • EZ-EIC for 1995 (30% of EZ-ITC) $45,000
  • EZ-EIC for 1996 (30% of EZ-ITC) $45,000
  • EZ-EIC for 1997 (30% of EZ-ITC) $45,000

If Wonder were a sole proprietorship or partnership, no credit would be available since the additional credit applies only to the franchise tax on business corporations (Article 9-A).

Zone Capital Credit

The Tax law regarding franchise taxes and personal income tax was amended, for tax years beginning on or after January 1, 1994, to allow the EZ Capital Credit for qualified investments or contributions to an EZ capital corporation, qualified investments in certified zone businesses and contributions of money to cer1ain community development projects. The new EZ capital tax credit is 25% of the following investments and contributions certified by the commissioner of Economic Development:

  • 1. Qualified investments made in, or contributions in the form of donations made to, one or more EZ capital corporations.
  • 2. Qualified investments in certified EZ businesses that during the 12-month period immediately preceding the month in which the investments were made, employed full time within the state an average number of individuals (excluding general executive officers) of 250 or fewer, computed the same as for the Wage Tax Credit. However, investments made by or on behalf of an owner of the business, including, but not limited to a stockholder, partner, or sole proprietor, or any related person, as defined in IRC 465(b)(3)(C) are not qualified investments.
  • 3. Contributions of money to community development projects as defined by regulations promulgated by the commissioner of Economic Development.
    • Qualified investment means:
  • 1. The contribution of property to a corporation for original issue capital stock or other ownership interest.
  • 2. The contribution of property to a partnership for a partnership interest
  • 3. The contribution of property to any other type of business entity for an ownership interest.

The total amount of credit allowable to a taxpayer for all years, taken in the aggregate, may not exceed $300,000, and may not exceed $100,000 for the investments and contributions described in each of 1, 2, and 3 above. For franchise tax, the credit or carryover of the credit 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. For personal income tax, the credit or carryover of the credit may not exceed the tax imposed pursuant to section 601, less the household credit, the credit for certain household and dependent care services necessary for gainful employment, the credit for income tax paid to another state, and the credit for a resident or nonresident trust beneficiary receiving an accumulation distribution. Any amount of unused credit may be carried forward to the following year or years. However, the amount of credit or carryover of the credit, deducted from the tax otherwise due, may not in the aggregate exceed 500/0 of the taxes imposed under: (1) the franchise taxes (the 500/0 of the tax imposed on insurance corporations is subject to the limitation of section 1505); or (2) the personal income tax (with the tax being computed without regarding to any credit provided by franchise tax or personal income tax provisions).

Example 4

Wonder Widget Works, Inc. (Wonder) made a qualified investment of $30,000 in a business located in an EZ during 1994. Wonder's franchise tax for the calendar year 1994 is $6,000. Wonder's EZ Capital Tax Credit for 1994 is computed as follows:

Qualified investment means:
  • $30,000 investment x 25% (rate of credit) $7,500
  • 1994 limitation (50% of tax of $6,000) $3,000
  • Credit carryover ($7,500 -$3,000) $4,500

(If Wonder's tax, computed without credits. were $15,000 or more in 1994, it could deduct the entire $7,500 in 1994.)

The basis of the stock, partnership interest or other ownership interest arising from a qualified investment for which the credit is allowed must be reduced by the amount of the credit when the stock or interest is disposed of. An early disposition of an ownership interest or the recovery of a contribution or investment that was the basis of the credit (during the tax year the ownership interest was acquired or the contribution or investment was made, or within 36 months from the close of the tax year) requires an addback of a portion of such credit claimed in the year of disposition or recovery.

The addback in the year of disposition or recovery is computed as follows:

  • 1. 100% of the credit if disposition or recovery occurs within the tax year for which the credit was allowed or within 12 months of the end of that tax year.
  • 2. 67% of the credit if disposition or recovery occurs more than 12 months but not more than 24 months from the end of the tax year in which the credit was allowed.
  • 3. 33% of the credit if disposition or recovery occurs more than 24 months but not more 36 months from the end of the tax year in which the credit was allowed.

Sales Tax Refund

Purchases of building materials used in connection with industrial or commercial property (other than property used or to be used exclusively by one or more registered vendors primarily engaged in the retail sale of tangible personal property) located in an EZ are exempt from state sales tax through a refund or credit process. This exemption does not apply if the property is to be used exclusively by one or more retail vendors.

Example 6

A contractor is repairing and enlarging a building in a designated EZ in Amsterdam, New York. When completed, a company that manufactures dresses will occupy the building’s three upper floors. The first floor will house a retail outlet for the dresses.

The contractor's purchases include lumber, bricks, cement, lighting fixtures, electric drills, saws, ladders and a new heating system to be installed in the building. Some of the lumber will be used for scaffolding. Sales tax must be paid on these items at the time of purchase.

However, since the building is not being used exclusively for retail establishments, the contractor can get a refund or credit for the state sales tax paid on his purchase of bricks, cement, lighting fixtures, the new heating system, and that portion of the lumber that becomes an actual part of the building (i.e., not the scaffolding). No refund is allowed for the tools and ladders.

The refund or credit provision does not apply to taxes imposed by cities, counties or school districts, unless those jurisdictions elect otherwise.

This provision for a refund or credit does not apply to the sales tax imposed for the benefit of the Municipal Assistance Corporation for the City of New York, or to the sales tax imposed for the Metropolitan Commuter Transportation District. If, in Example 6 above, the building were located in an EZ in New York City, the contractor could get a refund of the 4% state sales tax, but not the 4% imposed for the Municipal Assistance Corporation or the 1/4% imposed for the Metropolitan Commuter Transportation District.

485e

Section 485e of the Real Property Tax Law allows for an abatement of increases in real property taxes that result from the construction or improvement to property located in a zone for a period of up to ten years. All types of real property located in an EDZ are eligible for this abatement including residential property. EDZ certification is not required.

The 485e option selected by all taxing jurisdictions in the Amsterdam-Florida-Glen Empire Zone provides for a ‘soft landing’ 10-year abatement program beginning the year in which the property was improved, without regard to the expiration of the zone. Each taxpayer will receive a full 10-year abatement at 100% for seven years after the property was improved, decreasing 25% in each of the following three years.

Example 7

Property improved in 2002 will be eligible for an abatement according to the following schedule:

  • 2002 – 2009 = 100% abatement
  • 2010 = 75% abatement
  • 2011 = 50% abatement
  • 2012 = 25% abatement
  • The property will be fully taxed in 2013.

The following definitions apply to the terms used in this publication:

Empire Zone (EZ) Wages Wages a taxpayer pays (but not to general executive officers) for full-time work at a job that was created in an area designated or previously designated as an EZ while the area was so designated or within four years of the expiration of the designation.

Targeted Employee A New York State resident who receives EZ wages and who (1) is an eligible individual under the Federal Targeted Jobs Tax Credit Act; or (2) is eligible for benefits under the Job Training Partnership Act; (3) received public assistance benefits at any time within the previous two years; (4) has income that is below the U.S. Commerce Department's established poverty level; or (5) is a member of a family whose income is below the poverty level.

New Business Article 9-A, section 210.120), defines a new business as any corporation except:

1. A corporation in which over 50% of the number of shares of stock entitling their holders to vote for the election of directors or trustees is owned or controlled directly or indirectly by a taxpayer subject to the tax under Article 9-A; section 183, 184,185, or 186 of Article 9; Article 32 or 33 of the Tax law;

2. A corporation that is substantially similar in operation and in ownership to a business entity or entities taxable or previously taxable under Article 9-A; section 183, 184, 185, or 186 of Article 9; Article 32 or 33; or Article 23 or that would have been subject to tax under Article 23, as such article was in effect on January 1, 1980, or the Income (or losses) of which is (or was) includable under Article 22 of the Tax Law whereby the intent and purpose of paragraph (e) of section 210.19 with respect to refunding of credit to new business would be evaded;

3. A corporation that has been subject to tax under Article 9-A for more than four years (excluding short periods) before each tax year during which the taxpayer becomes eligible for the EZ Investment Tax Credit or EZ Wage Tax Credit (that is, the year or which the credit is allowed). Owner of a new business -under Article 22, section 606(a)(10), an individual who is either a sole proprietor or a member of a partnership qualifies as an owner of a new business unless:

A. The individual has previously received a refund of an EZ Wage Tax Credit;

B. The business of which the individual is an owner is substantially similar in operation and in ownership to a business entity taxable, or previously taxable under section 183, 184, 185 or 186 of Article 9, Article 9-A, 32, 33 or Article 23 or which would have been subject to tax under Article 23 (as such article was in effect on January 1, 1980) or the income (or losses) of which is (or was) includable under Article 22 whereby the intent and purpose of paragraph 5 of section 606(k) with respect to refunding of credit to new business would be evaded; or

The individual has operated the new business entity for more than four years prior to the first day of each tax year during which he or she becomes eligible for the EZ Wage Tax Credit or the EZ Investment Tax Credit for which the refund is claimed with respect to such new business entity.