Success Story - Los Angeles

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Los Angeles Empowerment Zone: Combining Federal, State and local Tax Incentives Means Good Business in the Los Angeles EZ

The Department of Housing and Urban Development designated a distressed region in Los Angeles as an Empowerment Zone (EZ) in 1997, with the tax incentives for the EZ becoming available beginning January 1, 2000.

The EZ is maximizing its use of the federal tax incentives by marketing them as a package with state tax incentives and local business incentives. The EZ staff worked with a local consulting firm to develop a marketing brochure to illustrate for businesses how much they can save by using different combinations of EZ tax incentives. Two examples of businesses in the marketing brochure include a small bakery business and a large manufacturing business.
The following promotional material and scenario on using tax incentives appear in the marketing brochure. This example focuses on how a manufacturing firm can use the incentives.


Help Lower Your Costs of Doing Business This Tax Year

The Los Angeles Federal Empowerment Zone:

	A generous Employer Wage Credit
	EZ/EC Bonds
	Additional Section 179 Expensing
	Waiver of City Business Tax

City of Los Angeles State Enterprise Zone tax credits and incentives:

	Employee Hiring Tax Credits
	Business Expense Deduction
	Sales & Use Tax Credit
	Net Interest Deduction
	Net operating loss carry-forward
	DWP 5-year electrical discount
	Double dipping on the MIC & sales-and-use tax credit

A company designs and fabricates precision aerospace machine parts. On January 1, 2000, the business relocates from Glendale to the Los Angeles State Enterprise Zone and Federal Empowerment Zone. Relocation is to a larger, 180,000 sq. ft. building, which will allow the company to add 40 new hires to its current workforce of 190. As a result of its move, the company anticipates increasing its sales from $4 million to $13 million over the next five years.

During the year, the business buys new machinery and parts, including telecommunication equipment and computers, totaling $1.2 million.

Thirty-five of the anticipated new employees are TEA eligible, i.e. eligible under the California State Enterprise Zone Targeted Employment Area, and 20 of the new employees reside in the Los Angeles Federal Empowerment Zone.

The current workforce has 33 employees who are TEA eligible and were hired on January 1, 1999. Twenty current employees live in the EZ. Net income at the end of the year is $2 million. All employees earn $10.00 per hour.

Tax Analysis - Assumptions

• Of the 190 current employees, 53 were hired on January 1, 1999 and 40 on January 1, 2000
• Employees worked 2,080 hours in 1999 and 2000
• Aerospace company is doing business as a "C" corporation
• 8.25% sales tax paid on new machinery
• Business qualifies as an "enterprise zone" business for purposes of the federal Increased Section 179 expensing
• Company will have $2 million of net income for the Year 2000

Tax Liability (before tax incentives)

Taxable Income = $2,000,000
Federal Tax Liability (before tax credits) = $680,000 (@ 34% of $2,000,000)
California Tax Liability (before tax credits = $176,800 (@ 8.84% of $2,000,000)

I. Tax Incentives Calculations

Scenario A

53 current employees were hired on January 1, 1999. 33 are qualified under the TEA and 20 reside in the Federal EZ.

Federal EZ Wage Credit = $ 60,000
($60,000 = 20 qualified employees x $15,000 maximum qualified wages x 20% applicable credit)

Federal Increased Section 179 Deduction = $ 40,000 (based on purchase of $1.2 M of machinery)

California Enterprise Zone Hiring Credit = $236,808
($236,808 = 33 qualified employees x $17,940 qualified wages (2080 hours x $8.625 max.) x 40% applicable credit)

Scenario B

Of the 40 new hires on January 1, 2000, 20 reside in the Los Angeles EZ and 35 are TEA eligible.

Federal EZ Wage Credit = $120,000, for qualified employees hired 1/1/99 and 1/1/00
($120,000 = 40 qualified employees x $15,000 maximum qualified wages x 20% applicable credit)

Federal Increased Section 179 Deduction = $40,000 (based on purchase of $1.2 M of machinery)

California Enterprise Zone Hiring Credit = $550,758, calculated as follows:

(For qualified employees hired January 1, 1999, $236,808 = 33 qualified employees x $17,940 qualified wages (2080 x 8.625 max.) x 40% applicable credit)

(For qualified employees hired January 1, 2000, $313,950 = 35 qualified employees x $17,940 qualified wages (2080 x 8.625 max.) x 50% applicable credit)

California Enterprise Zone Sales and Use Tax Credit = $99,000
($99,000 = 8.25% x $1.2 million (cost of new machinery and parts))

California Manufacturer' Investment Credit (MIC) = $69,600
($69,600 = 6% x ($1,200,000 - $40,000) (non qualified MIC cost due to Increased Section 179
expensing))

II. Tax Liability (after tax incentives)

Scenario A

FEDERAL
Taxable Income = $2,000,000
Fed. Increased Section 179 Deduction = ( 40,000)
Fed. Taxable Income = $1,960,000

Fed. Tax Liability = $ 666,400 (@ 34%)
Less: Fed. Tax Credits = 60,000
Fed. Tax Liability = $ 606,400 Federal Tax Credit Carry-forward: $0

CALIFORNIA
Taxable Income = $2,000.000
CA Taxable Income = $2,000,000

CA Tax Liability = $ 176,800 (@ 8.84%)
Less: CA Tax Credits = ($ 176,800)

CA Tax Liability = $ 800

(*Tax Credit cannot reduce the minimum Franchise Tax of $800.)

Scenario B

FEDERAL
Taxable Income = $2,000,000
Fed. Increased Section 179 Deduction = ( 40,000)
Fed. Taxable Income $1,960.000

Fed. Tax Liability = $666,400 (@ 34%)
Less: Fed. Tax Credits = 120,000
Fed. Tax Liability = $546,400 Federal Tax Credit Carry-forward: $0

CALIFORNIA
Taxable Income = $2,000.000
CA Taxable Income = $2,000,000

CA Tax Liability = $ 176,800 (@ 8.84%)
Less: CA Tax Credits = ( 176,800)

CA Tax Liability = $ 800

(* Tax Credit cannot reduce the minimum Franchise Tax of $800.)

Savings

FEDERAL TAXES REDUCED BY $73,600, OR 11% (Scenario A)
FEDERAL TAXES REDUCED BY $133,600, OR 20% (Scenario B)
STATE TAXES REDUCED BY $176,000, OR 99% (Scenarios A and B)
OTHER BENEFITS:
DWP 5-YEAR ELECTRICAL DISCOUNT - 35% FIRST YEAR = $132,000.00 REDUCTION
CITY BUSINESS TAX LIABILITY: No business tax for 5 years; pay $25 yearly for 5 years.

Information on federal, state and local incentives is available on the web site for the Los Angeles EZ (http://www.cityofla.org/cdd/business/). The Los Angeles EZ has seen an increase in the number of hits on the web site since the federal tax incentives became available January 1, 2000. The state hiring credits, sales and use tax credits, and manufacturing investment credits were enacted as part of a state enterprise zone program before the EZ received the federal incentives.
The examples in the marketing materials are fictitious, but the EZ has many examples of actual use of the incentives. The EZ Bond program, for example, has already created 280 jobs and retained 171 more with just three projects: one at Wing Hing Noodle; another at MEGA Toys, Inc.; and a third at AAA Packing and Shipping. Many of those jobs are well-paying, skilled positions with full benefits. Since the bonds are purchased by private investors, and backed by Letters of Credit from commercial banks, no city or grant funds were at risk or expended to achieve the results.

These projects were funded when Los Angeles had to compete with other municipalities in the state for the bond allocations, and individual projects were limited to roughly $3 million in funding. Under the terms of the Federal Community Renewal Tax Relief Act of 2000, the City has received its own allocation of bond funds worth $230 million, to be used over the eight years for manufacturing, office, retail and other types of projects. The City already has four potential EZ bond projects in the pipeline, worth over $30 million, and all to be located in the EZ. Each project will be required to fill a minimum of 36 percent of the available jobs with EZ residents.

For more information on these successful tax incentives transactions in the Los Angeles EZ, please call Mr. Robert Perez, Program Coordinator for the EZ, at (213) 485-8161.