Renee Khoury

Friday, 30 August 2002 06:54

New tax credit

 

On Dec. 21, 2000, the Community Renewal Tax Relief Act of 2000 was signed into law, providing $15 billion in tax incentives under the New Markets Tax Credit Program to help spur economic growth in new markets in urban and rural communities.

By making an equity investment in an eligible Community Development Entity (CDE), investors can receive a New Markets Tax Credit worth more than 30 percent of the amount invested over the life of the credit, in present value terms.

The program, overseen by the Community Development Financial Institutions Fund, was implemented because although markets in inner cities and distressed rural areas possess enormous untapped economic potential, growing businesses in these communities are unlikely to attract the attention of venture capitalists who generally work within their existing relationships and communities. CDEs can offer a lucrative incentive to invest in those areas.

Businesses apply for CDE certification by forming a subsidiary to apply for certification or by working with existing CDEs. Entities already certified as either a Community Development Financial Institution or a Specialized Small Business Investment Company only need to register, rather than apply for certification. Small businesses can visit www.cdfifund.gov to determine which entities in their area have received CDE designation.

To qualify, an entity must be a domestic corporation or partnership with a primary mission of serving or providing investment capital for low-income communities or persons, and that maintains accountability to residents through their representation on a governing or advisory board. CDEs may be nonprofit or for-profit, but only for-profits can provide tax credits to investors.

The entity must also explain how it will maintain accountability through the board -- how board members will be selected, how often it will meet and solicit feedback from residents of low-income communities, etc. The accountability requirement allows residents and business owners to be heard in the development of their communities.

Once an entity is certified, it may apply for an allocation of credits that it can make available to investors. The administrators at the fund say the allocation application process will be competitive. Once a CDE receives and issues credits to investors, investors receive a tax credit equal to a percentage of the cash paid to the CDE. These investments are transferable to other qualified investors.

The credit is available for seven years, unless a CDE ceases to be qualified, the proceeds of the investment cease to be used as required or the investment is redeemed by the CDE. These are called recapture events, and carry severe penalties.

As of June 20, 2002, there were 11 entities certified to offer tax incentives for investments in low-income communities in Ohio. These entities provide businesses in low-income areas with additional financing options.

The New Market Tax Credit Program is an excellent vehicle for providing low-risk investment opportunities and infusing capital into areas that are often overlooked. Small businesses, particularly those with significant operations in inner cities or distressed rural areas, should strongly consider seeking help from their CDEs. Renee C. Khoury is an attorney with the Columbus office of Vorys, Sater, Seymour and Pease LLP, tax group, (614) 464-6400.
Thursday, 31 October 2002 10:23

Inviting incentives?

The state of Ohio offers sizable business tax incentives to relocate, expand or remain here.

Not only are tax incentives offered to reduce or eliminate a portion of corporate franchise taxes, tangible personal property taxes, real property taxes, and sales and use taxes, but numerous programs offer low-interest loans and grants. Often, these can be combined into packages to induce a business to relocate or expand in one area over another. In return, the taxpayer creates or retain a certain number of jobs or invests a certain amount of money by an agreed upon date.

Over the last decade, smart business owners have increasingly used business tax incentives offered by the city of Columbus. The Columbus City Council approved incentive packages in 1992, 1993 and 1994. Similarly, the Village of Urbancrest, just outside Columbus, has granted five incentive packages in the last five years.

One of the more common incentive programs is the Community Reinvestment Area, or CRA. CRAs are areas in which housing facilities or structures of historical significance are located, and new housing construction and repair of existing facilities or structures is discouraged due to the distressed nature of the area. The community may grant up to a 100 percent exemption of the improved real property tax valuation for up to 15 years, depending on the project.

CRAs only grant exemptions from taxes on real property improvements, not on land and personal property, so businesses should consider combining this program with other tax incentives to create a package. The Ohio Job Creation Tax Credit and the warehouse machinery and equipment sales tax exemption are examples of other incentives that can be combined with a real property tax exemption.

However, executives face losing tax incentives if their business does not hold up its end of the bargain. Incentive agreements are typically reviewed each year by a community's tax incentive review council, which consists of people including the mayor, the county auditor, a city council representative and officials from affected school districts.

The council recommends maintaining, reducing or eliminating incentives. It relies on the companies to provide job and financial information that indicates whether the company is living up to its commitments.

Until recently, most companies have met or exceeded their obligations and maintained their incentive packages. However, the economic downturn has led to some businesses failing to meet their obligations -- a local tax incentive review council recently cut a tax abatement by 10 percent each year over 10 years after the company cut its new construction in half.

A review council can also recommend the company pay back incentives it has already used.

A company can also lose incentives due to poorly drafted agreements. One company lost an exemption because the agreement contained a clause stating that no exemption would commence after a specific date. Unfortunately, the property was not used in the business -- and thus not eligible for the exemption -- until after that date.

Businesses must be careful when entering into incentive agreements. Agreements must be carefully scrutinized, and businesses must be realistic about their ability to produce jobs and make investments. Careful drafting and conservative forecasts can keep a business off the hot seat with a local tax incentive review council and ensure that its agreements will withstand scrutiny. Renee C. Khoury is an attorney with the Columbus office of Vorys, Sater, Seymour and Pease LLP, tax group. Reach Khoury at (614) 464-6400.

Tuesday, 03 September 2002 11:13

New tax credit

On Dec. 21, 2000, the Community Renewal Tax Relief Act of 2000 was signed into law, providing $15 billion in tax incentives under the New Markets Tax Credit Program to help spur economic growth in new markets in urban and rural communities.

By making an equity investment in an eligible Community Development Entity (CDE), investors can receive a New Markets Tax Credit worth more than 30 percent of the amount invested over the life of the credit, in present value terms.

The program, overseen by the Community Development Financial Institutions Fund, was implemented because although markets in inner cities and distressed rural areas possess enormous untapped economic potential, growing businesses in these communities are unlikely to attract the attention of venture capitalists who generally work within their existing relationships and communities. CDEs can offer a lucrative incentive to invest in those areas.

Businesses apply for CDE certification by forming a subsidiary to apply for certification or by working with existing CDEs. Entities already certified as either a Community Development Financial Institution or a Specialized Small Business Investment Company only need to register, rather than apply for certification. Small businesses can visit www.cdfifund.gov to determine which entities in their area have received CDE designation.

To qualify, an entity must be a domestic corporation or partnership with a primary mission of serving or providing investment capital for low-income communities or persons, and that maintains accountability to residents through their representation on a governing or advisory board. CDEs may be nonprofit or for-profit, but only for-profits can provide tax credits to investors.

The entity must also explain how it will maintain accountability through the board -- how board members will be selected, how often it will meet and solicit feedback from residents of low-income communities, etc. The accountability requirement allows residents and business owners to be heard in the development of their communities.

Once an entity is certified, it may apply for an allocation of credits that it can make available to investors. The administrators at the fund say the allocation application process will be competitive. Once a CDE receives and issues credits to investors, investors receive a tax credit equal to a percentage of the cash paid to the CDE. These investments are transferable to other qualified investors.

The credit is available for seven years, unless a CDE ceases to be qualified, the proceeds of the investment cease to be used as required or the investment is redeemed by the CDE. These are called recapture events, and carry severe penalties.

As of June 20, 2002, there were 11 entities certified to offer tax incentives for investments in low-income communities in Ohio. These entities provide businesses in low-income areas with additional financing options.

The New Market Tax Credit Program is an excellent vehicle for providing low-risk investment opportunities and infusing capital into areas that are often overlooked. Small businesses, particularly those with significant operations in inner cities or distressed rural areas, should strongly consider seeking help from their CDEs. Renee C. Khoury is an attorney with the Columbus office of Vorys, Sater, Seymour and Pease LLP, tax group, (614) 464-6400.