CA Enterprise Zones-
Improved, Expanded and Additional Compliance
Over the past two years, the
California Enterprise Zone Tax Credit Program has witnessed significant changes,
including major expansions, new regulations and additional tax compliance
measures that will certainly affect CPAs across California. Some of the major
- Jan. 1, 2006- A significant court case was
decided by Board of Equalizations: Appeal of Deluxe Corporation,
giving the FTB the authority to audit the vouchers previously issued by
local administrative agencies.
- Nov. 3, 2006- Twenty-three EZs were either
renewed or expanded significantly.
- Jan 1, 2007- Housing and Community Development
Department (HCD) issued new vouchering regulations that standardized
- November 15, 2007- Franchise Tax Board (FTB)
issued Notice 2007-4 requiring new compliance requirements for tax credits
secured under contingency fee arrangements.
- Jan. 1, 2008- HCD implemented new state
- Jan 31, 2008- Gov. Schwarzenegger announced
eight new enterprise zones to boost California’s economy.
With the substantial geographic
expansions of existing EZs, new 15-year designations for both expiring and
entirely new EZs, plus improvements to the Hiring Credit vouchering process,
what do these changes mean to you?
Enterprise Zones- Significant Expansions the Past Two
Review your client list annually to determine if they
reside in a new or expanded EZ.
Between October 2006 and September 2008, 31 of
California’s 42 enterprise zones were scheduled to expire. At the conclusion of
a competitive bid process, HCD awarded five new enterprise zone designations and
re-designated 26 previous zones for an additional 15 years. Most of the
communities that received a re-designation were able to significantly expand the
enterprise zone boundaries of their original designation. For example,
Sacramento’s enterprise zone doubled in size to 3,500 acres. Los Angeles and
San Francisco substantially expanded their zones to include major portions of
their downtown financial districts. And Stanislaus County, one of the newest
enterprise zones, has expanded three times to approximately 67,000 acres.
HCD maintains the state’s official webite of EZ
street addresses, at www.hcd.ca.gov/fa/cdbg/ez/enterprise/#maps. While this site has not
posted the addresses of many of the new, conditionally designated zones, the
local communities have posted the addresses on their websites.
New Vouchering Regulations and Forms
Make sure you adhere to new documentation standards for
requesting an enterprise zone hiring credit voucher. “Cross-jurisdictional
vouchers” should be re-requested for the EZ in which the business is located.
On Jan. 1, 2007, the new
vouchering regulations, Secs. 8460-8467 of the California Code of Regulations,
Title 25, became effective. Among other things, these regulations impose new
documentation standards for requesting and obtaining the EZ Hiring Credit
voucher for qualified employees. Previous to the enactment of these
regulations, each of the local zone administrators were empowered to establish
their own documentation criteria, which created inconsistencies and, inevitably,
led some businesses to submit their voucher requests to zones with more lenient
standards, even thought he business was not located within that particular
zone. This practice, dubbed “cross-jurisdictional vouchering,” is now
In addition to the new
regulations, all new voucher requests submitted after Jan. 1, 2008, must use the
state’s new voucher application and certificate. Again, this was a move to
create consistency and standardization among the various zones that preciously
had required their own forms and eligibility checklists. The new voucher forms
are also available on the HCD website.
New Franchise Tax Board Compliance for Contingency Fee
Make sure you file the Form 8886 for any clients who secure
tax credits under a contingent fee arrangement. There is a $15,000 penalty per
year if you do not.
The FTB recently published Notice 2007-4
defining reporting requirements that may impact some of your EZ clients. As you
may know, many EZ businesses engage consulting firms to secure these tax credits
under a contingency fee arrangement. When a taxpayer pays consulting fees that
are contingent upon the taxpayer’s realization of tax benefits from certain
types of transactions, these transactions are reportable to the FTB on IRS Form
8886, Reportable Transaction Disclosure Statement. Not only does the
taxpayer need to file this form with the original tax return, but also a
duplicate copy must be mailed to FRB’s Abusive Tax Shelter Unit for the initial
year of participation.
Technically, this rule became effective for tax
years beginning Jan. 1, 2003. However, the FTB provided an amnesty period
through Nov. 15, 2007, to perfect all prior-year disclosures according to their
notice. The penalty for failing to disclose this transaction is steep: $15,000
for each transaction and for each year, according to RTC Sec. 19772.
However, the FTB is considering whether to
exempt the California Enterprise zone tax credits from this reporting
requirement in the future. Doing so would seem to conform to the federal
government’s exemptions for taxpayers who participate in federal hiring credit
programs, such as Empowerment Zones, Renewal Communities, and the Work
Opportunity Tax Credit.
FTB Enterprise Zone Litigation
Keep all supporting documentation used to secure an EZ
hiring credit voucher. The FTB is re-evaluating requests, even though they have
been approved by local enterprise zone officials.
The FTB has the authority to
request substantiation supporting enterprise zone hiring credit vouchers
submitted by a taxpayer claiming the EZ hiring credit. Upon audit of the EZ
Hiring Credit, the FTB will ask the taxpayer for the supporting documents used
to secure the voucher, in addition to requesting copies of the vouchers
themselves. If the supporting documentation is unavailable, the FTB may
disallow the voucher and the credits claimed for that employee.
I am aware of several anecdotal
cases in which the FTB auditor has been provided with the supporting
documentation used to obtain the voucher, but nonetheless determines that the
documentation is insufficient. In such cases, the FTB may require additional
supporting documentation or ultimately disallow the voucher if none can be
provided. In many cases where the vouchers were obtained seven or more years
ago, it could prove difficult to obtain supplemental supporting documentation,
particularly if the employee no longer works for the taxpayer.
The California Enterprise Zone program has undergone
tremendous changes in the past couple of years. Geographic expansions and new
zone designations will mean that more businesses can reap the program’s
benefits. Standardization of the program’s vouchering process will be a welcome
improvement over the uncertainties of the past.
Yet the FTB’s level of scrutiny of EZ credits is on the
rise, so taxpayers and their advisers must be evermore vigilant in determining
the appropriateness of each employee’s eligibility, consistent in their record
keeping and accurate in applying the credits to their tax return.
Joseph Abdallah, CPA, of Professional Solutions
Group LLC, specializes in the California Enterprise Zone Tax Credit Program. He
can be reached at