Commercial Revitalization Deduction

You can choose to treat qualified revitalization expenses chargeable to a capital account for any qualified revitalization building in either of the following ways:

1. Deduct half of the expenses for the tax year the building is placed in service, or
2. Amortize all the expenses over a 120-month period beginning with the month the building is placed in service.

Qualified revitalization building.   This is a building and its structural components that you place in service in a renewal community before 2010. If the building is new, the original use of the building must begin with you. If the building is not new, you must substantially rehabilitate the building and then place it in service.

Qualified revitalization expense.   This is an expense chargeable to a capital account for depreciable property that is:

1. Nonresidential real property, or
2. Section 1250 property that is related to nonresidential real property. Section 1250 property is depreciable real property that is not and never has been section 1245 property. Section 1245 property is defined in Publication 544, Sales and Other Dispositions of Assets.

Expenses that do not qualify.   The following do not count as revitalization expenses.

1. The cost of acquiring a building that you substantially rehabilitate, to the extent that cost is more than 30% of the total qualified revitalization expenses for the building (not counting the cost of the building itself).
2. Expenses you use to figure any allowable credit.

Dollar limit.   The total amount of qualified revitalization expenses for any qualified revitalization building cannot be more than the smaller of:

1. $10 million, or
2. The commercial revitalization expense amount allocated to the building by the commercial revitalization agency for the state in which the building is located.

More information.   For more information, see section 1400I of the Internal Revenue Code.

Capital Gain Exclusion

If you hold a qualified community asset more than 5 years, you will not have to include any qualified capital gain from its sale or exchange in your gross income. This exclusion applies to an interest in, or property of, certain businesses operating in a renewal community.

Qualified community asset.   The following are qualified community assets.

1. Qualified community stock.
2. Qualified community partnership interest.
3. Qualified community business property.

Qualified community stock.   This is any stock in a U.S. corporation, if all the following requirements are met.

1. You acquired the stock after December 31, 2001, and before January 1, 2010, at its original issue solely in exchange for cash. (This requirement is also met if you acquired the stock before, on, or after January 1, 2010, from another person in whose hands it was qualified community stock).
2. The corporation was a renewal community business (or was being organized as a renewal community business) at the time the stock was issued.
3. The corporation qualified as a renewal community business during substantially all of your holding period for the stock. (This requirement is also met if the corporation ceased to qualify as a renewal community business after the 5-year period beginning on the date you acquired the stock. However, your qualified capital gain cannot be more than what it would have been if you had sold the stock on the date the corporation ceased to qualify).

Redemptions of stock.   Stock will not qualify as qualified community stock if the issuing corporation makes certain redemptions of its stock within 2 years before or 2 years after the date the stock was issued. For details, see sections 1400F(b)(2)(B) and 1202(c)(3) of the Internal Revenue Code.

Qualified community partnership interest.   This is any capital or profits interest in a U.S. partnership, if all the following requirements are met.

1. You acquired the partnership interest from the partnership after December 31, 2001, and before January 1, 2010, in exchange for cash.
2. The partnership was a renewal community business (or was being organized as a renewal community business) at the time the partnership interest was acquired.
3. The partnership qualified as a renewal community business during substantially all of your holding period for the partnership interest. (This requirement is also met if the partnership ceased to qualify as a renewal community business after the 5-year period beginning on the date you acquired the partnership interest. However, your qualified capital gain cannot be more than what it would have been if you had sold the partnership interest on the date the partnership ceased to qualify).

Redemptions of partnership interest.   A partnership interest will not qualify as a qualified community partnership interest if the partnership makes certain acquisitions of its partnership interests within 2 years before or 2 years after the date the partnership interest was issued. For details, see sections 1400F(b)(3), 1400F(b)(2)(B), and 1202(c)(3) of the Internal Revenue Code.

Qualified community business property.   This is tangible property that meets all the following requirements.

1. You acquired the property after December 31, 2001, and before January 1, 2010.
2. You did not acquire the property from a related person or member of a controlled group of which you are a member.
3. Your basis in the property is not determined either by its adjusted basis in the hands of the person from whom you acquired it or under the stepped-up basis rules for property acquired from a decedent.
4. You were the first person to use the property in the renewal community.
5. Substantially all of the use of the property was in your renewal community business during substantially all of your holding period for that property. (This requirement is also met if you stopped using the property in your renewal community business, or your business ceased to qualify as a renewal community business, after the 5-year period beginning on the date you acquired the property. However, your qualified capital gain cannot be more than what it would have been if you had sold the property on the date you stopped using it in your renewal community business or on the date your business ceased to qualify).

Special rule for substantially improved buildings.   Buildings (and land on which they are located) will be treated as having met requirements (1) and (4) if you substantially improve the buildings before January 1, 2010. You substantially improve a building if, during any 24-month period beginning after 2001, your additions to the basis of the property are more than the greater of the following amounts.

1. 100% of the adjusted basis of the property at the beginning of the 24-month period.
2. $5,000.

Renewal community business.   This term is defined earlier under Increased Section 179 Deduction.

Qualified capital gain.   This is generally any gain recognized on the sale or exchange of a capital asset or property used in a trade or business as defined in section 1231(b) of the Internal Revenue Code (generally real property or depreciable personal property). But it does not include any gain attributable to periods before 2002 or after 2014.

More information.   For more information, see section 1400F of the Internal Revenue Code.

New Markets Credit

You can claim a tax credit for a qualified equity investment in a qualified community development entity made after December 31, 2000. This is called the new markets credit.

Amount of credit.   You claim the credit over a period of up to 7 years. To find the amount of your credit each year, multiply the amount you paid the qualified community development entity for your investment by a percentage. The percentage is:

• 5% for the year the investment is made and each of the next 2 years, and
• 6% for each of the next 4 years.

Thus the credit totals 39% of your investment over a 7-year period.

To claim the credit for a year, you must hold the qualified equity investment on the credit allowance date for that year. The credit allowance date is the date you make the initial investment and each of the next 6 anniversary dates.

Qualified equity investment.   Generally, this is the cost of any stock in a corporation or any capital interest in a partnership if the following requirements are met.

• The corporation or partnership is a qualified community development entity (defined next).
• You acquire the investment on the original issue date for cash.
• Substantially all of the cash is used to make qualified low-income community investments (defined later), or at least 85% of the entity's total gross assets are in qualified low-income community investments.
• The qualified community development entity designates the investment for purposes of the new markets credit.

Qualified community development entity.   This is any U.S. corporation or partnership that meets the following requirements.

• Its primary mission is serving, or providing investment capital for, low-income communities or persons.
• It maintains accountability to residents of low-income communities through their representation on any governing or advisory boards of the entity.
• It is certified by the Secretary of the Treasury as a qualified community development entity.

Qualified low-income community investment.   This means one of the following.

• Any capital or equity investment in, or loan to, any qualified active low-income community business (defined next).
• The purchase from another qualified community development entity of any loan made by that entity that is a qualified low-income community investment.
• Financial counseling and other services specified in regulations to businesses located in, and residents of, low-income communities.
• Any equity investment in, or loan to, any qualified community development entity.

Qualified active low-income community business.   This is any corporation (including a nonprofit corporation), partnership, or sole proprietorship, if all the following statements are true for the tax year.

1. At least 50% of its total gross income is from the active conduct of a qualified business (defined next) within a low-income community.
2. A substantial part of the use of its tangible property (whether owned or leased) is within a low-income community.
3. A substantial part of the employees' services are performed in a low-income community.
4. Less than 5% of the average of the total unadjusted bases of the property of the business is from:
   1. Nonqualified financial property (generally, debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, and annuities), or
   2. Collectibles not held primarily for sale to customers.

Also, a business that would qualify if it were separately incorporated is treated as a qualified active low-income community business.

Qualified business.   This is generally any trade or business except one that consists primarily of developing or holding intangibles for sale or license. However, the rental to others of real property located in a low-income community is a qualified business only if there are substantial improvements located on the property. Also, a qualified business does not include any business listed earlier in item (5) or item (6) under Nonqualified employees in the Empowerment Zone Employment Credit section.

Low-income community.   A low-income community generally means any population census tract if any of the following apply.

• The poverty rate is at least 20%.
• If the tract is not located within a metropolitan area, the median family income is not more than 80% of statewide median family income.
• If the tract is located within a metropolitan area, the median family income is not more than 80% of the greater of the statewide median family income or the metropolitan area median family income.

Recapture.   The credit is recaptured if, within the 7-year credit period, the community development entity is no longer qualified, substantially all of the proceeds of the investment are no longer used for a qualifying purpose, or the investment is redeemed.

More information.   For more information about the new markets credit, see section 45D of the Internal Revenue Code.

Environmental Cleanup Cost Deduction

This deduction provides businesses with an incentive to clean up certain sites that are contaminated with hazardous substances. Your business does not have to be in an empowerment zone, enterprise community, or renewal community to qualify for this deduction.

You can choose to deduct qualified environmental cleanup costs in the tax year you pay or incur the cost. You can do this instead of adding the cost to the basis of your property (and, if the property is depreciable, recovering the cost by taking depreciation deductions over a specified recovery period).

This special tax treatment is generally available for qualified environmental cleanup costs you pay or incur after August 5, 1997, and before January 1, 2004.

Qualified environmental cleanup costs.   Qualified environmental cleanup costs are generally costs you pay or incur to abate or control a hazardous substance (as defined by Internal Revenue Code section 198(d)) at a qualified contaminated site.

Qualified contaminated site.   A qualified contaminated site must meet both of the following requirements.

1. You hold it for use in a trade or business, for the production of income, or as inventory.
2. There has been a release, threat of release, or disposal of a hazardous substance at or on the site.

You must get a statement from the designated state environmental agency that the site meets requirement (2).

A site is not eligible if it is on, or proposed for, the national priorities list under section 105(a)(8)(B) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980. To find out if a site is on the national priorities list, contact the U.S. Environmental Protection Agency.

Recapture.   This deduction may have to be recaptured as ordinary income under section 1245 when you sell or otherwise dispose of the property that would have received an addition to basis if you had not elected this deduction.

More information.   For more information about the environmental cleanup cost deduction, see section 198 of the Internal Revenue Code.

Qualified Zone Academy Bonds

Beginning in 1998, state or local governments can issue qualified zone academy bonds to raise funds for the use of a qualified zone academy. However, these bonds require a private business contribution. Certain banks, insurance companies, and corporations actively engaged in the business of lending money can receive a tax credit as an incentive to hold these bonds. For more information about claiming the credit, see Form 8860.

Contact the appropriate state or local government agency to find out if qualified zone academy bonds are available in your area.

Qualified zone academy.   A qualified zone academy is a public school (or academic program within a public school) at the secondary level or below that meets certain requirements. It must be located in either an empowerment zone or an enterprise community, or there must be a reasonable expectation when the bonds are issued that at least 35% of the school's students (or program's participants) will be eligible for free or reduced-cost lunches under the school lunch program established under the National School Lunch Act. A qualified zone academy must also meet other requirements.

Private business contribution requirement.   Before qualified zone academy bonds can be issued, the local educational agency (as defined in section 14101 of the Elementary and Secondary Education Act of 1965) must obtain written commitments from private entities for qualified contributions with a present value (as of the bond issue date) of not less than 10% of the proceeds of the bond issue.

A qualified contribution is a contribution made with the approval of the local educational agency of any property or service from the following list.

1. Equipment for use in the qualified zone academy.
2. Technical assistance in developing curriculum or in training teachers to promote appropriate market driven technology in the classroom.
3. Services of employees as volunteer mentors.
4. Internships, field trips, or other educational opportunities outside the academy for students.
5. Any other property or service specified by the local educational agency.

More information.   For more information about qualified zone academy bonds, see section 1397E of the Internal Revenue Code and the regulations under that section.

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