Renewal Communities

The Community Renewal Tax Relief Act of 2000 authorizes up to 40 renewal communities in which businesses will be eligible for tax incentives. The tax incentives will be available January 1, 2002, through December 31, 2009.

State and local governments will nominate areas to be designated as renewal communities. Each renewal community must meet eligibility criteria related to population, unemployment, poverty, and general distress.

The Secretary of HUD will designate the renewal communities by December 31, 2001. At least 12 of the designated renewal communities must be in rural areas.

The designation will generally remain in effect until December 31, 2009. The designation may be revoked if the state or local government modifies the boundaries of the area or does not keep certain commitments.

Businesses that qualify and operate in a renewal community will be eligible for the following tax incentives.

• Renewal community employment credit.
• Increased section 179 deduction.
• Commercial revitalization deduction.
• Capital gain exclusion.

Renewal Community Employment Credit

The renewal community employment credit provides businesses with an incentive to hire individuals who both live and work in a renewal community. You can claim the credit if you pay or incur "qualified wages" to a "qualified employee." The credit is for wages paid or incurred after 2001.

The credit is 15% of the qualified wages paid or incurred during a calendar year. The amount of qualified wages you can use to figure the credit cannot be more than $10,000 for each employee for each calendar year. As a result, the credit can be as much as $1,500 (15% of $10,000) per qualified employee each year.

Qualified employee. A qualified employee is any employee who meets both of the following tests.

• The employee performs substantially all of his or her services for you within a renewal community and in your trade or business.
• While performing those services, the employee has his or her main home within that renewal community.

Both full-time and part-time employees may qualify.

Nonqualified employees. Certain individuals cannot be qualified employees. For a list of those individuals, see Nonqualified employees under Empowerment Zone Employment Credit, earlier.

Qualified wages. Qualified wages are any wages you pay or incur for services performed by an employee while the employee is a qualified employee (defined earlier). Wages are generally defined as those wages subject to the Federal Unemployment Tax Act (FUTA) without regard to the FUTA dollar limit.

Also treat as qualified wages certain training and education expenses you pay or incur on behalf of a qualified employee.

Effect of welfare-to-work or work opportunity credit. Qualified wages do not include any amount you take into account in figuring the welfare-to-work credit or the work opportunity credit. In addition, reduce the $10,000 maximum qualified wages for each qualified employee by the amount of wages you use to figure either of those credits for that employee.

Effect on salary and wage deduction. In general, you must reduce the deductions on your income tax return for salaries and wages and certain education and training costs by the amount of your renewal community employment credit.

Increased Section 179 Deduction

Section 179 of the Internal Revenue Code allows you to choose to deduct all or part of the cost of certain qualifying property in the year you place it in service. You can do this instead of recovering the cost by taking depreciation deductions over a specified recovery period. There are limits, however, on the amount you can deduct in a tax year.

You may be able to claim an increased section 179 deduction if your business qualifies as a renewal community business. The increase can be as much as $20,000 ($35,000 for 2002 and later years). This increased section 179 deduction applies to "qualified renewal property" you acquire after December 31, 2001, and before January 1, 2010, and place in service in a renewal community.

Renewal community business. For the increased section 179 deduction, a corporation, partnership, or sole proprietorship is a renewal community business if all the following statements are true for the tax year.

1. Every trade or business of the corporation or partnership is the active conduct of a qualified business (defined later) within a renewal community. (This rule does not apply to a sole proprietorship.)
2. At least 50% of its total gross income is from the active conduct of a qualified business within a renewal community.
3. A substantial part of the use of its tangible property is within a renewal community.
4. A substantial part of its intangible property is used in the active conduct of the business.
5. A substantial part of the employees' services are performed within a renewal community.
6. At least 35% of the employees are residents of a renewal community.
7. Less than 5% of the average of the total unadjusted bases of the property owned by 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.

For a sole proprietorship the term "employee" in (5) and (6) includes the proprietor.

Qualified business. A qualified business is generally any trade or business except one that consists primarily of the development or holding of intangibles for sale or license.

However, the rental to others of real property located in a renewal community is a qualified business only if the property is not residential rental property and at least 50% of the gross rental income from the property is from renewal community businesses.

The rental to others of tangible personal property is a qualified business only if at least 50% of the rentals of the property are to renewal community businesses or community residents.

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.

Qualified renewal property. This is any depreciable tangible property if all the following are true.

1. You acquired the property after the renewal community designation is in effect.
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 a renewal community.
5. At least 85% of the property's use is in a renewal community and in the active conduct of a qualified trade or business in the community.

Buildings are qualified renewal property, but they do not qualify for the section 179 deduction. Used property may be qualified renewal property if it has not previously been used within a renewal community.

More information. See the earlier discussion of the increased 179 deduction under Empowerment Zones and Enterprise Communities for a special rule for renovated property, the section 179 deduction limits, and the recapture rules, all of which also apply in renewal communities. That earlier discussion also tells where to get additional information about the section 179 deduction.

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.

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