The primary goal of the Arizona Enterprise Zone Program (or “EZ” program) is to improve the economies of areas in the state with high poverty and/or unemployment rates. The program does this by enhancing opportunities for private investment in certain areas that are called enterprise zones. Increased investments in such areas tend to strengthen property values, and encourage quality job creation to promote the vitality of the local economies. These enterprise zones cover a large part of the valley including all or a portion of cities such as Phoenix, Tempe, Chandler, Mesa, Glendale, Buckeye and Goodyear.
The program offers two types of tax benefits to business owners: property tax reduction, and income tax credits.
Property Tax Benefits
A manufacturer or commercial printer in an enterprise zone is eligible for a reduction in its property tax assessment ratio from as high as 24% to 5% on all personal and real property in the zone for five years. What does this mean to you? As much as a 75% reduction in annual property tax paid by the business owner for the next five years! A significant savings! At the end of the five-year reclassification period the property reverts to the standard assessment ratio.
If the business meets the following criteria it can qualify:
- Either minority-owned, woman-owned or small (a small business has fewer than 100 employees or gross sales of $4 million or less).
- Independently owned and operated (not owned more than 50% by another company unless the ultimate ownership is primarily family owned or closely held).
- Makes an investment in fixed assets at the zone of $500,000, $1 million or $2 million, depending upon the location of the facility. In Maricopa County the investment limit is $2M.
Please note that the investment in fixed assets can be aggregated from 1/1/2001 to today, as long as the enterprises zone was in place during that time. This really helps those businesses that made smaller investments over the last seven years qualify!
Income or Premium Tax Credits
A business owner can receive an income tax credit for net increases in qualified employment positions at a site located in an enterprise zone – except for those business locations where more than 10% of the activity is retail sales. The Tax credits can total up to $3,000 per qualified employment position over three years for a maximum of 200 employees in any given tax year. So, if you have a business with 200 qualifying employees, your tax credit could range from $100K to $300K per year! Not bad!
If the following criteria are met, the business can qualify:
- Position is a full-time permanent job (1,750 hours per year).
- Position pays an hourly wage above the “Wage Offer by County” (currently between ~$8 and ~$16 depending on the county in which the business is located).
- Employer offers health insurance to employees for which the employer pays at least 50 percent.
- Employee works at least 90 days in the first tax year.
- Employee cannot have worked for the employer within 12 months from current date of hire.
The enterprise zone credits for qualified employment positions are equal to:
- First year: one-fourth of wages paid to an employee up to $500.
- Second year: one-third of wages paid to each previously qualified employee up to $1,000.
- Third year: one-half of wages paid to each previously qualified employee up to $1,500.
Please note that 35% of the net new eligible employees on whom the business is claiming a credit must live within an enterprise zone in the same county as the business on the date of hire.
As with any government program, there is a little paperwork involved. The law requires that, for the property tax benefit, company reports need to be filed with the Arizona Department of Commerce by October 1st of each calendar year to be eligible for reclassification in the next valuation year. The law also requires that for the Employer Tax Credit program that EZ Income/Premium Tax Reports be filed with the Arizona Department of Commerce by the earlier of either six months after the end of the tax year in which the credits were earned or by the date the original tax return is filed for the tax year in which the credits were earned.
There are exceptions to these general rules, so please contact us for advice on how this information applies in your specific situation. If you are planning to start or expand a business in the greater Phoenix metropolitan area, consider Arizona’s Enterprise Zone Program, it can be well worth your time!
Note: The information contained in this material represents a general overview of finance and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.