U.S. DEPT. OF HOUSING AND URBAN DEVELOPMENT DESIGNATES NIAGARA FALLS AS A Renewal Community AREA

Niagara Falls, New York, has been designated as a Renewal Community area! In a highly competitive grant competition Niagara Falls' application was amongst dozens submitted vying to be chosen as one of only 40 cities in the nation to receive the Renewal Community designation.

What could this mean to you and your business? Listed below are some frequently asked questions and answers designed to help you better understand what benefits are available to those businesses located in and locating to a Renewal Community Area.

What exactly is a Renewal Community Area (RC) and how could my business
benefit from it?

A Renewal Community is a designation given to a specific targeted area in the City of Niagara Falls. The City as a whole is not an RC. Businesses that qualify and operate in an RC area will be eligible for the following tax incentives:

• Renewal Community employment credit (both full and part-time employees may qualify)
• Increased section 179 deduction
• Commercial revitalization deduction
• Capital gain exclusion

These individual incentives are outlined further in following questions.

Where is the RC located in the City of Niagara Falls?

The boundary areas of the Niagara Falls RC covers Census Tracts 202, 204, 205, 206, 209 and certain eligible areas of 211. Those areas are highlighted on the following map:

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How long can I benefit from the RC?
The tax incentives will be available January 1, 2002, through December 31, 2009.

What is a Renewal Community Employment Credit?
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.

What makes an employee and their wages qualified?
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. The following individuals are not qualified zone employees.

1)  An individual you employ for less than 90 days. However, this 90-day requirement does not apply in either of the following situation.
	a) You terminate the employee because of misconduct as determined under the state unemployment compensation law that applies.
	b) The employee becomes disabled before the 90th day. However, if the disability ends before the 90th day, you must offer to re-employ the former employee.
2)  Certain related taxpayers
3)  Certain dependents
4)  Any 5% owner
5)  An individual you employ at any:
	a) Private or commercial golf course,
	b) Country club
	c) Massage parlor
	d) Hot tub facility
	e) Suntan facility
	f) Racetrack, or other facility used for gambling, or
	g) Store whose principal business is the sale of alcoholic beverages for off premise consumption.

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.

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What does it mean I get an 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:
	a. Nonqualified financial property (generally, debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, and annuities), or
	b. 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) Nonqualified employees 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.

Special rule for substantially renovated property.
Property will be treated as having met requirements (1) and (4) if you substantially renovate the property. You substantially renovate property if, during any 24-month period beginning after the CR designation takes effect, your additions to the property's basis 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) $5,000.00

Section 179 deduction limits.
There are limits on the amount you can deduct under section 179. The following sections explain how these limits are increased for certain qualified zone property placed in service by an enterprise zone business.

Maximum dollar limit.
The total cost of section 179 property that you can deduct for a tax year generally cannot be more than the maximum section 179 dollar limit. However, if you place section 179 property that is qualified zone property in service during the year, this maximum dollar limit is increased by the smaller of the following amounts.
1) The cost of that property 2) $20,000 ($35,000 for 2002 and later years).

The following table shows these maximum dollar limits.

For Tax Years Beginning In:	Maximum Sect. 179 Dollar Limit	Maximum Dollar Limit with Qualified Zone Property
2002	$24,000	$59,000
Years After 2002	$25,000	$60,000

These maximum dollar limits are reduced if you go over the investment limit (discussed next) in any tax year.

Investment Limit.
For each dollar of your business cost over $200,000 for section 179 property placed in service in a tax year, reduce the maximum dollar limit by $1 (but not below zero). However, take only one-half of the cost of section 179 property that is qualified zone property into account when reducing the maximum dollar limit.

Example. In 2000, your enterprise zone business placed in service section 179 property that is qualified zone property costing $420,000. Because all of this property is qualified zone property, only $210,000 (one-half of its cost) is used to figure the investment limit. Because $210,000 is $10,000 more than $200,000, you must reduce the maximum dollar limit by $10,000. Your maximum dollar limit for 2000 is $40,000. You can claim a section 179 deduction of $30,000 ($40,000 - $10,000) for 2000 (if your taxable income from trades or businesses is at leased $30,000).

Recapture.
The recapture rules of section 179 apply when qualified zone property is no longer used in an empowerment zone or Renewal Community area by an enterprise zone or Renewal Community business.

More information.
For more information about the section 179 deduction, see IRS Publication 946 at www.irs.gov. For more information about the increased section 179 deduction, see sections 1397A, 1397C, and 1397D of the Internal Renewal Code at www.irs.gov.

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What is the 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.

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.

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What is the Capital Gain Exclusion?

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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Who can I talk to for further information?

You can contact the City of Niagara Falls Department of Community Development - Economic Development Division at (716) 286-4482. Or you can consult www.irs.gov website and search on "Renewal Community" for a list of Renewal Community publications.
 

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