An infrequently utilized tax incentive program could help Colorado landscapers lower their state income tax liability. The enterprise zone program, administered by the state’s Office of Economic Development and International Trade, allows businesses that operate in certain economically depressed zones to claim an annual tax credit.
The credits are tied to specific business activities: creating a job, providing training, offering health insurance, or purchasing equipment.
Over 4,000 Colorado businesses were certified as eligible for the program in fiscal year 2016, according to OEDIT’s annual report. The total business credits they were eligible for exceeded $72 million. However, according to program data, only between 40% and 60% of qualified businesses actually claim these credits.
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OEDIT tracks certified businesses based on their NAICS code. Since tax year 2014, just two nursery or greenhouses have been certified for credits, according to Sonya Guram, deputy director of business funding and incentives for OEDIT. No landscape architects or garden centers have been certified for the program in that period.
That may be because they don’t know about the program, or because they’re opting to use the federal Section 179 benefit, which allows businesses to deduct the cost of new equipment or software, Guram said.
“Often the investment tax credit isn’t utilized because [businesses will] choose to expense those types of investments rather than capitalize them,” Guram said. “It has to be a fairly large investment for it to be worth capitalizing it rather than taking advantage of a federal favorable tax situation.”
What is an enterprise zone?
The enterprise zone initiative was launched in the late ’80s to promote business-friendly environments in areas of the state that were struggling economically.
“It has been around for a very long time, and it’s been modified over the years by the legislature,” Guram said. “When it first began, I think there might have been only two enterprise zones allowed. At this point there are 16, and that’s the maximum allowed by statute.”
Rural areas with a population under 150,000 people, and urban areas with fewer than 115,000 people, are eligible to be designated an enterprise zone if they meet at least one of three criteria:
• Unemployment is 25% higher than the rest of the state.
• Per capita income is 75% lower than the rest of the state.
• Population is growing at a rate 25% slower than the rest of the state.
Some counties within those zones are designated “enhanced rural” enterprise zones if they have higher unemployment and slower growth than the rest of the zone.
Guram noted that different states have different enterprise zone programs. “Sometimes they’re very focused on a particular neighborhood. The Colorado program [was] developed to really cover larger areas. A lot of our rural counties are fully covered.”
Business owners can check whether their company is located in an enterprise zone by going to the program’s home page at choosecolorado.com, and entering their address.
Colorado’s program is “community driven,” Guram said. “The community has to want that designation and apply for it.” Zone borders were redrawn in January 2016, so businesses that weren’t eligible for the credits in the past may want to take another look.
How to apply
The trickiest aspect of the program is that a business has to be certified before any of the activities take place. Owners who think they might be interested in claiming most of these credits come tax time need to be proactive.
Guram encourages businesses to “figure out if they’re in an enterprise zone and, if they are, to pre-certify.”
Business owners can apply for pre-certification for each of their business locations up to three months before the start of the tax year. Then, if any of their business activities meet the program requirements throughout the year, they’ll be able to claim the credits when they file their taxes.
“They have to pre-certify in advance of the activities so that they’re eligible for activities during the year, so it does encourage investment during the year,” Guram explained.
Hiring and job training are the most commonly utilized credits, Guram said. New businesses that offer health insurance can also claim a credit, though she noted that’s less common.
The most accessible credit to landscape businesses may be the job-training credit, she explained. “If a company does provide safety training or equipment training” for its employees, it can recoup 12% of the cost, “so long as it’s a formalized job training,” Guram said. She explained that formal training means “employers are going to send somebody somewhere to be trained on equipment, or they have a particular trainer coming in. It can’t be on-the-job training.”
Giving (and getting) back
Businesses that give back to their communities can take advantage of the program’s contribution credit. Regardless of where their business is located, lawn and landscape firms can claim a credit for contributions made to projects that benefit an enterprise zone. Businesses don’t have to be certified to claim these credits.
Businesses can claim 25% of a cash donation or 12.5% of an in-kind donation to approved enterprise zone contribution projects.
“It’s not so much a business credit, but say any business chooses to give to an enterprise zone contribution project; they can earn that tax credit,” Guram explained. “It could be the case where, say, a lawn care business is making a charitable donation to some organization by taking care of their lawn, so they might donate that service. That would earn the in-kind credit of 12.5%.”
Contribution projects are administered by local zone administrators and are designed to “focus community engagement on an economic issue or opportunity to elicit a shift and accomplish a targeted economic development goal within a defined time period,” according to the OEDIT website.
When businesses make a contribution to an approved project, they should get a DR 0075 form documenting the contribution to include with their tax return.