Enterprise zones yield lucrative tax breaks

November 5, 2008: 9:35 AM ET

If your business is in a target zone, don't miss out on the benefits.

Ros Borden, Miami
My wife and I own a convenience store in a federally designated enterprise zone. We have eight employees and we have owned the store for two years. We are struggling to stay afloat and to hold onto our employees. Can you get us information on how to use this designation to benefit us and our employees? I have already cashed out my retirement money. If we can't get help, we'll have to put eight people out on the street.

By Kathleen Ryan O'Connor, Fortune Small Business contributor
Dear Ros: Enterprise zones can offer a powerful array of incentives and tax benefits, but even the best leg up can't save every business, especially in an economic downturn.

That said, there's still plenty you can do.

Nearly all of the experts we spoke to say small business owners in an enterprise zone rarely take advantage of all the benefits available to them. That's not too surprising given the complexity that accompanies some zone designations, which came out of a push in the 1980s to encourage economic activity in depressed areas. In addition to federal benefits, nearly every state has its own enterprise zone programs.

Typically, the programs will feature a mix of state and federal tax reductions, employee-based hiring credits, low-cost loan programs and, sometimes, subsidized marketing opportunities. Earlier this fall, small business owners in San Pedro, Calif. even used their enterprise zone designation as an argument to fight a steep hike in parking meter fees.

In your area, Miami-Dade County, benefits can include a 50% reduction in the sales tax on electricity for up to five years; a job tax credit of between 20% and 30% of wages paid for new jobs for enterprise-zone residents; a 97% reduction of sales tax on business equipment and building materials up to $10,000; a corporate tax credit of 20%; a credit of 96% on ad valorem taxes (a tax based on the value of real estate or personal property) not abated by local governments, and more. The benefits even include a 50% credit on contributions to local community groups.

If you haven't already, call the Miami-Dade County office of Economic Development. They can refer you to helpful resources. Also, the Small Business Administration offers free small business counseling at its SCORE centers. There's one right in Miami at 100 S. Biscayne Blvd.

At the same time, experts urge you to talk to an accountant who specializes in enterprise-zone tax benefits. Not every accountant is well-versed in current state and federal enterprise-zone benefits and boundaries, which can change over time. This is no time for Uncle Manny to do your taxes.

In 2003, for example, a year California gave away $300 million in tax credits, less than 10% of potentially eligible businesses actually claimed them, says C & I Tax Consultants, an accounting firm that specializes in tax credits.

"There's absolutely no reason not to look into this," says Steve Dotan, president and CEO of the Los Angeles company.

And just because you missed the boat on past credits doesn't mean that the benefit is gone forever. Most states will allow you to go back several years on returns and amend the information, something Dotan says will often uncover plenty of unused credits that are still available.

"I get a lot of, 'Wow, really?'"

Plus, some credits are refundable, he says, meaning that if you are struggling and not paying taxes, you can actually get cash back.

Louis Andrianos is a powerful example of how an owner can transform a once-struggling business with enterprise zone incentives and a lot of sweat equity.

He and his father took over a shuttered, failed restaurant in the Roselle, N.J., Urban Enterprise Zone more than 20 years ago. With the help from the zone's benefits, they expanded the business through the years from a modest but successful diner to a full-service restaurant, banquet and lounge facility.

A lot of things had to come together to make it work, says Andrianos, who runs the business with his father, George Andrianos, and brother-in-law Angelo Vayas, but the UEZ credits were critical, including the ability to make large capital investments tax-free.

Co-op marketing opportunities were particularly helpful, Andrianos says. Ask around to see if any are being offered near you. By bundling advertising for the Roselle UEZ businesses together, they were able to reach a far wider pool of customers.

"Like anything, there is no magic," he says. "You really have to put your time in and make your contacts."

Roselle UEZ director Harry Wyatt offers this advice for any enterprise zone business that may be struggling:

— Know where your business is coming from. Who is doing the buying and what are they buying from you? Many business owners are guilty of stocking their store with items they may use and enjoy themselves, but will their customers like them? Just as you keep meticulous records of who owes money to your business and who your business owes money to, you should keep a close watch on which items you're selling and which items you're not. Moving merchandise isn't guesswork; it's a science.

— Advertise to your target customer base. Word-of-mouth can be very powerful, but it's not very consistent. New businesses that come in and decide they're not going to do any advertising are really taking a shot in the dark. They don't know who they want to market to and they don't know how to reach them.

— Take advantage of networking opportunities. Being part of a UEZ is a license to network shamelessly with other business owners. Roselle has a monthly luncheon for business owners to meet with each other. This often results in new partnerships between local businesses, allowing both parties to save money. Tie your business into the community it serves and you will be rewarded.

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