Frequently Asked Questions

What is an Enterprise Zone (EZ)?

An Enterprise Zone is a tax savings program that the State of California has created to provide tax incentives to business. In 1984, the State of California established 42 Enterprise Zones to encourage and stimulate growth, development and investment areas. Taxpayers who invest, operate, or locate a trade or business within an Enterprise Zone may be eligible for special tax incentives.

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How do I claim Enterprise Zone tax incentives?

Use the Enterprise Zone Deduction and Credit Summary form – FTB 3805Z, found in the Enterprise Zone Business Booklet – FTB 3805Z Booklet. File this form with your California franchise or income tax return to claim the EZ tax incentives. For those tax incentives that require an election, make the election on this form. The hiring credit, sales or use tax credit, and net interest deduction do not require an election, and can be claimed on either an original return or an amended return. Make your election to claim the business expense deduction on the original return for the year you place the property in service. You cannot make the election on an amended return, and you can only revoke the election with the written consent of the Franchise Tax Board. Make your election to claim an Enterprise Zone NOL deduction on the original return for the year that you incur the NOL. You cannot make the election on an amended return, and you can only revoke the election with the written consent of the Franchise Tax Board.

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Can I take the sales or use tax credit if the property purchased was exempt from sales or use tax when purchased?

No. You can only take the sales or use tax credit for sales or use tax you actually paid or incurred on the purchase of qualified property. If the property was exempt from sales or use tax at the time of purchase, no sales or use tax was paid or incurred.

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Do leases qualify for the business expense deduction or the sales or use tax credit?

Yes. If you acquired the property through a leasing arrangement that constitutes a financial (conditional sales) contract, the property may qualify for the business expense deduction or the sales or use tax credit, or both. To determine whether the lease qualifies as a financial (conditional sales) contract, refer to IRS Revenue Ruling 55-540, 1955-2, C.B. 39, and FTB Legal Ruling 94-2, March 23, 1994.

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What type of loan qualifies a creditor for the net interest deduction?

Loans that may qualify for the net interest deduction include business loans and mortgage loans from commercial or noncommercial sources. To qualify, you must meet all of the following:

  • The funds must be loaned after the Enterprise Zone was designated, and before the designation expires.
  • The loan must be made to a trade or business located solely within the Enterprise Zone.
  • The loan proceeds must be used only for the trade or business activities within the Enterprise Zone.

Additionally, the lender may not have any type of ownership interest in the borrower’s trade or business.

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Is the net interest deduction allowed for the life of the loan?

No. The net interest deduction is only allowed as long as the borrower’s trade or business is located in an Enterprise Zone. Once the Enterprise Zone designation expires or the borrower moves out of the Enterprise Zone the net interest deduction is no longer allowed.

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Is the carryover of the net operating loss (NOL) deduction to future years limited?

Yes. You may carry an Enterprise Zone NOL forward for 15 years, or until exhausted, whichever occurs first. In addition, if your business operates both within and outside the Enterprise Zone, or is part of a unitary group, you must determine your Enterprise Zone NOL deduction by using the Enterprise Zone apportionment formula. The carryover deduction can only offset business income attributed to the Enterprise Zone. See the Enterprise Zone Business Booklet – FTB 3805Z.

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What is the maximum amount of Enterprise Zone credits I can take in any one year?

The total of all Enterprise Zone credits that you can take in any taxable year may not exceed the lesser of the Enterprise Zone tax limitation or the:

  • "net tax" limitation for individuals, or
  • "tax" limitation for corporations.

California Revenue and Taxation Code sections 17039 and 23036 define "net tax" and "tax" respectively.

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What are the "zone income" or "zone tax" limitations on the Enterprise Zone tax incentives?

The maximum amount of Enterprise Zone credits that you can take each year is limited to the tax on your business income attributed to the Enterprise Zone. Determine the amount of such tax by considering ALL your business activities conducted in the Enterprise Zone. The total Enterprise Zone credit is the combined amount of the current year’s hiring credit and the sales or use tax credit, and any prior year carryovers of these credits.

The Enterprise Zone net operating loss (NOL) is limited to the Enterprise Zone business loss. The Enterprise Zone NOL deduction is limited to the Enterprise Zone income. To determine "zone income", you must add the business income or loss from all of the trade or business activities you conduct in the Enterprise Zone. Exclude nonbusiness income from the calculation. If you have wages earned from a business located within, and outside an Enterprise Zone, determine your income or loss attributed to Enterprise Zone activities. The Enterprise Zone Business Booklet – FTB 3805Z provides the Income or Loss Worksheet for individuals.

The "zone tax" is determined on this "zone income" as if this amount was your total income or loss for the year.

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How are Enterprise Zone tax incentives claimed when passed-through to partners, shareholders, or members?

The "zone tax" or "zone income" limitations apply at the individual level as well as the pass through entity level. You must first determine your Enterprise Zone business income from ALL business activities you conduct in the Enterprise Zone to determine the amount of Enterprise Zone credits you can claim in the current year. First calculate pass-through entity level. Then, apply that apportionment factor your distributive share of your income or loss. For example, if Partnership A operates 80% in the Enterprise Zone and your distributive share of the partnership income is $100,000, your Enterprise Zone income from this activity is $80,000. Also consider wages, paid by the pass-through entity, as business income. Apportion the wages to the Enterprise Zone base on the percentage of your services performed with the Enterprise Zone.

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