Federal Tax Incentives
Commercial Revitalization Deduction (CRD)
Each year of the RC designation, Chattanooga receives $12 million in Commercial Revitalization Deduction (CRD) tax savings to award to qualified property owners who construct or do extensive renovations to commercial, industrial, and mixed-use (retail/rental housing) buildings in the Renewal Community.
Property owners that construct or renovate these commercial properties can deduct a portion of the costs of acquisition and rehabilitation over a shorter period of time than is permitted under standard depreciation rules. The standard IRS depreciation for commercial buildings is 39 years. With a CRD, a property owner can elect a deduction of one-half of qualifying revitalization expenditures (up to $10 million for any one project) in the year the building is placed in service or can deduct all qualifying expenditures pro rata over 10 years.
The building project must receive an allocation from Chattanooga’s CRD Selection Committee and the State of Tennessee to take advantage of this tax savings. Property owners may apply for a CRD prior to construction/renovation, at mid-construction/renovation, or during the calendar year in which the completed building will be placed in service. To determine if the expenses for a building project are eligible for this deduction, consult a tax professional and IRS Publication 954.
To qualify for the CRD, building projects:
Must be located in the RC
Must be non-residential and used for business purposes; commercial, retail, industrial, mixed-use
Cannot include expenses used to calculate historic tax credits
Can be new construction
Can be rehabilitation projects; improvements must at least equal the cost (basis) of the building to qualify
Priority consideration will be given to building projects that:
- Create new, permanent full-time jobs
- Offer above-average wages for these jobs
- Place buildings in service that have not been in use
- Can successfully be completed within the timeframe
Preference also may be given for:
- Location – Projects that stimulate additional growth in areas of the city with extraordinary revitalization challenges or in areas consistent with special plans of the city for revitalization.
- Ownership – Owner-occupied projects, projects owned by an RC resident, and/or projects that create a headquarters for a national or international corporation seeking to locate in the RC.
- Targeted Industry/Purposes – Projects related to certain types of industries, businesses, sectors or uses when consistent with the city’s overall economic development strategy and any target industries for the RC.
- Employment – Projects that employ RC residents and/or disadvantaged Chattanoogans.
- Special Awards – Projects that meet the city’s overall vision, direction and development efforts, including environmentally friendly industry (end use), environmentally engineered or constructed project, artistic or design excellence, etc.
Refer to IRS Publication 946 and 954 and Form 4492.
RC Employment (Wage) Credit
The RC Employment (Wage) Credit gives businesses an incentive to retain or hire individuals who live and work in the RC. Businesses can take a tax credit of up to $1,500 – 15 percent of the first $10,000 of wages during a calendar year – per qualified employee per year. Employees can be full-time or part-time, existing or new hires.
There is no limit on the number of eligible employees a business hires. Eligible employees must be employed for at least 90 days. Substantially all the work (at least 85 percent) must be completed within the RC. Businesses can take the deduction every year they employ qualifying persons during the RC designation period. The RC Employment (Wage) Credit cannot be combined with the Work Opportunity Tax Credit.
Employees who are not eligible for the RC Employment (Wage) Credit include:
- Any 5 percent business owner, spouse, certain dependents and related tax payers
- Individuals hired in a farming trade or business, if the farm assets owned and/or leased are more than $500,000 at the end of the tax year
- Employees at a golf course, country club, massage parlor, hot tub facility, suntan facility, liquor store, racetrack or other gambling facility
- An employee who works less than 90 days, unless terminated due to misconduct or the employee becomes disabled before the 90th day
Refer to IRS Publication 954 and Form 8844.
Work Opportunity Tax Credit (WOTC)
The Work Opportunity Tax Credit (WOTC) provides businesses with an incentive (up to $2,400 tax credit) to hire individuals from groups that have high unemployment rates or special employment needs. The WOTC is a one-year tax credit for new hires only. Businesses and employees do not have to be located in the RC to qualify for this tax credit.
A State Employment Service Agency must certify the employee is in a targeted group within the first 21 days of hire. The WOTC cannot be combined with the RC Employment (Wage) Credit.
Groups that qualify include:
- Vocational rehabilitation referrals
- Individuals with disabilities
- Supplemental Nutrition Assistance Program (SNAP), more commonly known as "Food Stamps" Program, Recipients
- Recipients of assistance under Aid to Families with Dependent Children (AFDC), Temporary Assistance for Needy Families (TANF), or Families First
- Supplemental Security Income (SSI) recipients
- High-risk adults (ages 18 to 39 who also live in the RC)
- Summer youth employees (ages 16 and 17 who also live in the RC)
Refer to IRS Publication 954 and Forms 8850 and 5884.
Zero Percent Capital Gains Rate
If a business holds an RC business asset – acquired after December 31, 2001 and before January 1, 2010 – for a minimum of 5 years and employs at least 35 percent of its workforce from within the RC during those 5 years, the business does not have to include any "qualified capital gain" from the asset's sale or exchange in its gross income. RC business assets that qualify include business stock, partnership interests or business properties. Only gains attributable to the period from January 1, 2002 through December 31, 2014 may be excluded.
Increased Section 179 Deduction
Businesses that maintain at least 35 percent of their workforce from the RC qualify for up to $35,000 in increased 179 deductions for eligible property/equipment owned by the business. Section 179 of the Internal Revenue Code allows businesses to choose to deduct all or part of the cost of certain qualifying equipment and property in the year they place it in service. Businesses can do this instead of recovering the cost by taking depreciation deductions over a specified recovery period.
Refer to IRS Publication 954 and Form 4562.
Low-Income Housing Tax Credit (LIHTC)
This 10-year credit against federal taxes is for owners of newly constructed or renovated rental housing who set aside a specified percentage of units for low-income persons for a minimum of 15 years. The credit varies for new construction and renovation. To qualify for this incentive, the project owner must receive an allocation of tax credits from the Tennessee Housing Development Agency. The project does not have to be in the RC to qualify.
Refer to IRS Publication 954 and Forms 8586 and 8609.
New Markets Tax Credit (NMTC)
Another source of loans or equity contributions for for-profit or not-for-profit businesses that are started or expanded in the RC is what is known as New Markets Tax Credits. The NMTC provides individuals and corporations with an incentive to invest in a community development entity (CDE) that provides capital and financial advisory services to low-income communities.The investor receives a credit against federal taxes of 5 to 6 percent of the amount invested for each of the years the investment is held. The credit can be taken up to 7 years. The credit is available for investments in CDEs designated by the U.S. Treasury Department.
According to Chattanooga-based program directors, the size of the project for which these equity or loan investments are made has a minimum amount of $500,000. However, a search of NMTC program providers on the internet will provide descriptions of NMTC programs with additional criteria.
Refer to IRS Publication 954.
Link to U.S. Treasury Department NMTC listing: www.cdfifund.gov
Environmental (Brownfields) Cleanup Cost Deduction
This deduction provides businesses with an incentive to clean up certain sites that are contaminated with hazardous substances. Businesses can choose to deduct qualified environmental cleanup costs in the tax year they pay or incur the cost. A business can do this instead of adding the cost to the basis of its property (and, if the property is depreciable, recovering the cost by taking depreciation deductions over a specified recovery period). The property does not have to be in the RC to qualify for this deduction.
Refer to IRS Publication 954
Qualified Zone Academy Bonds (QZABs)
State or local governments can issue bonds at zero percent interest cost to them to finance certain public school programs – including materials, teacher training, building renovation, or equipment for programs that prepare students for jobs or college – with private business partnerships. Private businesses must contribute money, equipment or services equal to 10 percent of bond proceeds (which may qualify as a charitable contribution). The federal government pays interest in the form of tax credits to banks, insurance companies, and certain lending corporations that hold QZABs. These bonds are available for public or chartered school projects where 35 percent of students receive subsidized lunch.
Refer to IRS Publication 954 and Form 8860.
Disclaimer: The information contained in this website should not be relied upon for Federal government tax purposes. Business and property owners in the Renewal Community are urged to consult with their tax preparers or the IRS for official guidance.