Attention to detail maximizes enterprise zone credit opportunity
Understanding business operations can translate to hard dollar savings
A California-based trash removal and processing company engaged RSM to provide general tax compliance services. The family-owned business, with four shareholders and widespread operations, had previously applied for and secured a California Enterprise Zone (CAEZ) credit, based on approximately 6 percent of revenues being attributed to work conducted in an enterprise zone.
Upon learning more about the new client, RSM identified a possible missed opportunity related to a previously filed CAEZ credit study.
The California Enterprise Zone credit is utilized based on an average of two apportionment factors: (1) employee payroll attributable to identified enterprise zones as a percentage of all California payroll, and (2) equipment operating in identified enterprise zones as a percentage of all equipment costs.
The greater percentage of work a company conducts in a zone, the greater the overall credit utilization. The route patterns for the trash removal company involved employees and equipment moving in and out of enterprise zones all day long. However, the prior credit application did not account for this incremental buildup of CAEZ credit-eligible workers and equipment.
By taking the time to accurately understand the client’s business—not just what they do, but where and how they do it—and balancing that information with the requirements of the CAEZ program, RSM recognized that although the routes started and ended in non-EZ locations, a substantial percentage of the work conducted by the company took place in enterprise zones, and therefore qualified for the credit.
As a result of the RSM team’s attention to detail, the company secured a 400 percent increase in CAEZ credit utilization, as well as eligibility during the 2011 tax year. In addition, this reevaluation was applied to prior years, and amended returns were filed for 2008, 2009 and 2010. As a result, the company and its individual shareholders achieved significant refunds.
The overall benefits of this project included:
- Three-year look-back refunds of $1.2 million, collectively
- Increase from 6 percent to 24 percent eligibility for CAEZ credits going forward
- Maximized credit utilization in the current tax year, which minimized carryforwards
The client understands the financial power of a diligent approach to credits and incentives, and is collaborating with RSM on the construction of a new facility that will be located in an enterprise zone territory. In addition to the CAEZ credits related to the operations, the team is evaluating the potential opportunities presented by research and development credits, cost segregation analyses and the federal Work Opportunity Tax Credit, in light of the building, employees and activity that will take place at the new location.