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previous page Previous Page: Publication 954 - Tax Incentives for Empowerment Zones and Other Distressed Communities - Empowerment Zones
next page Next Page: Publication 954 - Tax Incentives for Empowerment Zones and Other Distressed Communities - Enterprise Communities
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication
taxmap/pubs/p954-002.htm#TXMP7ab968d4

Renewal Communities


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Renewal Communities

This section describes the areas that have been designated renewal communities and explains the tax benefits available to businesses in those renewal communities.
taxmap/pubs/p954-002.htm#TXMP58da9fcd

Designated Renewal Communities


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Designated Renewal Communities

The Secretary of Housing and Urban Development (HUD) has designated the parts of the following areas as renewal communities. The designation will generally remain in effect until December 31, 2009. The designation may be revoked if the state or local government modifies the boundaries of the area or does not keep certain commitments.
You can find out if a business or an employee's residence is located within a renewal community by using the RC/EZ/EC Address Locator at www.hud.gov/crlocator or by calling HUD at 1-800-998-9999.
taxmap/pubs/p954-002.htm#TXMP2c8e539a

Renewal Community Employment Credit


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Renewal Community Employment Credit

The renewal community employment credit provides businesses with an incentive to hire individuals who both live and work in a renewal community. You can claim the credit if you pay or incur "qualified wages" to a "qualified employee." The credit is for wages paid or incurred after 2001.
The credit is 15% of the qualified wages paid or incurred during a calendar year. The amount of qualified wages you can use to figure the credit cannot be more than $10,000 for each employee for each calendar year. As a result, the credit can be as much as $1,500 (15% of $10,000) per qualified employee each year.
taxmap/pubs/p954-002.htm#TXMP21b4fc17

Qualified employee.


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A qualified employee is any employee who meets both of the following tests. Both full-time and part-time employees may qualify.
taxmap/pubs/p954-002.htm#TXMP7d13b468

Substantially all services performed within the renewal community.
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You can use the pay-period method or the calendar-year method to determine the period of time the employee has performed services in the renewal community. For details, see section 1.1396–1 of the regulations.
taxmap/pubs/p954-002.htm#TXMP4cbe35ba

Nonqualified employees.
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Certain individuals cannot be qualified employees. For a list of those individuals, see Nonqualified employees under Empowerment Zone Employment Credit, earlier.
taxmap/pubs/p954-002.htm#TXMP15ce2fad

Qualified wages.


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Qualified wages are any wages you pay or incur for services performed by an employee while the employee is a qualified employee (defined earlier). Wages are generally defined as wages (excluding tips) subject to the Federal Unemployment Tax Act (FUTA) without regard to the FUTA dollar limit.
Also treat as qualified wages certain training and education expenses you pay or incur on behalf of a qualified employee.
taxmap/pubs/p954-002.htm#TXMP7231f1fd

Effect of welfare-to-work or work opportunity credit.
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Qualified wages do not include any amount you take into account in figuring the welfare-to-work credit or the work opportunity credit. In addition, you must reduce the $10,000 maximum qualified wages for each qualified employee by the amount of wages you use to figure either of those credits for that employee.
taxmap/pubs/p954-002.htm#TXMP1393c60a

Fiscal year taxpayers.


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If you use a fiscal tax year, the amount of qualified wages you use to figure the credit is the amount paid or incurred during the calendar year that ends during the tax year.
taxmap/pubs/p954-002.htm#TXMP5899a463

Example.

Your tax year begins on February 1 and ends on January 31 of the next year. You use the cash method of accounting and have one employee, whom you hired in March 2003 and pay $500 a month. You pay that employee qualified wages of $5,000 in calendar year 2003 and $500 in January 2004. When you figure your credit for the tax year ending January 31, 2004, you use the $5,000 paid in 2003 but cannot use the $500 paid in January 2004. That amount will be used to figure the credit on your next tax return.
taxmap/pubs/p954-002.htm#TXMP4d1eaf21

Claiming the credit.


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Use Form 8844 to claim this credit. Although the renewal community employment credit is a component of the general business credit, a special tax liability limit applies to this credit. Therefore, you figure the credit separately and never carry it to Form 8300, General Business Credit.
taxmap/pubs/p954-002.htm#TXMP4b890e10

Effect on salary and wage deduction.
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In general, you must reduce the deductions on your income tax return for salaries and wages and certain education and training costs by the amount of your current year renewal community employment credit (before applying the tax liability limit).
taxmap/pubs/p954-002.htm#TXMP44240c15

Increased Section 179 Deduction


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previous topic occurrence Increased Section 179 Deduction next topic occurrence

Section 179 of the Internal Revenue Code allows you to choose to deduct all or part of the cost of certain qualifying property in the year you place it in service. You can do this instead of recovering the cost by taking depreciation deductions over a specified recovery period. There are limits, however, on the amount you can deduct in a tax year.
You may be able to claim an increased section 179 deduction if your business qualifies as a renewal community business. The increase can be as much as $35,000. This increased section 179 deduction applies to "qualified renewal property" you acquire after 2001 and before 2010 and place in service in a renewal community.
taxmap/pubs/p954-002.htm#TXMP2fda9c88

Renewal community business.


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For the increased section 179 deduction, a corporation, partnership, or sole proprietorship is a renewal community business if all the following statements are true for the tax year.
  1. Every trade or business of the corporation or partnership is the active conduct of a qualified business (defined later) within a renewal community. (This rule does not apply to a sole proprietorship.)
  2. At least 50% of its total gross income is from the active conduct of a qualified business within a renewal community.
  3. A substantial part of the use of its tangible property is within a renewal community.
  4. A substantial part of its intangible property is used in the active conduct of the business.
  5. A substantial part of the employees' services are performed within a renewal community.
  6. At least 35% of the employees are residents of a renewal community.
  7. Less than 5% of the average of the total unadjusted bases of the property owned by the business is from:
    1. Nonqualified financial property (generally, debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, and annuities), or
    2. Collectibles not held primarily for sale to customers.
For a sole proprietorship the term "employee" in (5) and (6) includes the proprietor.
taxmap/pubs/p954-002.htm#TXMP45795c29

Qualified business.
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A qualified business is generally any trade or business except one that consists primarily of the development or holding of intangibles for sale or license.
However, the rental to others of real property located in a renewal community is a qualified business only if the property is not residential rental property (defined under Commercial Revitalization Deduction, later) and at least 50% of the gross rental income from the property is from renewal community businesses.
The rental to others of tangible personal property is a qualified business only if at least 50% of the rentals of the property are to renewal community businesses or community residents.
Also, a qualified business does not include any business listed earlier in item (5) or item (6) under Nonqualified employees in the Empowerment Zone Employment Credit section.
taxmap/pubs/p954-002.htm#TXMP1260a843

Qualified renewal property.


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This is any depreciable tangible property if all the following are true.
  1. You acquired the property after the renewal community designation is in effect.
  2. You did not acquire the property from a related person or member of a controlled group of which you are a member.
  3. Your basis in the property is not determined either by its adjusted basis in the hands of the person from whom you acquired it or under the stepped-up basis rules for property acquired from a decedent.
  4. You were the first person to use the property in a renewal community.
  5. At least 85% of the property's use is in a renewal community and in the active conduct of a qualified trade or business in the community.
Buildings are qualified renewal property, but they do not qualify for the section 179 deduction. Used property may be qualified renewal property if it has not previously been used within a renewal community.
taxmap/pubs/p954-002.htm#TXMP54815aa6

More information.


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See the earlier discussion of the increased 179 deduction under Empowerment Zones for a special rule for renovated property, the section 179 deduction limits, and the recapture rules, all of which also apply in renewal communities. That earlier discussion also tells where to get additional information about the section 179 deduction.
taxmap/pubs/p954-002.htm#TXMP1f9c4977

Commercial Revitalization Deduction


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Commercial Revitalization Deduction

You can elect to treat qualified revitalization expenditures chargeable to a capital account for any qualified revitalization building in either of the following ways:
  1. Deduct half of the expenditures for the tax year the building is placed in service, or
  2. Amortize all the expenditures over a 120-month period beginning with the month the building is placed in service.
If you elect to take this deduction, you cannot take a depreciation deduction for the same expenditures. Claiming this deduction enables you to recover half (or all) of your qualified revitalization expenditures over a shorter period of time than depreciation. The commercial revitalization deduction is also allowed for both regular tax and alternative minimum tax purposes.
The election must be made by the due date (including extensions) of your return for the tax year the building is placed in service. If you timely filed your return without making the election, you can still make the election by filing an amended return within 6 months of the due date (excluding extensions). Enter "Filed pursuant to section 301.9100-2" on the amended return. Once made, the election may be revoked only with IRS consent. To do so, you must submit a request for a letter ruling under the provisions of Rev. Proc. 2004-1 (or its successor). See Rev. Proc. 2004-1 on page 1 of Internal Revenue Bulletin 2004-1 at www.irs.gov/pub/irs-irbs/irb04-01.pdf.
taxmap/pubs/p954-002.htm#TXMP42274eb5

Qualified revitalization building.


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This is a building and its structural components that you place in service in a renewal community before 2010. If the building is new, the original use of the building must begin with you. If the building is not new, you must substantially rehabilitate the building and then place it in service.
taxmap/pubs/p954-002.htm#TXMP619c3c8a

Substantially rehabilitated building.
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You substantially rehabilitate a building if, during any 24-month period, your qualified rehabilitation expenditures are more than the greater of the following amounts.
  1. The adjusted basis of the building at the beginning of the 24-month period, or at the beginning of your holding period for the building, whichever is later.
  2. $5,000.
taxmap/pubs/p954-002.htm#TXMP6d89ef73

Qualified revitalization expenditure.


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This is a capital expenditure for depreciable property that is:
  1. Nonresidential real property, or
  2. Section 1250 property that is functionally related and subordinate to nonresidential real property. Section 1250 property is depreciable real property that is not and never has been section 1245 property. Section 1245 property is defined in Publication 544, Sales and Other Dispositions of Assets.
The total amount of qualified revitalization expenditures for any qualified revitalization building cannot be more than the smaller of:
  1. $10 million, or
  2. The commercial revitalization expenditure amount allocated to the building by the commercial revitalization agency for the state in which the building is located.
taxmap/pubs/p954-002.htm#TXMP4fb3a2e1

Nonresidential real property.
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This is section 1250 property that is not residential rental property or property with a class life of less than 27.5 years. Residential rental property is any building or structure if 80% or more of the gross rental income from it is rental income from dwelling units.
taxmap/pubs/p954-002.htm#TXMP3237b439

Expenditures that do not qualify.
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The following do not count as revitalization expenditures.
  1. The cost of acquiring a building that you substantially rehabilitate, to the extent that cost is more than 30% of the total qualified revitalization expenses for the building (not counting the cost of the building itself).
  2. Expenditures you use to figure any allowable credit (such as the rehabilitation credit).
taxmap/pubs/p954-002.htm#TXMP51fa6243

Allocation of revitalization expenditure amounts.


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Each state authorizes an agency to act as the community revitalization agency. For a renewal community located within an Indian Reservation, the reservation governing body (as determined by the Department of the Interior) is treated as a state for this purpose. A commercial revitalization agency may make the following types of allocations for each qualified revitalization building.
  1. You must place the building in service by the close of the second calendar year following the calendar year during which the allocation is made and
  2. Your basis in the project of which the building is a part (as of the later of the date that is 6 months after the date the allocation was made or the end of the calendar year during which the allocation was made) must be more than 10% of your reasonably expected basis in the project (land and depreciable property) as of the end of the second calendar year following the calendar year during which the allocation was made. Under an exception that applies for allocations made after June 30, 2002, and before January 1, 2003, you had until December 31, 2003, to meet this test.
taxmap/pubs/p954-002.htm#TXMP616ed455

Dollar ceiling.
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Each state is allowed to allocate up to $12 million of commercial revitalization expenditure amounts to each renewal community located within the state for calendar years 2002 through 2009. For calendar years after 2002, the $12 million ceiling for a renewal community may not be allocated, in whole or in part, to any other renewal community. For a special rule that applies for 2002, see section 8.02 of Rev. Proc. 2003-38 on page 1020 of Internal Revenue Bulletin 2003-24 at www.irs.gov/pub/irs-irbs/irb03-24.pdf. Allocations for buildings placed in service during the allocation year and carryover allocations both reduce the $12 million ceiling for the calendar year during which the allocation is made. A binding commitment does not reduce the $12 million ceiling until the year in which the actual allocation is made.
taxmap/pubs/p954-002.htm#TXMP55aba705

Carryforward.
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If a commercial revitalization agency does not allocate all of the commercial revitalization expenditure ceiling for a renewal community for any calendar year after 2002, the unused ceiling amount may not be carried forward to another year. For a special rule that applies for 2002, see section 8.01 of Rev. Proc. 2003-38 on page 1020 of Internal Revenue Bulletin 2003-24 at www.irs.gov/pub/irs-irbs/irb03-24.pdf.
taxmap/pubs/p954-002.htm#TXMP244d5d08

Allocation document.
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An allocation is made when an allocation document containing all of the required information is completed, signed, and dated by an authorized official of the commercial revitalization agency. The agency must send a copy of the allocation document to you no later than 60 days following the end of the calendar year during which the allocation was made.
The allocation document requires the following information.
A carryover allocation document must include the following additional information:
taxmap/pubs/p954-002.htm#TXMP7a763500

How to report the deduction.


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If you claim amortization, report it in Part VI of Form 4562, Depreciation and Amortization.
If you claim the deduction for half your expenditures, report it on the applicable "Other deductions" or "Other expenses" line of your return.
If your commercial revitalization deduction is from a passive rental real estate activity, you must file Form 8582, Passive Activity Loss Limitations, to use the $25,000 special allowance. You can claim the special allowance for the commercial revitalization deduction regardless of your adjusted gross income and even if you do not actively participate in the rental real estate activity.
taxmap/pubs/p954-002.htm#TXMP44e656ed

More information.


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For more information, see section 1400I of the Internal Revenue Code.
taxmap/pubs/p954-002.htm#TXMP6945e290

Capital Gain Exclusion


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Capital Gain Exclusion

If you hold a qualified community asset more than 5 years, you will not have to include any "qualified capital gain" from its sale or exchange in your gross income. This exclusion applies to an interest in, or property of, certain businesses operating in a renewal community.
taxmap/pubs/p954-002.htm#TXMP512cf206

Qualified community asset.


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The following are qualified community assets.
  1. Qualified community stock.
  2. Qualified community partnership interest.
  3. Qualified community business property.
taxmap/pubs/p954-002.htm#TXMP23c7b88c

Qualified community stock.


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This is any stock in a U.S. corporation, if all the following requirements are met.
  1. You acquired the stock after 2001 and before 2010 at its original issue solely in exchange for cash. (This requirement is also met if you acquired the stock at any time from another person in whose hands it was qualified community stock.)
  2. The corporation was a renewal community business (or was being organized as a renewal community business) at the time the stock was issued.
  3. The corporation qualified as a renewal community business during substantially all of your holding period for the stock. (This requirement is also met if the corporation ceased to qualify as a renewal community business after the 5-year period beginning on the date you acquired the stock. However, your qualified capital gain cannot be more than what it would have been if you had sold the stock on the date the corporation ceased to qualify.)
taxmap/pubs/p954-002.htm#TXMP7fa527bf

Redemptions of stock.
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Stock will not qualify as qualified community stock if the issuing corporation makes certain redemptions of its stock within 2 years before or 2 years after the date the stock was issued. For details, see sections 1400F(b)(2)(B) and 1202(c)(3) of the Internal Revenue Code.
taxmap/pubs/p954-002.htm#TXMP790d3ac8

Qualified community partnership interest.


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This is any capital or profits interest in a U.S. partnership, if all the following requirements are met.
  1. You acquired the partnership interest from the partnership after 2001 and before 2010 solely in exchange for cash.
  2. The partnership was a renewal community business (or was being organized as a renewal community business) at the time the partnership interest was acquired.
  3. The partnership qualified as a renewal community business during substantially all of your holding period for the partnership interest. (This requirement is also met if the partnership ceased to qualify as a renewal community business after the 5-year period beginning on the date you acquired the partnership interest. However, your qualified capital gain cannot be more than what it would have been if you had sold the partnership interest on the date the partnership ceased to qualify.)
taxmap/pubs/p954-002.htm#TXMP2bff7e01

Redemptions of partnership interest.
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A partnership interest will not qualify as a qualified community partnership interest if the partnership makes certain acquisitions of its partnership interests within 2 years before or 2 years after the date the partnership interest was issued. For details, see sections 1400F(b)(3), 1400F(b)(2)(B), and 1202(c)(3) of the Internal Revenue Code.
taxmap/pubs/p954-002.htm#TXMP131b684a

Qualified community business property.


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This is tangible property that meets all the following requirements.
  1. You acquired the property after 2001 and before 2010.
  2. You did not acquire the property from a related person or member of a controlled group of which you are a member.
  3. Your basis in the property is not determined either by its adjusted basis in the hands of the person from whom you acquired it or under the stepped-up basis rules for property acquired from a decedent.
  4. You were the first person to use the property in the renewal community.
  5. Substantially all of the use of the property was in your renewal community business during substantially all of your holding period for that property. (This requirement is also met if you stopped using the property in your renewal community business, or your business ceased to qualify as a renewal community business, after the 5-year period beginning on the date you acquired the property. However, your qualified capital gain cannot be more than what it would have been if you had sold the property on the date you stopped using it in your renewal community business or on the date your business ceased to qualify.)
taxmap/pubs/p954-002.htm#TXMP21396bf5

Special rule for substantially improved buildings.
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Buildings (and land on which they are located) will be treated as having met requirements (1) and (4) if you substantially improve the buildings before 2010. You substantially improve a building if, during any 24-month period beginning after 2001, your additions to the basis of the property are more than the greater of the following amounts.
  1. 100% of the adjusted basis of the property at the beginning of the 24-month period.
  2. $5,000.
taxmap/pubs/p954-002.htm#TXMP1802c1b8

Renewal community business.


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This term is defined earlier under Increased Section 179 Deduction.
taxmap/pubs/p954-002.htm#TXMP772c7f98

Qualified capital gain.


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This is generally any gain recognized on the sale or exchange of a capital asset or property used in a trade or business as defined in section 1231(b) of the Internal Revenue Code (generally real property or depreciable personal property). Qualified capital gain does not include:
taxmap/pubs/p954-002.htm#TXMP7ebc8e62

Other rules.


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Rules similar to certain rules in section 1202 of the Internal Revenue Code apply to interests in pass-through entities, certain tax-free transfers, contributions to capital after the original stock issuance date, and short positions.
taxmap/pubs/p954-002.htm#TXMP1b6e8a54

More information.


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For more information, see section 1400F of the Internal Revenue Code.
previous pagePrevious Page: Publication 954 - Tax Incentives for Empowerment Zones and Other Distressed Communities - Empowerment Zones
next pageNext Page: Publication 954 - Tax Incentives for Empowerment Zones and Other Distressed Communities - Enterprise Communities
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication