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Sohodojo Advisory Board Member
Jim Schneider
The Taxman86 Speaks...
03 August 2000
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The Move To Pass Distressed Communities Legislation Grows; A House Is Not A Home.

1. The list of Enterprise Communities seeking tax incentives grows.

Whether it is urban or rural Enterprise Communities [the little guys] the issue is the same, how to best get venture capital, hope and enthusiasm, to Enterprise Zone Businesses and the workers they hire. Below are two citations check out the difference, nothing is simple these days.

No matter where you go, the issues are the same:

Where are the tax incentives to make these distressed neighborhoods work. Well as someone once said, help is on its way. H.R. 4923, the "Community Renewal and New Markets Act of 2000" passed the House on July 25, 2000 on a vote of 394 to 27. S. 2733 almost passed the Senate on July 13, 2000 [it was an amendment to H.R. 8, "The Death Tax Elimination Act", and needed 60 votes, it got 57], but not without some controversy. Finally S. 2936, "Creating New Markets and Empowering Communities" was introduced in the Senate last week and will be the vehicle of choice we have been told.

Buried in these various bills are a number of approaches to bringing capital, tax and financial incentives, including ZERO Capital Gains, increased low income housing credits, up front rehab deductions, exempt from the Passive Loss Rules, wage tax credits, and 39% Investment Credits for Venture Capital. Unfortunately they all become effective next July 2001 or January 2002, and require new rules and regulations from the Treasury, HUD or the SBA.

Two provisions* however, become effective immediately when the legislation is passed, that being a new IRC Section 1397B allowing for a capital gains roll over for Empowerment Zone Investment [EZI] made after the legislation is passed. And an increase in the IRC Section 1202 Capital Gains Exclusion [increased to 60%] for investments made in Qualified Small Business Stock of Enterprise Zone Businesses after the enactment of the legislation [IRC Section 1045 capital gains roll overs after the enactment can be used if invested in Enterprise Zone Business Qualified Small Business Stock]. *[Sections 206 and 207 of H.R. 4923, effective immediately]

What is an EZI [Or a ECI if we are successful] that will qualify for the capital gains roll over? That is a little bit tricky but in short it is Enterprise Zone Business [EZB], as now defined under IRC Section 1397B [it will become IRC Section 1397C] acquired for cash after the date of enactment. However, a major change may be coming if we read the Press Release properly, `"Businesses that produce Intangibles, such as Dot-Com Companies will be allowed.". These rules require that 35% or more of the full or part time employees be residents of the neighborhood. This is great since the IRC currently allow employers a 40% tax credit for all wages uo to $6,000 paid to a high risk youth [ages 18 to 25] from the neighborhood.

See: IRS Publication 936, which is on-line By the way any kid from the neighborhood, will do, whether a college student, or high school drop out.

Will the capital gains roll over, effective next month, work? We strongly believe it will, and hiring high risk youths is the added benefit. Moreover, many others we have talked to also think it will work, it is called the free market system.

Moreover in this new world of startups; Let the games begin. See: New Yorker films and Two Attorneys Hang Their Shingles Online, in today's economy, from rag to riches big time. Or for something interesting an internet incubator wanting to put their projects in Empowerment Zones/Enterprise Communities for tax advantages, plus Russia, India and China. WOW!!! Or how about music for a "tax professional's ears" or for those who need it full time . Or if you are a political junky, how about, pseudo.com and their partner. The world is clearly at our doorsteps, and with some creative tax planning we can have some fun and maybe save for the future.

2. A House is not a home, it is a business, or is it?

We like books , and this one caught our eye. Sex and Real Estate: Why We Love Houses. See the NY Times review.

On the other hand, just plain cheap housing seems to be foremost in many employers' minds in the hot Dot-Com Cities. We suggest they talk to their tax advisors. "Internet in San Francisco Employs 40,000." in today's NY Times 40,000 in downtown San Francisco and 140,000 in the Silicon Valley have created the "perfect storm." What about putting some of those into Empowerment Zones and Enterprise Communities with their 7/24/365 life styles. As said before, help is on its way.

Jim Schneider, LL.M.

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