The tax law is nondiscriminatory. Small-business owners get no special incentives just because they are minorities.
1. IRS information in various languages
The IRS has created a new multilingual gateway to provide federal income tax information in Chinese, Korean, Russian, Vietnamese and Spanish.
Also, the IRS offers Spanish versions of many forms and publications. Check the IRS website for specifics.
2. New-markets tax credit
Investors are allowed to claim the new-markets tax credit (NMTC) for making indirect investments in minority-owned businesses. Under the program, any taxpayer can receive a credit against federal income taxes for making an investment in designated community development entities (CDEs). The CDEs invest the capital in qualifying businesses in low-income communities.
The tax credit is equal to 39 percent of the cost of the initial investment and is claimed over seven years. Investors may not redeem or otherwise cash out their investments in the CDEs prior to the conclusion of the seven-year credit period.
“The NMTC program has brought $49.7 billion and 500,000 jobs to distressed communities throughout the nation," according to the New Markets Credit Coalition. "[It leverages] $8 of private investment for every dollar of federal tax-credit incentive.”
The credit expired at the end of 2011, but it's possible it will be extended through 2012.
3. Breaks for businesses on Indian reservations
These tax incentives encourage investments in businesses located on Indian reservations.
Indian employment tax credit. If you hire people who live on or near a reservation, you are eligible for this credit. It amounts to 20 percent of the excess of current qualified wages (the first $20,000 of wages), plus any health insurance coverage, over the corresponding amounts that were paid or incurred during 1993. A company that was not in business at that time is eligible for 20 percent of all qualified wages.
Accelerated depreciation. The recovery periods for determining depreciation are shortened so that write-offs for equipment and other depreciable property are speeded up. For example, property that would normally be depreciated over five years has a three-year recovery period, if it is considered Indian reservation property.
The special breaks for businesses on Indian reservations have expired but will likely be extended.
4. Tax breaks for businesses in distressed areas
A number of tax incentives are designed to encourage businesses to operate in locations that are economically distressed. These are not only for minority-owned businesses, but for any businesses that qualify.
Empowerment zones. These are areas designated by the Department of Housing and Urban Development for urban areas and by the Department of Agriculture for rural areas. Businesses operating in this zone qualify for these special tax breaks.
Empowerment-zone employment credit: For hiring workers in these locations: $3,000 per eligible employee.
Special capital-gain exclusion: For small-business stock in corporations within the zone that is held for more than five years.
Additional first-year expensing write-off: Up to $35,000 for purchases of equipment and machinery, in addition to the basic write-off amount ($500,000 in 2011; $139,000 in 2012 unless the old limit is restored).
DC enterprise zone. This includes parts of the District of Columbia. Businesses within these areas are eligible for tax incentives similar to those in empowerment zones.
These breaks expired at the end of 2011, but, as with the other incentives, are likely to be extended, at least for 2012. Find the list of qualifying zones using the HUD locator.
5. State tax breaks for special locations
A variety of tax breaks at the state level help reduce state income taxes. They help businesses operating in distressed areas and are not specific to minority-owned businesses or minority workers.
Tax credits similar to the federal new-markets credit are offered by a number of states.
Tax incentives for businesses that locate within various distressed areas. For example, Pennsylvania has the Keystone Opportunity Zone and Washington offers benefits to businesses within Community Empowerment Zones.
You may think that many of the breaks discussed here can no longer benefit businesses because of 2011 expiration dates. But past experience shows that Congress likely will extend them. Work with a knowledgeable tax advisor who can keep you posted on extensions and the opportunities that may apply to your business.
Barbara Weltman is an attorney and a prolific author, with such titles as J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business. She is a trusted professional advocate for small businesses and entrepreneurs and publishes Idea of the Day and monthly e-newsletter Big Ideas for Small Business. She hosts Build Your Business radio. Follow her on Twitter @BarbaraWeltman.
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