April 15th. The end of the traditional income tax "busy season". The first day of the year that tax CPAs begin to seriously think about white sandy beaches and green rolling fairways. And then came the email alert!

The New York State Department of Taxation and Finance ("DTF") issued TSB-M-09(5)C announcing legislative changes to the Empire Zones (EZ) Program. The TSB-M, issued April 15, 2009, is effective for tax years beginning on or after January 1, 2008…..yes, 2008!

In a flash, the visions of sandy beaches and rolling fairways turned to mountains….of tax notices and amended returns!

The EZ Program was enacted to provide tax benefits, primarily in the form of tax credits, to taxpayers who conduct business within certain designated areas known as "Empire Zones". Virtually every county within New York State has one or more designated zones. Eligible businesses are required to become certified under Article 18-B of the General Municipal Law by Empire State Development ("ESD") and must meet certain eligibility requirements for each of the various tax credits. Certification is required prior to claiming any of the EZ credits and is evidence by a Certificate of Eligibility. The eligibility requirements for each of the tax credits differ depending on whether the business obtained its certification prior to August 1, 2002 or after July 31, 2002.

While a popular program for many businesses, the EZ program has not been without its controversies. The primary purpose of the EZ Program was to encourage economic investment, or re-investment, in the form of both job creation and capital expenditures, in the various zones. Eligible businesses seeking certification were required to forecast their expected increase in both employment and capital investment within their respective EZ. Generally, certifications were granted based on these forecasts. While their intentions were no doubt genuine at the outset, many businesses exploited a loophole in the original legislation. They merely "changed their shirt". Businesses simply reincorporated their existing entity or established a new entity. The next step was to satisfy required employment thresholds. Newly certified entities simply "hired" (actually "transferred") one employee to their "new" entities and were now eligible for and received thousands, in some cases millions, of tax credit dollars. These credits were used to reduce, and often eliminate, the taxes on their business or individual tax returns. Some credits even resulted in cash refunds to the businesses and/or individuals. 

Legislative changes effecting businesses certified after July 31, 2002 closed several of the original loopholes, but inequities and abuses (whether perceived or real) still existed. After years of debate on how to "fix" the problems of the EZ Program, the state Legislature promulgated sweeping reforms to the EZ certification requirements as part of recently approved budget bill. The DTF issued TSB-M-09(5)C to summarize the law changes.

Article 18-B of the General Municipal Law was amended to require the ESD to review all certified EZ business enterprises and apply new eligibility criteria for any business wishing to retain EZ benefits. The review process is currently on-going. Those businesses that are re-certified will be issued an"EZ Retention Certificate". The EZ business must still meet the eligibility requirements for the various credits in order to receive additional credits. Those businesses that are de-certified will receive notices informing them of the revocation and outlining the appeals process.

This is where we tax CPAs trade our golf shoes for the mountain boots…….

Businesses must obtain the EZ retention certificate to receive any EZ benefits for tax years beginning on or after January 1, 2008. "Any EZ benefits" refers to new credits generated in 2008 or the utilization of credits carried forward from previous tax years. The retention certificate must be attached to the tax return. Pass-through entities such as partnerships, S corporations and LLCs must distribute the retention certificate to their partners, shareholders and members who will need to attach it to their individual tax returns. The TSB-M (remembered, it was issued 4/15/09) indicates that taxpayers who have already filed a tax return must file an amended return with an EZ retention certificate attached. If a return was filed without a retention certificate and included any of the seven EZ credit forms, the credit(s) will be denied. To add further insult, any resulting underpayment of tax attributable to the disallowed credits may be subject to interest assessments. Unfortunately, the TSB-M did not discuss the rather obvious fact that amended returns cannot be filed until ESD actually issues the EZ retention certificates. We anticipate further guidance will be forthcoming from ESD and/or the DTF.

In the interim, we expect that many of our business and individual clients will be receiving notices from ESD or the DTF in the coming weeks. In fact, we are already aware of some such notifications.

The end result indicates a potential for a significant amount of previously claimed EZ credits to be disallowed on 2008 tax returns. For now, it seems there will be more blame to go around than there will be credits!

As always, we encourage you to contact your DB&B tax advisor if you have any questions or would like to further discuss how this new development impacts your business or individual tax situation.

The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.