Please take note that these questions and answers are only a guideline and any actions taken by an employer must be reviewed and discussed with a legal advisor before taking any tax credits.

Questions & Answers on Renewal Community Businesses

What is a Renewal Community Business?
In general, a Renewal Community Business is a corporation, partnership, or sole proprietorship that, for each taxable year, meets the following tests:

1. Except with respect to a sole proprietorship, every trade or business of the entity is actively conducted in a RC (legally separate entities are not aggregated with related entities for these tests).

2. At least 50 percent of the total gross income of the entity is derived from the active conduct of business within a RC.

3. A substantial portion of the use of the tangible property of the entity (whether owned or leased) is within a RC.

4. A substantial portion of the intangible property of the business is used in the active conduct of the business.

5. A substantial portion of the services performed for the employer by its employees occur within a RC.

6. At least 35 percent of the employees reside in a RC.

7. No more than 5 percent of the property is nonqualified financial property (such as debt, stock, and various financial instruments) except for reasonable amounts of working capital held in cash, cash equivalents, or debt instruments with a term of 18 months or less and certain accounts receivable arising from sales of inventory.

8. No more than 5 percent of the property is works of art or other collectibles unless held for sale to customers.

How does a business know whether its building is in the RC?
The local RC entity can provide businesses with information on its boundaries, or businesses may obtain the information over the Internet at www.hud.gov/offices/cpd/ezec

Are there any types of businesses that cannot be Renewal Community Businesses?
Yes. The tax laws exclude certain businesses from the definition, including liquor stores, golf courses, racetracks, gambling facilities, country clubs, residential rental properties, businesses that predominantly hold or develop intangibles for sale or license, or businesses that rent personal property, such as car rental agencies (unless at least 50 percent of the rentals are to a Renewal Community Businesses or to RC residents). Non-profit organizations are not automatically precluded merely because the activities carried on by the organization are conducted on a non-profit basis..

Can a high-technology company qualify as a Renewal Community Business?
The answer depends on its operations. The tax law states that no business consisting predominantly of the development or holding of intangibles for sale or license can qualify as a Renewal Community Business.

Can a real estate developer qualify as a Renewal Community Business?
A business that develops and owns commercial real estate can qualify only if at least 50 percent of its gross rental income from real property is from a Renewal Community Businesses. The owner is permitted to accept certifications of lessees in determining whether the lessee is a Renewal Community Business. If the project is residential rental property, the business is automatically excluded by statute from the definition of a Renewal Community Business.

Is farming a qualified business for purposes of the Renewal Community Business definition?
Farming is a qualified business only if the sum of the value of the assets owned or leased by the employer for use in the farming business does not exceed $500,000. The definition of farming and the method for calculating the value of the assets are found in the tax laws. An employer should consult its legal advisor on this matter.

How does a business apply the tests if it has several locations?
The tests generally apply to legally separate entities. If a single business entity has locations both within and outside a RC, all of the tests apply to the overall operations. If the various locations are operated by legally separate entities, the tests apply only to that location's operations even if the various legal entities are related for Federal tax purposes. For example, if a national chain store or restaurant set up operations in a RC, the tests would be measured with respect to the RC location store only if that store or restaurant was separately incorporated from other stores or restaurants in the chain.

What does it mean that "legally separate entities are not aggregated with related entities for the Renewal Community Business tests?"
This rule permits businesses to set up separate corporations or partnerships to conduct business in a RC. All Renewal Community Business tests would be measured based on the RC business, and a business would not have to include any activities of other related entities outside of the RC. Many other tax law provisions treat related entities as one business and require adding together the activities of all entities. This rule for and Renewal Community Businesses is more lenient than other tax rules.

How does a business apply the active conduct of business within a RC test if raw materials and customers come from outside the RC?
The tax regulations relating to Enterprise Facility Bonds describe a mail-order clothing business that is located in an EZ. The business purchases the supplies for its clothing business from suppliers located both within and outside the EZ and expects that orders will be received both from customers who will reside or work within the EZ and from others outside the EZ. All orders are received, filled at, and shipped from the clothing business located in the EZ. The income generated from the sales would be treated as gross income derived from the active conduct of business within an EZ.  The same would apply to a Renewal Community.

How do the tests apply if a business makes deliveries inside and outside a RC?
The tax regulations for Enterprise Facility Bonds give an example of a printing operation located in an EZ. All orders are taken and completed, and all billing and accounting activities are performed, at the print shop located in the EZ. The business, on occasion, uses its equipment (including its trucks) and employees to deliver large print jobs to customers who reside outside the EZ. As long as the business is able to establish that its trucks are used in the EZ a substantial portion of the time and that its employees perform a substantial portion of their services for the business in the the business meets the requirements with respect to the use of tangible property and location of services performed by employees. The same test would apply to Renewal Communities.

How does a business calculate the requirement that 35% of its employees be RC residents?
The tax regulations relating to tax-exempt bonds permit calculation either on a per-employee fraction or an employee actual work-hour fraction. In the per-employee fraction method, the business would compare the number of RC resident employees in a taxable year to the total number of employees during the same taxable year. Employees include persons employed for at least 90 days and who work at least 15 hours per week. The employee actual work-hour fraction seeks to accommodate businesses with full-and part-time workers and compares actual hours worked by RC residents to total employee hours worked in a taxable year. A business must apply the same method consistently over the period of the tax incentive once a method is selected. The same methods of determining whether the 35-percent test is met may apply for purposes of the other RC incentives and the incentives that require a Renewal Community Business, but the Internal Revenue Service (IRS) has not formally extended the rules

Are there any waivers for businesses that meet requirements in all other areas but the "35% rule" for RC employees?
The 35-percent RC employee requirement is statutory and cannot be waived. For purposes of tax-exempt financing, the is permitted to average yearly percentages over a rolling, consecutive 5-year period. There are no tax regulations on whether the averaging provision applies to any of the other RC incentives.

Do employees contracted through a temporary agency meet the definition of employee for purposes of the Renewal Community Business tests? Do employees who are also relatives meet the definition of employee for this purpose?
The tax laws do not directly address these issues with respect to the Renewal Community Business definition. If the business treats the individuals as employees for other Federal tax purposes, the business presumably could treat them as employees for this purpose.

How does a business know it qualifies as a Renewal Community Business? 
There is no formal application or certification process for being a Renewal Community Business. A business must analyze the requirements in light of its own operations and use the same standards it applies for taking any position on its Federal tax return. This requires a legal determination, so a business should consult a tax attorney or its tax preparer. The business should retain documents that establish that it is a Renewal Community Business, such as statements that an employee is a RC resident, in case of an audit by the IRS.