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Apr 2003
01
April 01, 2003

Legislators Tighten Loopholes in Renaissance Zone Act

State legislators recently amended the Renaissance Zone Act to stop crafty business owners from abusing tax incentives. Public Act 622 prevents business owners from buying storefront property in Renaissance Zones only to receive their tax credits. Instead of moving their operations and employees into the Renaissance Zone to help revitalize the community, those businesses merely hang a shingle to qualify for the tax credits. The 2002 Amendment curbs this problem by implementing a new tax credit formula for business owners.

On July 17, 1996, the state of Michigan became the first state in the nation to establish Renaissance Zones by enacting the Renaissance Zone Act. The purpose of the Act is to spur economic growth and development; stimulate industrial, commercial and residential improvements; and prevent further physical deterioration of disadvantaged areas. Renaissance Zones are regions in Michigan set aside as virtually tax-free for any business or resident located in or moving to one of the Zones. Although residents in Renaissance Zones remain liable for sales and employment-related taxes, residents receive tax exemptions on state income taxes, local income taxes, state single business taxes, and real and personal property taxes. The tax exemptions span over fifteen years and phase out over the last few years. Michigan public officials recently expanded the Renaissance Zones from urban, rural, agricultural and ex-military facilities to the research and development of alternative energy resources and pharmaceuticals.

As one of the first eleven communities to receive Renaissance status on January 1, 1997, Grand Rapids designated six Renaissance Zones throughout Kent County. West Michigan obtained additional Zones when the second round of Renaissance Zones was passed into law in 2000. Currently, there are over twenty communities throughout Michigan with designated Renaissance Zones. Renaissance Zones are superior to enterprise or empowerment zones, which provide government money for development without really identifying the underlying problems in the cities. Since Renaissance Zones require no paperwork to qualify, a person merely has to live or own a business in a Zone to take advantage of the tax break. As a result, businesses began to abuse the Act. Prior to Public Act 622, business owners could qualify for tax credits by buying property in Renaissance Zones even though the business owner had no intention of fully using the property.

Effective December 23, 2002, Public Act 622 establishes two different tax credit formulas depending on when a business locates to a Renaissance Zone. If a business locates to a Renaissance Zone after November 30, 2002, then the tax credit is calculated as the lesser of the following:


a.     Taxpayer's Total Liability x Average Value of Taxpayer's Property
                                            + Payroll in Renaissance Zone Average
                                               Value of Taxpayer's Total Michigan
                                                           Property + Payroll 
                                                                         2

or

b.     10% of the adjusted payroll for services performed in a Renaissance Zone and depreciation expenses

For businesses that locate within a Renaissance Zone before December 1, 2002, the credit is calculated by the greater of 1) the above formula or 2) the lesser of the following:

a.        Taxpayer's Total Liability x Average Value of Taxpayer's Property 
                                               + Payroll in Renaissance Zone Average
                                                  Value of Taxpayer's Total Michigan
                                                             Property + Payroll
                                                                           2
or


b.    The credit allowed for the tax year beginning in 2002 + 2% of the increase in taxpayer's Renaissance Zone payroll plus depreciation expenses for the tax year over those amounts in the tax year beginning in 2002.

The formulas are slightly amended if the business is a partnership, limited liability company, S corporation or individual.

The new formulas ensure that a business owner who operates 20% of his/her business in a Renaissance Zone receives credits for only 20% of the business's income. The Amendment similarly revises the calculation of credits allowed under the alternative energy Renaissance Zone. While legislators may not always think of every loophole when creating law, they are quick to eliminate those loopholes as they become apparent.

* * *

Warner Norcross & Judd is a full-service law firm with offices in Grand Rapids, Metro Detroit, Holland and Muskegon. Because each business situation is different, this information is intended for general information purposes only and is not intended to provide legal advice.

West Michigan Commercial Development & Real Estate Quarterly

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