December 31, 2011
Rob Babek, Tax & Business Services Partner, Quoted in Northbay Biz Article "On the Chopping Block"
By Karen Hart
The Impact on Business
Putting a halt to redevelopment could have a major impact on California businesses. That’s because redevelopment agencies also administer enterprise zones and give businesses tax incentives to move into blighted areas or opportunities to earn credits by installing new equipment or hiring employees in those zones. However, because of the economy, many businesses have lost money or have declining revenue, so they can’t currently use their credits. Now Governor Brown wants to get rid of the zones and wipe the credits off the state books, according to Rob Babek, a CPA and partner-in-charge of the Los Angeles office of Marcum LLP, a New York-based CPA firm.
“We have more than 1,000 clients with tax credits up and down the coast of California,” says Babek. “Some have $800,000 to $900,000 in tax credits, which they may lose. If that happens, these companies may have to rethink their long-term strategies. My clients may have to move or decide they can’t hire new employees or have to cut back on their existing ones. I understand what the governor is trying to do, but by balancing the budget in this fashion, we could lose jobs and businesses in California.”
One of Babek’s clients, a manufacturer, strategically built in an enterprise zone and took advantage of the manpower there. “It planned to use earned credits, which add up to approximately $900,000, to save a significant amount in California income taxes. With those savings, it intended to purchase new equipment and hire new employees,” says Babek. “If those credits are lost, my client will have to rethink its business plans going forward and may have to cut back or eliminate the purchase of new equipment and the hiring of additional employees. Short term, this will help the governor adjust his budget. Long term, it appears it will hurt local businesses throughout California.”
However, Babek notes, if enterprise zones continue to exist in the future, there should be some reform in this area. “As a CPA, I saw that whenever they came out with an enterprise zone, they let existing businesses qualify for the credits. So, many existing businesses were able to benefit without doing a lot.”
In the spirit of redevelopment law, enterprise zones were created to draw new businesses in to keep communities vital and to hire local citizens, says Babek. However, many existing businesses were getting significant credits for purchasing equipment they’d already had plans to purchase, and they weren’t hiring new local employees. “Redevelopment agencies benefit both citizens and businesses, but the rules weren’t defined well enough,” says Babek. “Enterprise zones should be all about giving incentives to new businesses to move in and put people to work.”