Interest earned on investments in a zone business is free from
California tax. A deduction from income is allowed on the amount of net interest earned on
loans made to a business in the enterprise zone. Net interest refers to the full amount of
the interest, less any direct expenses incurred in making the loan.
Qualifying loans
Limitations
-
Loan
must be made to a business located solely within an enterprise
zone
-
Money
loaned must be used strictly for business activities within
the enterprise zone
-
Loans
must have been made after the zone was designated
-
Lender
must not have any equity or other ownership interest in the
zone business
Example
A business is loaned $5,000 from an individual with no interest or connection to
the business as specified in the limitations above. Interest earned amounts to $550 and
expenses relating to the loan amounts to $300. The individual can deduct $250 ($550 -
$300) of net interest.Another example . . . a
financial institution lends a business $450,000 to purchase a building at 7.68 percent
interest. The institution can deduct the interest earned, $34,560, tax-free yearly. Note:
This deduction is no longer allowed with the zone expires or if
the borrower moves out of the enterprise zone. Additionally, the
money lent must stay eithin the zone (i.e. trucking operation that
receives a loan to operate its business would not qualify, because
the truck travels outside the zone and therefore the money leaves
the zone. |
