Tax-Exempt Bond Financing State or local governments can issue enterprise zone facility bonds(a type of exempt facility tax-exempt bond) to raise funds to providean "enterprise zone business" with "qualified zone property."At least 95% of the net proceeds from the bond issue must be used tofinance: Qualified zone property whose principal user is anenterprise zone business, and Certain land used for a related purpose (for example, landwhere the business is located and a parking lot for customers andemployees). Tax-exempt bonds generally have lower interest rates thanconventional financing. TaxTip: Contact the appropriate state or local government agency to findout if this type of financing is available in your empowerment zone orenterprise community. Enterprise zone business.For tax-exempt bond financing, a corporation, partnership, or soleproprietor- ship is generally an enterprise zone business if all ofthe following statements are true for the tax year. Every trade or business of the corporation or partnership isthe active conduct of a qualified business (defined later) within anempowerment zone or an enterprise community. (This rule does not applyto a sole proprietorship.) At least 50% (80% for bonds issued before August 6, 1997) ofits total gross income is from the active conduct of a qualifiedbusiness within a zone or community. A substantial part of the use of its tangible property iswithin a zone or community. (For bonds issued before August 6, 1997,at least 85% of the use of its tangible property must be within a zoneor community.) A substantial part of its intangible property is used in theactive conduct of the business. (For bonds issued before August 6,1997, at least 85% of its intangible property must be used in, andexclusively related to, the active conduct of the business.) A substantial part of the employees' services are performedwithin a zone or community. (For bonds issued before August 6, 1997,at least 85% of the employees' services must be performed within azone or community.) At least 35% of the employees are residents of anempowerment zone or enterprise community. (This rule does not apply tobusinesses in the DC Zone.) Less than 5% of the average of the total unadjusted bases ofthe property owned by the business is from: Certain financial property, or Collectibles not held primarily for sale tocustomers. luxury hotels in MontecatiniFor a sole proprietorship, the term "employee" in (5) and(6) includes the proprietor. Also, a business located in a zone orcommunity that would qualify if it were separately incorporated istreated as an enterprise zone business. For example, a business thatis part of a national chain could qualify, providing it would meet thedefinition of an enterprise zone business if it were separatelyincorporated. Qualified business.A qualified business is generally any trade or business except onethat consists primarily of the development or holding of intangiblesfor sale or license. However, the rental to others of real property located in anempowerment zone or enterprise community is a qualified business onlyif the property is not residential rental property and at least 50% ofthe gross rental income from the real property is from enterprise zonebusinesses. The rental to others of tangible personal property is a qualifiedbusiness only if at least 50% of the rentals of the property are toenterprise zone businesses or zone or community residents. (For bondsissued before August 6, 1997, at least 85% of the rentals of theproperty must be to enterprise zone businesses or zone or communityresidents.) Also, a qualified business does not include any business listedearlier in item (5) or item (6) under Nonqualified employeesin the Empowerment Zone Employment Credit section. Relaxed requirements during start-up period.For bonds issued after August 5, 1997, a business will be treatedas an enterprise zone business during a start-up period if both of thefollowing apply. It is reasonable, at the beginning of the start-up period,to expect the business to be an enterprise zone business by the end ofthe start-up period. The business makes bona fide efforts to be an enterprisezone business. The start-up period is the period that ends with the start of thefirst tax year beginning more than 2 years after the later of thefollowing two dates. The issue date of the bond issue financing the qualifiedzone property. The date this property is first placed in service (or, ifearlier, the date that is 3 years after the issue date). Requirements during and after testing period.For bonds issued after August 5, 1997, a business that qualifies asan enterprise zone business at the end of the start-up period mustcontinue to qualify during a testing period that ends 3 tax yearsafter the start-up period ends. After the 3-year testing period, a business will continue to betreated as an enterprise zone business as long as it meets an employeeresidency requirement. To meet this requirement, at least 35% of itsemployees must be residents of an empowerment zone or enterprisecommunity. However, the following businesses are not treated asenterprise zone businesses even if they meet the employee residencyrequirement. Any business that consists primarily of the development orholding of intangibles for sale or license. Any business listed earlier in item (5) or item (6) underNonqualified employees in the Empowerment ZoneEmployment Credit section. A business in the DC Zone does not need to meet the employeeresidency requirement to continue to be treated as an enterprise zonebusiness after the testing period. Qualified zone property.For tax-exempt bond financing, qualified zone property is anydepreciable real or tangible personal property if all of the followingare true. You acquired the property after the zone or communitydesignation is in effect. You did not acquire the property from a related person ormember of a controlled group of which you are a member. Your basis in the property is not determined either by itsadjusted basis in the hands of the person from whom you acquired it orunder the stepped-up basis rules for property acquired from adecedent. You were the first person to use the property in anempowerment zone or enterprise community. At least 85% of the property's use is in an empowerment zoneor enterprise community and in the active conduct of a qualified tradeor business in the zone or community. Used property may be qualified zone property if it has notpreviously been used within an empowerment zone or enterprisecommunity. Special rule for substantially renovated property.Property will be treated as having met requirements (1) through(4), listed earlier under Qualified zone property, if yousubstantially renovate the property. Property is substantiallyrenovated if, during any 24-month period beginning after the zone orcommunity designation takes effect, your additions to the basis of theproperty are more than the greater of the following amounts. 15% (100% for bonds issued before August 6, 1997) of theadjusted basis of the property at the beginning of the 24-monthperiod. $5,000. Special rule for bonds issued after July 30, 1996.Generally for bonds issued after July 30, 1996, property that youreasonably expect by exercising due diligence to be qualified zoneproperty by an initial testing date will be treated as qualified zoneproperty for the period before that date. The initial testing date is generally the date that is18 months after the later of the following dates. The issue date of the bond issue financing the qualifiedzone property. The date this property is first placed in service (or, ifearlier, the date that is 3 years (5 years for certain constructionprojects) after the issue date). However, the issuer of the bonds can choose to use any earlierdate that comes after the bond issue date as the initial testing date. Interest not deductible.No deduction will be allowed for interest on any financing providedfrom a bond if the interest accrues in any year in which either of thefollowing occurs. Substantially all of the facility that was financed ceasesto be used in an empowerment zone or enterprise community. The principal user of the facility ceases to be anenterprise zone business. This rule does not apply if the use of the facility ceases toqualify because of bankruptcy or the termination or revocation of thedesignation as an empowerment zone or enterprise community. In addition, interest will remain deductible if the issuer andprincipal user try in good faith to meet the requirements and anyfailure is corrected within a reasonable period after discovery. More information.For more information, see Internal Revenue Code section 1394 andthe regulations under that section.