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California Enterprise Zone Net Interest Deduction
Lenders making loans to Enterprise Zone businesses may receive a net interest deduction. As a lender, this means tax savings, thus increasing profitability.
Net Interest Deduction
Interest earned on investments in a zone business is free from California State Income Tax. A deduction from income is allowed on the amount of "net interest" earned on loans made to a trade or business located exclusively in an Enterprise Zone. Net interest refers to the gross interest, less any direct expenses incurred in making the loan.
 Who May Benefit?
- Private Lenders
- Business owners obtaining financing
- Individual Lenders
- Financial Institutions
Qualifying Loans
- Business loans
- Mortgages
- Loans from non-commercial sources
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
Examples
A small business is loaned $5,000 from an private-individual with no interest. Interest earned amounts to $550 and expenses relating to the loan amounts to $300. The individual can deduct $250 ($550 - $300) of net interest from his/her State tax return. A financial institution lends a business $450,000 to purchase a building at 7.68% interest. The institution can deduct the interest earned, $34,560, from its State tax return yearly.
Note: The money lent must stay within the zone |
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