October  2003      Vol. 12, No. 9  REAP HOME PAGE  A publication of the Center for Rural Affairs    
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New Homestead Act and Rural Businesses
The bill provides for tax incentives to encourage business activity in counties that have lost 10 percent or more of their population since 1980.

To help renew the promise of the original Homestead Act and to reinvigorate rural communities, several members of Congress have introduced the New Homestead Act of 2003.

In the U.S. Senate, S. 602 was introduced by Senators Chuck Hagel (Nebraska) and Byron Dorgan (North Dakota), and co-sponsored by Senators from Louisiana, Montana, Minnesota, South Dakota, Arkansas, Kansas, Illinois, Iowa, Georgia, and West Virginia. In the U.S. House of Representatives, H.R. 2194 was introduced by Reps. Tom Osborne (Nebraska) and Earl Pomeroy (North Dakota).

The New Homestead Act offers a variety of incentives and tax credits for those who locate or begin a business in non-metropolitan counties that have lost at least 10 percent of their population since 1980.

The New Homestead Act contains specific provisions targeted at small business development in qualifying counties. Briefly, those provisions are:

○ Establishment of Individual Homestead Accounts, which are essentially savings accounts where an individual may contribute up to $2,500 annually for up to five years; these individual contributions would be matched by the federal government in an amount equal to 25 to 100 percent of the individual contributions (depending on the accountholder’s income).

Tax-free and penalty-free distributions may be made from the account after five years for costs related to developing a business, including capital, plant, equipment, and inventory costs.

○ Offering Microenterprise Tax Credits to aid small business owners (those with five or fewer employees) in qualifying counties. Under the New Homestead Act, each state with qualifying counties receives $1 million per qualifying county in “Rural Investment Tax Credits” (credits against federal income taxes) as incentives for businesses to expand or move to qualifying rural counties.

States may choose to allocate up to 20 percent of their total Rural Investment Tax Credit amount for microenterprise credits. Businesses can use these credits to reduce their federal taxes by 30 percent of any new business investment with a limit of $25,000.

So, for example, 63 counties in Nebraska would qualify for provisions under the New Homestead Act, allowing for $63 million in Rural Investment Tax Credits to the state and the potential for up to $12.6 million in microenterprise tax credits.

The New Homestead Act holds great potential for America’s rural communities and small businesses in them, but it is not law yet. We will continue to monitor its progress and keep you informed.

 Contact: Jon Bailey, jonb@cfra.org for more information.
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