While Indian gaming has helped some tribes, economic development challenges still persist in many tribal communities. These challenges range from insufficient access to capital, to insufficient workforce development, to underdeveloped physical infrastructure. In an effort to overcome these challenges and combat the persistent poverty and unemployment that pervades many Indian reservations, the federal government has enacted certain business development incentives to encourage economic growth in Indian country.
These incentives take many forms, including tax credits, loan guarantees and tribal contracting preferences. A non-Indian business can leverage these incentives on its own and in partnership with a tribe to the benefit of all involved. With nearly 100 Indian reservations (or rancherias) throughout California, businesses in this state are uniquely situated to profit from these federal programs. A business interested in exploring such business opportunities should consult an attorney experienced in Indian law who is familiar with these federal programs.
The Empowerment Zones program, provides tax incentives for businesses located within certain areas designated by the Department of Housing and Urban Development or Department of Agriculture. These Empowerment Zones are usually located in areas of high unemployment, pervasive poverty and general economic distress conditions that describe many Indian reservations. Tax incentives for locating a business within an Empowerment Zone include employee tax credits, reduced tax on capital gains, increased tax deductions on equipment, accelerated real property depreciation and tax-exempt bond financing. Tax savings abound to those businesses interested in partnering in Indian country.
Several tax benefits are available to non-Indian businesses that partner with tribal businesses or employ tribal members. For example, manufacturers located on an Indian reservation can use shorter recovery periods when calculating depreciation deductions for equipment. To qualify, the property must be mainly used for trade or business purposes and certain property located off reservation but connected to infrastructure on the reservation may also qualify. While currently unavailable, Congress is in the process of reauthorizing this program.
The New Markets Tax Credits program gives non-Indian investors a federal income tax credit for making certain kinds of investments in designated Community Development Entities, or CDEs, that provide capital to low-income communities, including Indian reservations. Tribes and tribally owned businesses benefit with access to financing not typically available in the traditional credit markets, below-market interest rates and loan forgiveness of about 20 to 25 percent at the end of seven years. Non-Indian businesses can benefit by becoming a CDE, investing in an already existing CDE, or creating a joint venture with at tribal business using capital from this program.
Qualified investments made through the CDE will give the investor a 39 percent tax credit on its investment over a seven-year period. Types of projects that can get financing through this program include job training centers, community health clinics, "green" commercial buildings, grocery stores, office buildings, shopping centers, mixed-use projects, for-sale housing, renewable energy facilities, arts centers, train stations, movie studios, theaters, charter schools, hospitals, college campuses, high-tech and biotech facilities, nursing homes, workforce housing, homeless shelters, transitional housing, facilities to assist educating the homeless, and assistance with home ownership in underserved areas. Projects that cannot receive financing under this program include casinos, golf courses, race tracks, massage parlors, rental housing, liquor stores, farms and financial businesses.
The Indian Employment Tax Credit program is another federal program that encourages businesses to hire tribal members who live on or near an Indian reservation. Under the program, a business that hires a tribal member or spouse who works on the reservation and lives on or near the reservation can get a $4,000 tax credit for each such employee. While this program has expired, legislation has been introduced in Congress to extend the program retroactively from its expiration.
A non-Indian business that partners with a tribe or locates its business on an Indian reservation may also enjoy unique financing opportunities. For example, Indian tribes can issue tax-exempt debt so long as the proceeds are used for essential governmental functions like schools, roads, parks, government buildings, health clinics or water treatment facilities. Because the interest on the debt paid to the debt holders is not treated as taxable income, the borrowing costs for this type of debt are less. The savings can then be transferred to businesses that develop or lease land on the reservation.
Under the Indian Financing Act of 1974, the Bureau of Indian Affairs also offers loan guaranties to Indian businesses that otherwise would not qualify for a loan. These loan guaranties effectively lower the applicable interest rate charged by traditional lending institutions, thereby allowing Indian businesses to obtain financing. The guaranty cannot exceed 90 percent of the loan and the term cannot be greater than 30 years. Loans may be used for a variety of purposes including operating capital, equipment purchases, business refinance, building construction and lines of credit. The borrower's business must be located on or near an Indian reservation and must contribute to the economy of the reservation. The program can benefit non-Indian businesses by allowing them to open lines of credit for tribes and by giving them access to the lower interest rate when they form joint ventures with tribes so long as a tribe owns 51 percent of each joint venture.
The U.S. Department of Agriculture also offers loan guarantees to manufacturers, wholesalers, retailers and other businesses that cater to rural communities, such as Indian reservations. These businesses which can be non-Indian must provide employment, improve the economy or the environment, promote conservation of water for aquaculture, or reduce reliance on nonrenewable energy sources. The loan guarantees range from 60 to 80 percent of the loan amount. The loan funds may be used for business acquisitions, purchase and development of land, equipment purchase, business enlargement and modernization, and other business needs. Under this program and other programs, non-Indian businesses have access to special financing if they choose to locate on or near a rural Indian reservation.
Federal Contracting Preference
Tribes also enjoy certain federal contracting advantages unavailable to non-Indian businesses. For example, under the Historically Underutilized Business Zone, or HUBZone, program, a small business located on an Indian reservation that has at least 35 percent of its employees residing on the reservation may enjoy a preference when competing for federal contracts. The business does not have to be owned by the tribe or an Indian. The program is designed to stimulate economic development and create jobs in tribal communities by providing federal contracting preferences to small businesses that locate in and hire employees from the HUBZones. A "small" business could employ as many as 500 to 1,000 people and still qualify for the program.
In addition, the federal Small Business Administration's 8(a) Business Development Program gives small businesses with at least 51 percent tribal ownership competitive advantages in federal contracting. The 8(a) BD program is designed to help small businesses owned and controlled by socially and economically disadvantaged individuals, as well as by economically disadvantaged Indian tribes, in competing on an equal basis in the mainstream of the American economy. Unlike other businesses, tribally owned firms may receive sole source 8(a) contracts regardless of dollar size. Tribal firms are not subject to the $3.5 million limitation on sole-source contracts applicable to other entities. Tribes may also have as many 8(a) firms as they wish, so long as each is in a different primary North American Industry Classification System (formerly SIC) Code. Additionally, certain exceptions to the affiliation rules for size exist for tribally owned companies.
The Buy Indian Act is another federal program that gives Indian-owned businesses a competitive advantage in obtaining government contracts from the Departments of Interior and Health and Human Services. Under the act, the departments must use Indian labor and products where practicable without necessarily opening the procurement contract to the "open market." The Buy Indian Act also may benefit non-Indian businesses that enter into a joint venture with an Indian-business as long as the Indian business owns 51 percent or more of the joint venture. As part of the Buy Indian Act, the Indian Incentive Program will give a 5 percent rebate to a Department of Defense prime contractor that uses an Indian-owned business as a subcontractor. As with the other programs described above, there is great economic upside in federal contracting for non-Indian businesses that partner with tribes and tribal businesses.
With so many Indian reservations in California, businesses in this state have a unique opportunity to benefit from federal programs set up to stimulate tribal economies. This could be a win-win scenario for businesses and tribes.
Thomas Weathers is Aleut and of counsel to Vasquez Estrada & Conway, a minority-owned law firm with offices in Marin and Los Angeles counties. Weathers practices Indian law and business law. He can be reached at firstname.lastname@example.org.
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