Federal Tax Incentives: Empowerment Zone Credit 

Background 

 

The Empowerment Zone Employment Credit is an incentive to businesses that are located in an empowerment zone (EZ) to hire and retain employees who also live in the EZ. Empowerment Zones are distressed urban and rural areas nationwide that are in need of revitalization. The Empowerment Zone Initiative brings communities together through public and private partnerships to create the investment necessary for economic development. The Federal government assists these targeted communities by providing tax incentives, grants, loans and technical assistance.

 

Businesses are eligible for a wage credit of up to $3,000 yearly per eligible employee. You can claim the credit if you pay or incur “qualified zone wages” to a “qualified zone employee.” See IRC § 1396(c)(1). The credit is 20% of the qualified zone wages (including training and education expenses treated as qualified zone wages) paid or incurred during a calendar year. See IRC § 1396(b). The amount of qualified zone wages you can use to figure the credit cannot be more than $15,000 for each employee for each calendar year. See IRC § 1396(c)(2). As a result, the credit can be as much as $3,000 (20% of $15,000) per qualified zone employee each year

Both full time and part time employees may qualify, as long as they work at least 90 days during the year in which the credit is claimed. The credit amount is 20% of the first $15,000 of wages paid to the employee.

The credit is renewable each year, and there is no limit to the number of employees a business can claim, as long as each employee lives in the EZ. Both newly hired and current employees are eligible.

Qualifying EZ businesses may also be eligible for low-cost loans through EZ facility bonds, increased Section 179 tax deductions, partial-exclusion of tax on capital gains upon the sale of certain assets, and other incentives.The deduction on the income tax return for salaries and wages and certain education and training costs must be reduced by the amount of your empowerment zone employment credit. 

Empowerment Zones

A qualified empowerment zone employee is any employee (full-time or part-time) of the employer who:

  • Performs substantially all of the services for that employer within an empowerment zone in the employer’s trade or business, and

  • Has his or her principal residence within that empowerment zone while performing those services.

Empowerment Zones (EZs) are distressed urban and rural communities where qualifying businesses are eligible for billions of dollars in tax incentives. See § 1397C. The Departments of Housing and Urban Development (HUD) and Agriculture (USDA) have designated EZs historically within both urban areas and rural areas, typically with populations less than 200,000. 

Designated Zones

  • Urban areas.

    • Parts of designated urban areas may be classified as empowerment zones. You can find out if your business or an employee’s residence is located within an urban empowerment zone by going to HUD.gov. However, it may not be a final eligibility determination for any given Federal, state or local program. Note. The treatment of parts of Washington, DC as an empowerment zone ended at the end of 2011.

  • Rural areas.

    • Parts of designated rural areas may be classified as empowerment zones. You can find out if your business or an employee’s residence is located within a rural empowerment zone by going to HUD.gov. However, it may not be a final eligibility determination for any given Federal, state or local program.

A listing of designated empowerment zone and their designation dates has also previously been provided in Form 8844, Empowerment Zone and Renewal Community Employment Credit, instructions.​

Qualified Empowerment Zone Employees

To be a “qualified zone employee,” the employee must live in the same EZ in which substantially all of the services are performed for the employer. (See IRC § 1396(d)(1)). 

IRC § 1396(d)(1) provides a qualified zone employee is any employee who meets both of the following tests:

  • Performs substantially all of the services for the employer within an empowerment zone in the employer's trade or business, and

    • You can use the pay-period method or the calendar-year method to determine the period of time the employee has performed services in the zone.

    • For details, see Treas. Reg. § 1.1396–1 of the regulations

  • has his or her principal residence within that empowerment zone while performing these services. Both full-time and part-time employees may qualify.

IRC § 1396(d)(2) states the term “qualified zone employee” shall NOT include

  • Any relative of the employer described in IRC §§ 152(d)(2)(A) through 152(d)(2)(G).

    • ​A child or a descendant of a child.

    • A brother, sister, stepbrother, or stepsister.

    • father or mother, or an ancestor of either.

    • A stepfather or stepmother.

    • A son or daughter of a brother or sister of the taxpayer.

    • A brother or sister of the father or mother of the taxpayer.

    • A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

  • A dependent of the employer described in IRC § 152(d)(2)(H).

    • ​ An individual (other than an individual who at any time during the taxable year was the spouse, determined without regard to IRC § 7703, of the taxpayer) who, for the taxable year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer's household.

  • If the employer is a corporation, any individual who bears any of the relationships described in IRC §§ 152(d)(2)(A) through 152(d)(2)(G), or is a dependent, as described in IRC §152(d)(2)(H), of an individual who owns (or is considered to own under IRC § 267(c)) more than 50% in value of the outstanding stock of the corporation.

  • If the employer is an entity other than a corporation, any individual who owns directly or indirectly more than 50% of the capital and profits interest, including constructive ownership, in the entity.

  • If the employer is an estate or trust, any individual who is a grantor, beneficiary, or fiduciary of the estate or trust (or a dependent, as described in IRC § 152(d)(2)(H), of such an individual), or any individual who is a relative, as described in IRC §§ 152(d)(2)(A) through 152(d)(2)(G), of the grantor, beneficiary, or fiduciary of the estate or trust.

  • Any person who owns (or is considered to own under IRC § 318) more than 5% of the outstanding or voting stock of the employer, or if not a corporate employer, more than 5% of the capital or profits interest in the employer.

  • Any individual employed by the employer for less than 90 days.

    • IRC § 1396(d)(3) provides the 90-day requirement does not apply in the following situations. 

      • The employee is terminated because of misconduct as determined under the applicable state unemployment compensation law.

      • The employee becomes disabled before the 90th day. However, if the disability ends before the 90th day, the employer must offer to reemploy the former employee.

    • An employee is not treated as terminated if the corporate employer is acquired by another corporation under section 381(a) and the employee continues to be employed by the acquiring corporation. Nor is a mere change in the form of conducting the trade or business treated as a termination if the employee continues to be employed in such trade or business and the taxpayer retains a substantial interest therein.

  • Any individual employed by the employer at any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises.

  • Any individual employed by the employer in a trade or business of which the principal activity is farming (see Note below), but only if at the close of the tax year the sum of the following amounts exceeds $500,000.

    • 1. The larger of the unadjusted bases or fair market value of the farm assets owned by the employer.

    • 2. The value of the farm assets leased by the employer.

    • Certain farming activities are described in section 2032A(e)(5)(A) or (B) which provides the term “farming purposes” includes—

      • cultivating the soil or raising or harvesting any agricultural or horticultural commodity (including the raising, shearing, feeding, caring for, training, and management of animals) on a farm;

      • handling, drying, packing, grading, or storing on a farm any agricultural or horticultural commodity in its unmanufactured state, but only if the owner, tenant, or operator of the farm regularly produces more than one-half of the commodity so treated; and

      • the planting, cultivating, caring for, or cutting of trees, or

      • the preparation (other than milling) of trees for market.

Wages

Qualified empowerment zone wages are qualified wages paid or incurred by an employer for services performed by an employee while the employee is a qualified empowerment zone employee pursuant to IRC § 1396(c). Wages are further defined in IRC § 51(c) and generally are wages (excluding tips) subject to the Federal Unemployment Tax Act (FUTA), without regard to the FUTA dollar limitation. See IRC § 1396(c); IRC § 51(c); IRC § 3306.

The maximum wages that may be taken into account for each employee is limited to $15,000. The $15,000 amount for any employee is reduced by the amount of wages paid or incurred during the calendar year on behalf of that employee that are used in figuring the work opportunity credit (Form 5884). See IRC § 1396(c)(3). 

IRC § 1397(2) also states the following are also treated as wages:

  • Amounts paid or incurred by the employer as educational assistance payments excludable from the employee’s gross income under IRC § 127. However, this does not apply if the employee has a relationship to the employer described in IRC §§ 267(b) or 707(b)(1) (substituting “10%” for “50%” in those sections) or the employer and employee are engaged in trades or businesses under common control (within the meaning of sections 52(a) and (b)).

  • Amounts paid or incurred by the employer on behalf of an employee under age 19 for a youth training program operated by that employer in conjunction with local education officials

  • In general, you must reduce your deduction for salaries and wages and certain educational and training costs by the credit amount. You must make this reduction even if you cannot take the full credit this year because of the tax liability limit.

    • If you capitalized any costs on which you figured the credit, reduce the amount capitalized by the amount of the credit attributable to these costs.

  • Members of a controlled group of corporations and businesses under common control are treated as a single employer in determining the credit. The members share the credit in the same proportion that they paid or incurred qualifying wages.

The credit must be figured using only the wages that you paid or incurred in the calendar year that ended with or within your tax year. See IRC § 1396(a). For example, if your tax year began on April 1, 2016, and ended on March 31, 2017, you must figure wages based on the calendar year that began on January 1, 2017, and ended on December 31, 2017. Wages paid after the end of the calendar year may be used only to figure the credit claimed on the following year’s tax return.

 

See IRS Link for additional background:

Need more details? Contact us

We are here to assist. Contact us by phone, email or via our Social Media channels.