The Empowerment Zone Employment Credit is a federal tax incentive designed to encourage businesses to operate in economically distressed or disadvantage areas and to hire residents of these areas.
Under the Empowerment Zone Employment Credit, an employer may claim a 20% credit (up to $3,000) on up to the first $15,000 of wages paid to certain employees. Substantially all of the services must be provided in the employer’s trade or business within an empowerment zone and the employee’s main residence while providing the services must be within the zone.
Both full-time and part-time employees qualify, provided they work at least 90 days during the year for which the credit is claimed.
Eligibility Requirements
To qualify for the Empowerment Zone Employment Tax Credit, businesses must meet several criteria:
- Location: The business must be located within a designated Empowerment Zone. These zones are designated by the Departments of Housing and Urban Development (HUD) and Agriculture (USDA) and include both urban and rural areas.
- Employee Residence: The employees for whom the credit is claimed must also reside within the Empowerment Zone.
- Employment Duration: Employees must work at least 90 days during the year in which the credit is claimed. There are exceptions to this requirement, such as if the employee is terminated due to misconduct or becomes disabled.
How to Claim the Empowerment Zone Credit
Step #1 – Determining Eligibility
The first step for businesses is to determine whether they are located in a designated Empowerment Zone. Specialty Tax Group can assist with this step by verifying the addresses on the HUD website and consulting the IRS’s list of designated zones. It is important to note that while HUD.gov provides information on the locations of these zones, Specialty Tax Group will confirm their eligibility through official IRS documentation.
Step #2 – Employee Qualification
Next, businesses need to ensure that their employees meet the criteria for being “qualified zone employees.” This involves verifying that the employees live within the Empowerment Zone and perform substantially all of their work within the zone. Businesses can use either the pay-period method or the calendar-year method to determine the period during which the employee has performed services in the zone.
Step #3 – Filing Claim for the Credit
To claim the Empowerment Zone Credit, businesses must file IRS Form 8844, Empowerment Zone and Renewal Community Employment Credit. This form is used to calculate the credit and must be included with the business’s annual tax return. Additionally, businesses must reduce their deduction for salaries and wages by the amount of the credit.
There may be more than one Enterprise Zone located in a state and there may be one Zone with multiple regions. To see if your business is located in an Enterprise Zone and which benefits are available, call us today at (563) 583-2115 or Click here to submit an online request.