Empowerment Zone Tax Credit Example

The Empowerment Zone Tax Credit is a federal tax credit under IRC section 1396 and is equal to 20% of total qualified zone wages. Qualified zone wages are wages paid or incurred by an employer for services performed by an employee while the employee is a qualified zone employee. A qualified zone employee is any employee of the employer who:

• Performs substantially all (interpreted as 80%) of the services for that employer within an empowerment zone in the employer’s trade or business and
  
• Has his principal residence within that empowerment zone while performing these services.

Both full and part-time employees may qualify but individuals who bear certain relationships to an individual who owns more than 50% in value of the outstanding stock of the employer do not qualify. In addition, the employer must employ the individual for at least 90 days, except where terminated because of misconduct as determined under the applicable unemployment compensation law or where the employee becomes disabled (the employer must offer to reemploy the individual if recovery occurs before the 90th day). 

Boston has been designated by HUD as an urban empowerment zone. Wages paid after 2001 in the Boston urban empowerment zone are eligible for the EZE. HUD has created an address-based web site that is used to determine whether a specific address is within the Boston urban empowerment zone. Specifically, the web site address: 

http://www.hud.gov/offices/cpd/economicdevelopment/programs/rc/index.cfm 

provides an address locator (under "Related Information" where the address, including zip code of the business and employee is entered and a determination is made). It is necessary to input each eligible employee’s address and zip code to determine whether the employee resides within the Boston urban empowerment zone. The employer should obtain a statement from the employee, under penalty of perjury, that gives the address of the employee's principal residence and provides assurance that the employee will notify the employer of a change in the employee's principal residence. 

Finally, the deduction for wages eligible for the EZE must be reduced by the amount of the credit. For example, wages totaling $40,000 would produce a maximum credit of $3,000 (20% X $15,000) and the deduction for wages would be reduced to $37,000. 

Procedurally, the credit is claimed on Federal form 8844 – Empowerment Zone Employment Credit. Unused credits may be carried back 1 year and forward 20 years. 

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