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Empowerment Zone Employment Credit

By: John V. Aksak John E. Boseman Ross J. Valenza Jason Carter |

In addition to the tax benefits provided for in the CARES Act, companies should also revisit existing credits that may have been overlooked in the past. During this time of economic uncertainty, companies may find opportunities to increase liquidity by utilizing credits on their 2019 tax return in conjunction with seeking CARES Act relief.

Summary

Empowerment Zone tax credits are available to companies doing business and employing current residents in areas deemed to be empowerment zones. Tax credits of up to $3,000 per employee per year are available to eligible companies, which could generate significant tax savings for companies operating in these zones. While this program originally expired at the end of 2017, legislators have reinstated it through 2020.

Details

Empowerment Zones:

While the 2019 instructions for Form 8844 (Empowerment Zone Employment Credit) lists general areas where empowerment zones exist, taxpayers should use the interactive map linked here to confirm whether their business is in an empowerment zone. These empowerment zones are federally designated by the U.S. Department of Housing and Urban Development.

The following list reflects areas where empowerment zones exist. The eligible zones do not encompass the entirety of the listed areas, so it is key to confirm whether a specific address falls within an empowerment zone.

Urban areas. Parts of the following urban areas are empowerment zones:

  • Pulaski County, AR
  • Tucson, AZ
  • Fresno, CA
  • Los Angeles, CA (city and county)
  • Santa Ana, CA
  • New Haven, CT
  • Jacksonville, FL
  • Miami/Dade County, FL
  • Chicago, IL
  • Gary/Hammond/East Chicago, IN
  • Boston, MA
  • Baltimore, MD
  • Detroit, MI
  • Minneapolis, MN
  • St. Louis, MO/East St. Louis, IL
  • Cumberland County, NJ
  • New York, NY
  • Syracuse, NY
  • Yonkers, NY
  • Cincinnati, OH
  • Cleveland, OH
  • Columbus, OH
  • Oklahoma City, OK
  • Philadelphia, PA/Camden, NJ
  • Columbia/Sumter, SC
  • Knoxville, TN
  • El Paso, TX
  • San Antonio, TX
  • Norfolk/Portsmouth, VA
  • Huntington, WV/Ironton, OH

Note: The treatment of parts of Washington, DC as an empowerment zone ended at the end of 2011.

Rural areas. Part of the following rural areas are empowerment zones:

  • Desert Communities, CA (part of Riverside County)
  • Southwest Georgia United, GA (part of Crisp County and all of Dooly County)
  • Southernmost Illinois Delta, IL (parts of Alexander and Johnson Counties and all of Pulaski County)
  • Kentucky Highlands, KY (part of Wayne County and all of Clinton and Jackson Counties)
  • Aroostook County, ME (part of Aroostook County)
  • Mid-Delta, MS (parts of Bolivar, Holmes, Humphreys, Leflore, Sunflower, and Washington Counties)
  • Griggs-Steele, ND (part of Griggs County and all of Steele County)
  • Oglala Sioux Tribe, SD (parts of Jackson and Bennett Counties and all of Shannon County)
  • Middle Rio Grande FUTURO Communities, TX (parts of Dimmit, Maverick, Uvalde, and Zavala Counties)
  • Rio Grande Valley, TX (parts of Cameron, Hidalgo, Starr, and Willacy Counties)

Qualified Zone Employees:

As stated in IRC § 1396, there are three key criteria for an employee to qualify for the Empowerment Zone tax credit (qualified zone employees):

  1. Substantially all of the services performed during that period by the employee for the employer are performed within an empowerment zone in a trade or business of the employer.
  2. The employee must live within an empowerment zone while performing the services.
  3. The employee must not be an ineligible employee.

Note: There is no limit on the number of qualified zone employees and they may be employed on a full-time or part-time basis.

The following are ineligible employees:

  • Related Individuals
  • 5% or more owners
  • Short-term employees
  • Recreational employees
  • Farm employees

Calculation of the Empowerment Zone Tax Credit:

If the company and its employees work/live in a qualified empowerment zone and meet the requirements detailed above, then it is worth considering the following qualifications in order to calculate the credit:

  • Per IRC § 1396, qualified zone wages do not include wages taken into account for the Work Opportunity Tax Credit (WOTC) and only the first $15,000 of qualified zone wages for each employee each year is taken into account in computing the credit.
  • Because of the $15,000 limitation, the maximum credit that an employer may claim each year for each qualified zone employee in an originally designated empowerment zone is $3,000 ($15,000 × 20%).
  • Wages are determined similarly to calculating the WOTC, except that educational assistance programs and youth training program wages are included for the Empowerment Zone tax credit.

Partnerships and S corporations must use Form 8844 to calculate their Empowerment Zone tax credit. All other entities may choose to directly report the credit on Form 3800 (General Business Credit).

When calculating the credit, employers will want to confirm that their employees’ addresses fall within the empowerment zone in which the business operates. The following is a step-by-step breakdown of Form 8844 (see the form’s instructions for more details):

  1. Once the qualified employee headcount is complete, the total qualified wages are determined by summing each employee’s qualified wages after applying the $15,000 limitation per employee.
  2. The total qualified wages are then further limited to 20% of the amount computed in step 1.
  3. The amount computed in step 2 is then increased by any Empowerment Zone tax credits from Schedule K-1s or Form 1099-PATR. For most companies this will be the amount reported on Form 3800.

Taxpayers are advised that special rules may apply in various situations, specifically in regard to cooperatives, estates, and trusts.

Considerations for business with multiple locations:

Businesses with multiple locations should consider exploring this credit opportunity since each additional location increases the likelihood that one will be in an empowerment zone. Taxpayers should search the interactive map for each location’s address to confirm whether they are located in empowerment zone, and then cross-reference each employees’ addresses to determine eligibility.

As detailed in Treasury Regulation § 1.1396-1, an employee satisfies the location-of-services requirement if substantially all of the services performed by the employee for the employer are performed within the empowerment zone in a trade or business of the employer. In determining whether the employee satisfies the location-of-services requirement, an employer may use either the pay period method or the calendar year method. Each tax year the employer must apply the chosen method consistently to all employees, but the employer may change the method from one tax year to the next.

Under the pay period method, an employee does not satisfy the location-of-services requirement during a pay period unless the employee performs substantially all of the services for the employer during that pay period within the empowerment zone. The company can have multiple types of pay periods for their employees (weekly, bi-weekly, etc.), and each employee should be evaluated based on their pay period.

Alternatively, under the calendar year method, an employee does not satisfy the location-of-services requirement during any part of a calendar year unless the employee performs substantially all of the services for the employer during that calendar year within the empowerment zone. However, a partial year may be used for any employee who is employed for less than the entire calendar year.

Work Opportunity Tax Credit Implications:

The WOTC is available to companies who employ individuals from defined target groups. Similar to the Empowerment Zone tax Credit, it is a per-employee credit with no set limit of qualifying employees. Taxpayers can claim both credits in the same tax year, but each employee’s wages can only generate the WOTC or the Empowerment Zone tax credit in any given year per IRC §1396(c)(1). Therefore, companies should consider having an annual study performed in order to optimize their benefit from these two credits.

Please contact a member of your TPC engagement team if you have any questions about this topic or to learn more about how we can help you maximize your company’s benefits from employment related credits.