Empowerment zone employment credit.

A tax credit designed to achieve social goals.

Congress sometimes tries to use the Internal Revenue Code to achieve social goals. One example is the creation of empowerment zones by the Revenue Reconciliation Act of 1993. Believing that special consideration should be given to the problems of distressed urban and rural areas and that Federal tax incentives could play a role in revitalizing these economically distressed areas, Congress added Internal Revenue Code sections 1396 through 1397D; it was felt that expanding business and employment opportunities, especially for residents of those areas, could help play a part in alleviating both economic and social problems.

EMPOWERMENT ZONES

In general, empowerment zones are areas designated by either the Secretary of Housing and Urban Development (urban areas) or the Secretary of Agriculture (rural areas), that will retain designated status for 10 years. Generally, an eligible area must have pervasive poverty, unemployment and general economic distress.

These zones were formally designated on December 21, 1994, and include portions of Atlanta, Baltimore, Chicago, Detroit, New York, a cross-border area of Philadelphia-Camden, three counties in the Kentucky Highlands, six countries in the Mid-Delta region of Mississippi and four counties in the Rio Grande Valley region in Texas.

TAX CREDIT

Under section 1396, an employer can receive a credit for a specified percentage of certain wages paid or costs incurred for services performed by a qualified zone employee.

The amount allowed for any tax year is 20% of the first $15,000 of qualified wages paid to each employee who is a resident of the zone and who performs substantially all employment services within the zone in the employer's trade or business during any period. Thus, an employer can take a credit of up to $3,000 each year for each employee; note that the amount of this credit reduces the employer's deduction for such wages.

Unlike the (now expired) targeted jobs credit, this credit is not limited to wages paid in the first year of employment. This credit is added to the list of those credits that make up the general business credit. In addition, it can offset a percentage of tax even for those employers subject to the alternative minimum tax.

Enterprise zone business. The investment tax incentives for empowerment zones are available only for trades or businesses that satisfy the criteria for "enterprise zone businesses," generally defined as a corporation or partnership whose sole trade or business is the active conduct of a qualified business within an empowerment zone. It must derive 80% of its gross income from the qualified business; substantially all of its tangible property must be located in the zone; and substantially all of its employees' services must be performed within the zone. There are similar rules for proprietorships.

Qualified wages. Qualified wages include salary and wages as generally defined for unemployment tax purposes plus certain amounts paid or incurred by an employer for educational assistance on behalf of qualified employees. Note that qualified wages do not include wages taken into account in determining the targeted jobs credit.

Qualified zone employee. As noted, such employees must perform substantially all of their services within an empowerment zone in the employer's trade or business, and must have principal residences within the zone while performing their services. The credit is available for both full-and part-time employees; however, the employee must work for the employer for at least 90 days.

RECORDKEEPING

While there are no specific recordkeeping requirements, an employer is still expected to maintain sufficient records to establish where the employees worked during the relevant period to substantiate any credit claimed.

For a discussion of the credit and other recent developments, see the Tax Clinic, edited by Philip Weisner, in the June 1996 issue of The Tax Adviser.

Nicholas Fiore, editor, The Tax Adviser

Editor's Note 

The material discussed provides general information. Before you take any action in this area, the appropriate code sections, regulations, cases and rulings should be examined.