IRS guidance on the empowerment zone employment credit.

• Author: Culp, David

Gains & Losses

Notice 96-1 provides guidance to assist employers in determining whether their employees are "qualified zone employees" whose wages may entitle the employer to an empowerment zone employment credit under Sec.1396.

The credit, part of the tax incentives enacted in 1993 for certain activities in federally designated empowerment zones, is equal to 20% of up to . $15,000 of certain wages paid or incurred each year to an employee who resides and performs services in a zone. Unlike the now-expired targeted jobs credit, the Sec. 1396 credit is not limited only to wages paid in the first year of employment. An especially appealing feature of the empowerment zone wage credit is that it can offset up to 25% of tentative minimum tax; see Sec. 38(c)(2). Thus, although the credit is not refundable, it can produce a benefit even for an employer in an alternative minimum tax situation. The Sec. 1396 credit is effective for wages paid or incurred in 1994 and later years. The nine Federal empowerment zones, which have very specific boundaries, were designated in December 1994. Six are urban zones, located in Atlanta, Baltimore, Chicago, Detroit, New York City, and a cross-border area of Philadelphia and Camden, NJ.; there are also three rural zones, located in three counties in the Kentucky Highlands, six counties in the "Mid-Delta" area around Greenville, Miss., and four counties in the Rio Grande Valley of southernmost Texas.

The credit is equal to 20% of the "qualified zone wages" paid or incurred by an employer in the calendar year that ends in, or with, the employer's tax year. "Qualified zone wages" are wages for services performed by an employee while the employee is a "qualified zone employee." A maximum of $15,000 of qualified zone wages can be taken into account for any qualified zone employee for any calendar year (reduced by any wages that were eligible for the targeted jobs credit). Thus, an employer can take a credit of up to $3,000 each year for wages paid to each "qualified zone employee." The employer's deduction for such wages is reduced by the amount of the credit; see Sec. 280C(a).

Sec. 1396(d) (1) provides two major requirements for a person to be a "qualified zone employee" during "any period":

1. "Substantially all" of the services performed during "such period" must be performed within an empowerment zone in a trade or business of the employer.

2. The employee's principal place of abode while performing "such services"...