On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (CCA, 2021). The Act contains numerous individual, business, payroll, disaster, and energy-related tax provisions, as well as tax extenders.
One of those tax extenders was the extension of Empowerment Zone Tax Incentives, which The Act extends through December 31, 2025. Under pre-Act law, Empowerment Zone designations were set to expire on December 31, 2020.
What is an Empowerment Zone?
An “Empowerment Zone” is an economically depressed census tract that renders businesses within such a Zone eligible for special empowerment zone tax incentives, including the 20% wage credit under Code Sec. 1396.
Code Sec. 1396 states that a qualified zone employee is any employee (full-time or part-time) of the employer who:
- Performs substantially all of the services for that employer within an empowerment zone in the employer’s trade or business, and
- Has his or her principal residence within that empowerment zone while performing those services.
Why is this important?
Empowerment Zone employment credits allow for a credit to be taken equal to 20% of the employer’s qualified zone wages (up to $15,000) paid or incurred during the calendar year for services performed by an employee while the employee is a qualified zone employee. However, it is important to note that “qualified zone wages” should not include wages that are taken into account when determining eligibility for the Work Opportunity Tax Credit (WOTC), as well as wages that are taken into account for certain benefits and credits included in recent relief legislation related to COVID-19. With that in mind, Empowerment Zone employment credits can potentially amount to $3,000 per employee each year. It is an income tax credit that can be used to reduce the tax liability of both C-corporations and owners of pass-through entities like partnerships and S-corporations, subject to certain limitations.
There are Empowerment Zones in several of Ohio’s major cities as well as all over the country. If you would like to know more, contact your GBQ advisor and let us help determine if these credits are available for you.
Article written by:
Dan Conroy, CPA
Manager, Tax & Business Advisory Services