CARL WATTS & ASSOCIATES

December 12, 2016

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Designated Empowerment Zones
Tax Benefits
This is a topic many people are not familiar with and, if that is your case, you should keep on reading to find out some basic notions on the subject and whether such tax benefits may apply to you or anyone close to you.

Empowerment zones (EZs) are economically distressed communities designated by government for aid, primarily intended to lift the communities out of poverty by stimulating business enterprise and creating jobs.


Empowerment zones are designated as rural or urban; rural programs are administered by the U.S. Department of Agriculture and the urban programs by the U.S. Department of Housing and Urban Development.


For a community to be considered for designation as an empowerment zone under the The Empowerment Zones and Enterprise Communities Act, passed by Congress in 1993, it had to demonstrate economic distress: high levels of unemployment, a poverty rate of at least 20 percent, a declining population, and a pattern of disinvestment by businesses. In addition, an EZ community had to show the potential for economic development and the capacity to build public-private partnerships. Communities could meet this requirement by having public and private resources available to aid in the renewal process and by involving various community groups and other interested parties in developing and implementing the strategic plan.


Last March, the IRS issued Notice 2016-28 which provided that any nomination for an empowerment zone in effect on Dec. 31, 2014, will have a new termination date of Dec. 31, 2016, unless the governing state or municipality declined the extension in a notification to the IRS. 






The deadline for notification was May 24, 2016, and no state or municipality contacted the IRS to decline the extension. Therefore, all empowerment zone designations in effect on Dec. 31, 2014, remain in effect through Dec. 31, 2016.


Congress created Empowerment Zones in 1993. Most zones had an expiration date of Dec. 31, 2009, and this is the fourth extension of the expiration date. (FYI the designation for the District of Columbia enterprise zone ended on Dec. 31, 2011.) 


The Department of Housing and Urban Development and the Department of Agriculture designated 40 economically distressed locations as empowerment zones. You can find a list of all of them in the instructions to IRS Form 8844.



One of the key federal tax benefits for EZs is the empowerment zone employment credit which can be claimed using Form 8844.

A qualified empowerment 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.

For tax years that include December 31, 2016, the credit is 20% of the employer's qualified wages (up to $15,000) paid or incurred during calendar year 2016 on behalf of qualified empowerment zone employees. The tax credit may amount to as much as $3,000 (20% of $15,000) per qualified empowerment zone employee.

Partnerships and S corporations must file Form 8844 to claim the credit. All others are generally not required to complete or file this form if their only source for this credit is a partnership, S corporation, estate, trust, or cooperative. Instead, they can report this credit directly on Form 3800, General Business Credit.


Other federal tax benefits include:


  • Increased expensing for qualifying depreciable property. The maximum amount allowed to be expensed under Code Sec. 179 by an enterprise zone business is increased by $35,000 for qualified zone property.

  • Tax-exempt bond financing. Exempt enterprise zone facility bonds are bonds 95% or more of the net proceeds of which are used to finance an enterprise zone facility.
  • Deferral of capital gains tax on the sale of qualified assets sold and replaced. For any sale or exchange of a qualified empowerment zone asset held by the taxpayer for more than one year, the taxpayer can elect to defer the gain if he purchases certain other empowerment zone assets within 60 days of the date of the sale. Gain is recognized only to the extent that the amount realized from the sale exceeds the cost of any replacement zone assets (with respect to the same zone as the asset sold) purchased during a 60-day period, reduced by any portion of the cost previously taken into account under a rollover rule
  • Partial exclusion of capital gains tax on certain sales of qualified small business stock (QSBS). There is a 60% exclusion of gain on QSBS in a qualified business entity held more than five years and acquired before Feb. 18, 2009.

The tax benefits for empowerment zones are governed by complex rules that specifically identify classes of employees, types of property, types of equipment, and so on.

Our main purpose was to offer some basic information and encourage you to enroll help from a tax professional in order to make sure you fully benefit from all tax incentives you may be entitled to.
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