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Maximize Your Tax Savings with Federal Empowerment Zone Credits
Federal Empowerment Zones (FEZ) offer businesses in designated high-poverty areas the opportunity to claim up to $3,000 in federal income tax credits per employee. Ernst & Young LLP provides comprehensive services to help businesses identify eligible employees, calculate credits, and ensure compliance with all relevant regulations.
The team
Background
The Consolidated Appropriations Act of 2021 extended the FEZ credit through December 31, 2025. However, taxpayers may amend their open tax returns (e.g., 2022, 2023 or 2024) and file for a refund claim against taxes paid. Credits are not refundable but can be carried forward up to 20 years. Additionally, FEZ credit may be used to offset the Corporate Alternative Minimum Tax (CAMT).
Locations
There are currently 30 designated zones in urban areas and 10 in rural areas. The following major jurisdictions have designated Federal Empowerment Zones that are eligible for a federal income tax credit.
- East: Baltimore, MD; Boston, MA; New Haven, CT; New York, NY; Norfolk/Portsmouth, VA; Philadelphia, PA/Camden, NJ; Syracuse, NY; Yonkers, NY
- Midwest: Chicago, IL; Cincinnati, OH; Cleveland, OH; Columbus, OH; Detroit, MI; Minneapolis, MN; St. Louis, MO
- South: Columbia/Sumter, SC; Jacksonville, FL; Knoxville, TN; Miami/Dade County, FL; Pulaski County (Little Rock), AR
- West: El Paso, TX; Fresno, CA; Los Angeles, CA; Oklahoma City, OK; San Antonio, TX; Santa Ana, CA; Tucson, AZ
The basics
IRC Section 1396 provides a tax credit equal to 20% of qualified zone wages paid or incurred in a calendar year to a qualified zone employee up to a maximum of $3,000 per qualified zone employee per tax year. Generally, a qualified zone employee is defined as an employee who meets the following criteria, which includes but is not limited to:
- 90-day test: employed by the employer for at least 90 days
- Abode requirement: is a resident of an empowerment zone
- Location-of-services requirement: performs substantially all of his/her services for the employer within an empowerment zone in a trade or business of the employer
The qualified zone wages are subject to a qualified wage overlap analysis of other federal tax credits claimed like the Work Opportunity Tax Credit. Also, the FEZ credit is subject to an IRC 280C adjustment.
The following business types are not eligible to claim the credit: private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises.
What EY can do for you
- Ernst & Young LLP can assist with screening employee home addresses and work locations and apply the various tests to determine if an employee is qualified for the tax credit.
- Once qualified employees are identified, we can assist you with calculating the tax credit and performing the qualified wage analysis, if applicable.
- We will provide a memorandum documenting the credit.