What Is the Federal Empowerment Zone Tax Credit?

Federal Empowerment Zone programs were established to foster economic growth and investment in specific high-poverty urban and rural areas. These initiatives used targeted tax incentives to encourage businesses to operate in and hire residents from these economically distressed communities. The original designations for these zones were for a limited time and have technically expired.

However, Congress has periodically extended certain tax benefits associated with the original zones. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 continued these incentives, extending them through December 31, 2025. This extension means the tax advantages for businesses operating within the historical boundaries remain active and available.

Locating a Federal Empowerment Zone

To take advantage of the available tax incentives, a business must first confirm that its physical address is within the geographic boundaries of a federally designated Empowerment Zone (EZ). The U.S. Department of Housing and Urban Development (HUD) provides a specific online tool for this purpose, known as the EZ Address Locator. This tool is the authoritative source for determining eligibility based on location.

Using the locator, a user must navigate to the HUD website and enter a complete street address, including the city, state, and zip code. The tool will provide a clear confirmation if the address falls within one of these zones.

Businesses should perform this check for both their own operational address and the residential addresses of their employees to meet all qualifications for the tax credit. The boundaries of these zones can be very specific, sometimes varying from one side of a street to the other, making the use of this official tool a required step.

The Empowerment Zone Tax Credit

The primary incentive still available is the Empowerment Zone Tax Credit, a component of the general business credit. This is a federal income tax credit available to employers who operate a business and pay wages to certain employees within an EZ. The credit is calculated as 20% of the first $15,000 of qualified wages paid to an eligible employee during a calendar year. This results in a maximum annual credit of $3,000 per qualifying employee, with no limit on the number of employees an employer can claim.

For a business to be eligible to claim the credit, its trade or business must be located within a designated EZ. The more detailed requirements apply to the employee. To be considered a “qualified employee,” an individual must have their principal residence within the same EZ where the business is located.

The employee must also perform substantially all of their job duties for the employer within that EZ. Both full-time and part-time employees can qualify, but they must be employed for at least 90 days. Certain individuals, such as relatives or those who own more than 5% of the business, are not considered qualified employees.

Calculating the credit is a direct computation based on wages. For example, if a qualified employee earns $20,000 during the year, the credit is calculated on the first $15,000 of those wages, which equals $3,000. If another qualified employee earns $10,000, the credit would be 20% of $10,000, or $2,000. Wages used to calculate the Empowerment Zone Tax Credit cannot also be used to figure other wage-based credits, such as the Work Opportunity Tax Credit.

Claiming the Tax Credit

Once a business has determined it has qualifying employees and has calculated the credit amount, the final step is to claim it. The specific form required to claim the Empowerment Zone Employment Credit is IRS Form 8844. This form is filed as part of the business’s annual federal income tax return and consolidates the wage information for all qualifying employees.

The process of completing Form 8844 requires the total qualified zone wages paid during the calendar year. The form walks the filer through the calculation, applying the 20% rate to the lesser of the actual wages paid or the $15,000 per-employee limit. The resulting credit is then carried to Form 3800, General Business Credit, which is used to apply the credit against the business’s overall tax liability.

Partnerships and S corporations must file Form 8844 to claim the credit and then pass the credit through to their partners or shareholders on Schedule K-1. Other entities, such as sole proprietorships or corporations, will attach Form 8844 to their respective income tax returns, like Form 1040 or Form 1120.