More information. For more information, call HUD at 1-800-998-9999 or USDA at 1-800- 645-4712.

Or you can find out whether your area has been designated as an empowerment zone or an enterprise community by using the Internet address www.ezec.gov.

Empowerment Zone Employment Credit

The empowerment zone employment credit provides businesses with an incentive to hire individuals who both live and work in an empowerment zone. (Individuals who work in the DC Zone may live anywhere in the District of Columbia.) You can claim the credit if you pay or incur qualified zone wages to a qualified zone employee.

The credit is 20% of the qualified zone wages paid or incurred during a calendar year. The amount of qualified zone wages you can use to figure the credit cannot be more than $15,000 for each employee for each calendar year. As a result, the credit can be as much as $3,000 (20% of $15,000) per qualified zone employee each year.

You cannot claim this credit for wages paid before 2002 for a business you operate in one of the 15 urban or 5 rural zones whose designation was effective December 31, 1998. But you can claim the credit in these zones for wages paid after 2001.

Qualified zone employee.   A qualified zone employee is any employee who meets both of the following tests.

1. The employee performs substantially all of his or her services for you within an empowerment zone and in your trade or business.
2. While performing those services, the employee has his or her main home within that empowerment zone (or within the District of Columbia, for services performed within the DC Zone).

Both full-time and part-time employees may qualify.

Nonqualified employees.   The following individuals are not qualified zone employees.

1. An individual you employ for less than 90 days. However, this 90-day requirement does not apply in either of the following situations.
   1. You terminate the employee because of misconduct as determined under the state unemployment compensation law that applies.
   2. The employee becomes disabled before the 90th day. However, if the disability ends before the 90th day, you must offer to reemploy the former employee.
2. Certain related taxpayers.
3. Certain dependents.
4. Any 5% owner.
5. An individual you employ at any:
   1. Private or commercial golf course,
   2. Country club,
   3. Massage parlor,
   4. Hot tub facility,
   5. Suntan facility,
   6. Racetrack, or other facility used for gambling, or
   7. Store whose principal business is the sale of alcoholic beverages for off-premise consumption.
6. Any individual you employ in a farming trade or business if, at the close of the tax year, the sum of the following amounts is more than $500,000.
   1. The larger of the unadjusted bases or fair market value of the farm assets you own.
   2. The value of the farm assets you lease.

Qualified zone wages.   Qualified zone wages are any wages you pay or incur for services performed by an employee while the employee is a qualified zone employee (defined earlier). Wages are generally defined as those wages subject to the Federal Unemployment Tax Act (FUTA) without regard to the FUTA dollar limit.

Also treat as qualified zone wages certain training and education expenses you pay or incur on behalf of a qualified zone employee.

Effect of welfare-to-work or work opportunity credit.   Qualified zone wages do not include any amount you take into account in figuring the welfare-to-work credit or the work opportunity credit. In addition, reduce the $15,000 maximum qualified zone wages for each qualified zone employee by the amount of wages you use to figure either of those credits for that employee.

Claiming the credit.   Use Form 8844 to claim this credit. Although the empowerment zone employment credit is a component of the general business credit, a special tax liability limit applies to this credit. Therefore, you figure the credit separately and never carry it to Form 3800, General Business Credit.

Effect on salary and wage deduction.   In general, you must reduce the deduction on your income tax return for salaries and wages and certain education and training costs by the amount of your empowerment zone employment credit.

More information.   For more information about the empowerment zone employment credit, see Form 8844.

Increased Section 179 Deduction

Section 179 of the Internal Revenue Code allows you to choose to deduct all or part of the cost of certain qualifying property in the year you place it in service. You can do this instead of recovering the cost by taking depreciation deductions over a specified recovery period. There are limits, however, on the amount you can deduct in a tax year.

You may be able to claim an increased section 179 deduction if your business qualifies as an enterprise zone business. The increase can be as much as $20,000 ($35,000 for 2002 and later years). This increased section 179 deduction applies to qualified zone property you place in service in an empowerment zone.

You cannot claim this increased deduction for a business you operate in an enterprise community. 

Enterprise zone business.   For the increased section 179 deduction, a corporation, partnership, or sole proprietorship is an enterprise zone business if all the following statements are true for the tax year.

1. Every trade or business of the corporation or partnership is the active conduct of a qualified business (defined later) within an empowerment zone. (This rule does not apply to a sole proprietorship.)
2. At least 50% of its total gross income is from the active conduct of a qualified business within a zone.
3. A substantial part of the use of its tangible property is within a zone.
4. A substantial part of its intangible property is used in the active conduct of the business.
5. A substantial part of the employees' services are performed within a zone.
6. At least 35% of the employees are residents of an empowerment zone. (This rule does not apply to businesses in the DC Zone.)
7. Less than 5% of the average of the total unadjusted bases of the property owned by the business is from:
   1. Nonqualified financial property (generally, debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, and annuities), or
   2. Collectibles not held primarily for sale to customers.

For a sole proprietorship, the term employee in (5) and (6) includes the proprietor.

Qualified business.   A qualified business is generally any trade or business except one that consists primarily of the development or holding of intangibles for sale or license.

However, the rental to others of real property located in an empowerment zone is a qualified business only if the property is not residential rental property and at least 50% of the gross rental income from the property is from enterprise zone businesses.

The rental to others of tangible personal property is a qualified business only if at least 50% of the rentals of the property are to enterprise zone businesses or zone residents.

Also, a qualified business does not include any business listed earlier in item (5) or item (6) under Nonqualified employees in the Empowerment Zone Employment Credit section.

Qualified zone property.   For the increased section 179 deduction, qualified zone property is any depreciable tangible property if all the following are true.

1. You acquired the property after the zone designation is in effect.
2. You did not acquire the property from a related person or member of a controlled group of which you are a member.
3. Your basis in the property is not determined either by its adjusted basis in the hands of the person from whom you acquired it or under the stepped-up basis rules for property acquired from a decedent.
4. You were the first person to use the property in an empowerment zone.
5. At least 85% of the property's use is in an empowerment zone and in the active conduct of a qualified trade or business in the zone.

Buildings are qualified zone property, but they do not qualify for the section 179 deduction. Used property may be qualified zone property if it has not previously been used within an empowerment zone.

Special rule for substantially renovated property.   Property will be treated as having met requirements (1) and (4) if you substantially renovate the property. You substantially renovate property if, during any 24-month period beginning after the zone designation takes effect, your additions to the property's basis are more than the greater of the following amounts.

1. 100% of the adjusted basis of the property at the beginning of the 24-month period.
2. $5,000.

Property used in developable sites.   For tax years beginning before 2002, property is not qualified zone property if substantially all of its use is in a developable site. A developable site is a site to which both of the following apply.

1. The site could be developed for commercial or industrial purposes.
2. The site was included in one of the 15 urban or 5 rural zones whose designation was effective December 31, 1998, under an exception for developable sites that allowed it to be excluded from the poverty rate requirement.