Enterprise Zone and Employer Tax Incentives

Enterprise Zone (EZ) programs have existed in the United States since the early 1980’s. However, most people are unaware of these programs or fail to realize their impact.

When new tax legislation is proposed or passed, the majority of people immediately consider: “how does this affect me and my family?” The focus is on personal tax rates, credits and deductions. But there are other, somewhat hidden ways in which tax legislation can affect us.

An example of the “hidden” impacts of tax legislation can be found by taking a closer look at the employer tax incentives embedded in EZ programs. Not only do individuals often overlook these programs, the very businesses that they are designed to benefit may not be aware of them either.

EZ Programs

EZ programs first appeared in the U.S. at the state level. Roughly a decade later, the federal government created its own program with passage of the Empowerment Zones and Enterprise Communities Act of 1993. Whether it’s an “empowerment” or “enterprise” zone, these programs have remained popular to this day. So what are EZ programs, and how do employers, employees, and communities stand to benefit from them?

Enterprise Zones are areas that local authorities define as being economically distressed. EZ programs seek to encourage business growth and stability in these zones by incentivizing employers to stay or locate there. Employer incentives take the form of government subsidies, such as corporate income tax credits and property tax abatements.

Though the exact package of incentives will vary by area, the goal of all programs is to improve living conditions within the zones. And while most states seek to do this purely through economic growth, federal EZ programs go further by also funding social services and engaging with community institutions to support the needs of residents within the zone.

Employer State and Local Tax Incentives

State laws define the qualifying criteria for an enterprise zone; however, they may also dictate additional conditions that employers must meet in order to qualify for EZ incentives.

For example, some states require that EZ employers must create new jobs, hire from the local area, or provide wages above a specified level. The purpose of these extra conditions is to ensure that EZ programs actually benefit the EZ community in a meaningful way.

For employers looking to participate in EZ programs, it’s important to understand the EZ requirements at the local and state levels.

Federal Empowerment Zone Wage Tax Credit (FEZ)

The FEZ program provides a federal income tax credit of up to $3,000 per qualifying employee, per year. Employers’ facilities or work sites must be located in the zone and employees must live in the zone as well. Qualifying employers may claim this credit by completing Form 8844.

Employers can determine eligibility and tax credit potential by doing the following:

1. Identify which facilities, worksites, and employees meet the geographic requirements.
2. Understand minimum retention requirements.
3. Determine qualifying wages based on analysis of hire dates, termination dates, qualifying rehire dates and maximum annual credits.
4. Calculate retroactive credits
5. Complete appropriate schedules, supporting documentation and reports to provide to you and/or your tax accounting firm.

While completing the above will require a team effort among organizational leaders, hiring software and third party providers can help make this process easier. In many cases, an investment in software and services can easily be justified by the savings derived from tax credits.

The Future of Enterprise Zone Programs

A number of studies in recent years have suggested that enterprise zone programs, despite their great intentions, do not actually work. Some states have sought to eliminate or restructure programs in light of this research. In 2013, California repealed its EZ tax credit program, opting to replace it with a competitive tax incentive program.

However, as with other government programs, lawmakers in other states and at the federal level are finding that it’s harder to take a program away than it is to establish one. With over thirty years of history, EZ programs have momentum on their side. Congress recently extended the federal EZ program, retroactively, through 2017.

As elected officials change, however, employers who wish to benefit from available tax incentives will need to keep a close eye on tax legislation.

Disclaimer:The information provided is not intended to be legal advice. Please seek legal assistance, or assistance from State, Federal, or International governmental resources, to make certain your legal interpretation and decisions are correct for your location. This information is for guidance, ideas, and assistance.