For business owners looking to lower their tax bills while positively impacting underserved communities, the Federal Empowerment Zone (EZ) program offers a compelling opportunity. Initially created in the 1990s to revitalize economically distressed urban and rural areas, the program provides substantial federal tax incentives for companies that operate in and hire employees from these designated zones.
Thanks to an extension passed in 2020, businesses can benefit from these incentives through December 31, 2025. If your company qualifies, these tax savings can add up quickly, especially when integrated into a long-term hiring and growth strategy.
What Is an Empowerment Zone?
Empowerment Zones are specific areas nationwide with high poverty levels, unemployment, and economic need. The federal government designates these zones, which include parts of major cities such as New York City, Philadelphia, Baltimore, Los Angeles, Cleveland, Cincinnati, and Camden, NJ, as well as numerous rural communities.
The EZ program offers meaningful tax breaks to encourage businesses to invest in and hire from these communities.
The Empowerment Zone Employment Credit: A Powerful Tax Incentive
One of the program’s most valuable benefits is the Empowerment Zone Employment Credit, which allows businesses to claim a tax credit of up to $3,000 per eligible employee each year.
Here’s how it works: If your business is located in an Empowerment Zone and you employ someone who also lives in that zone and performs most of their work there, you may claim a credit equal to 20% of the first $15,000 in wages paid up to a maximum of $3,000 per employee, per year. There is no limit to how many qualifying employees you can include.
This credit applies to newly hired and current employees, as long as they meet the residency and work-location requirements.
Who Counts as a Qualified Zone Employee?
Most employees can qualify under the program, but a few important exceptions exist. Individuals do not qualify if they:
- Own more than 5% of the business, whether a corporation or a partnership.
- Are employed for fewer than 90 days, unless the early termination was due to misconduct or disability.
- Work at specific types of excluded businesses, such as golf courses, country clubs, massage parlors, gambling facilities, tanning salons, or stores where the primary business sells alcohol for off-premises consumption.
- Are involved in farming operations where the total value of farm assets exceeds $500,000 at the close of the tax year.
These rules ensure the credit supports genuine employment and community investment within the zones, not related-party transactions or ineligible business types.
A Multi-Year Opportunity
Because the program is active through 2025, the Empowerment Zone Employment Credit offers a valuable multi-year opportunity. If a business retains an eligible employee from 2021 through 2025, that’s a potential $15,000 in tax credits per employee over five years.
For businesses with multiple qualifying employees, these savings can scale quickly, making them well worth examining during your annual tax planning.
Who Can Benefit?
Both large and small businesses can take advantage of this credit. Whether you’re operating as a C-corporation or a pass-through entity (like an S-corp, partnership, or sole proprietorship), the Empowerment Zone Employment Credit can reduce your federal income tax liability.
Industries that often benefit from the credit include construction, manufacturing, logistics, retail, and services, particularly those with a local workforce and operations concentrated within the zone.
A Strategic Way to Save and Support Your Community
Beyond tax savings, this program offers a deeper benefit: it supports economic revitalization in communities that need it most. By hiring locally, businesses strengthen the neighborhoods they operate in, build stronger teams, and secure long-term financial benefits.
Bottom Line
If your business operates in or near a designated Empowerment Zone, or you employ people who live in one, the Empowerment Zone Employment Credit could offer meaningful annual tax savings through 2025. This is more than a deduction—it’s a chance to align your business goals with real community impact. Contact your Stephano Slack tax manager/partner at 610-687-1600 or taxinfo@StephanoSlack.com to learn if you qualify for this tax credit.
Author John J. Loughlin, Jr., CPA, Partner, leads the Tax & Advisory Services Department at Stephano Slack. He specializes in tax compliance, planning, and projections. His expertise and personalized approach help clients navigate complex tax matters, ensuring peace of mind and optimal outcomes. John can be contacted at 610-710-4045 or jloughlin@stephanoslack.com.
Recent Comments