The end of the year is a time for businesses to evaluate their operations over the past 12 months, not only to help them devise their growth strategies for the future, but to also determine if they can reduce their tax liability or the tax liability of business owners. As is the trend each year, a number of tax incentives are set to expire at the end of 2013, making it important for executives to work with their tax professionals to determine their eligibility for these benefits.

The Empowerment Zone Employment Credit is one lesser-known benefit facing the ax this year. Businesses of all sizes that employ local talent may be eligible for this program. Similar to other revitalization credits, the benefit is designed to incentivize businesses that are located in an Empowerment Zone (EZ) to hire and retain employees who also live in the EZ. These zones are distressed urban and rural areas nationwide that are in need of renewal and restoration. To attract business to stay in or move into these areas federal, state and local governments may provide tax incentives, grants, loans and other forms of technical assistance.

Credit Eligibility

The qualifying criteria for the credit applies to businesses of all designations and sizes, and is listed as follows:

• Full- and part-time employees are eligible
• The credit extends to both new and existing hires
• Eligible employees must work at least 90 days during the year in which the credit is claimed
• Employees must live and work in the EZ to qualify
• Certain employees are excluded from the credit calculator, including 5 percent owners, relatives of employers and employees of certain businesses. This includes gambling establishments, golf courses, country clubs, liquor stores, massage parlors, suntan facilities and certain farms.

In addition to employee eligibility, companies must ensure that the community in which they reside has applied for and been designated an EZ. These zones are selected based upon poverty levels, unemployment rate, crime rate and the number of low income households. EZ zone, locations can be found on the IRS website.

Credit Details

The Empowerment Zone Credit is a 20 percent credit on the first $15,000 of wages per eligible employee each year for a maximum annual credit per qualified employee of $3,000. There is no cap on the number of employees a company may claim under the benefit. Although the credit only applies to the first $15,000 in employee wages, companies may still secure tax benefits regardless of gaps in worker salaries.

For example, let’s say employee 1 is a qualified employee who earned $10,000 in 2012 working for the qualified employer. The formula for calculating the credit is as follows:

$10,000 x 20 percent = $2,000 in Empowerment Zone Tax Credits

Then, say employee 2 qualifies under the tax guidelines and earns annual wages of $32,000.

$15,000 x 20 percent = $3,000 in Empowerment Zone Tax Credits

An important provision to keep in mind is that the credit is prorated for the portion of time the employee performs services in the EZ. For tax return purposes the business must reduce its salaries/wage expense by half of the credit. The credit is nonrefundable, however unused credits can be carried back one year and carried forward for twenty years. Many states have similar programs which may allow for an additional reduction in the amount of overall taxes paid for 2013. To speak with a member of our tax team regarding research and development tax credits please email trustedadvisors@kahnlitwin.com.