Reader’s Question About Washington DC Empowerment Zone

Someone asked me recently (1) if the District of Columbia enterprise zone is considered to be a federal empowerment zone and (2) if all residents of the District of Columbia would be eligible employees for purposes of the empowerment zone employment credit.

There are ways in which the Washington DC zone is not exactly like other empowerment zones.  For purposes of the empowerment zone employment credit, however, it’s a relatively simple concept.

The instructions to IRS Form 8844 “Empowerment Zone and Renewal Community Employment Credit,” are relatively (cough couch) clear.

Under [Internal Revenue Code] section 1400, parts of Washington, DC, are treated as an empowerment zone. For details, use the RC/EZ/EC Address Locator at www.hud.gov/crlocator or see Notice 98-57, on page 9 of Internal Revenue Bulletin 1998-47 at www.irs.gov/pub/irs-irbs/irb98-47.pdf.

I read the relevant section of IRS Bulletin 1998-47 as suggested.  It confirms that parts of the District of Columbia are to be treated as an Empowerment Zone.  However, the bulletin is not helpful to the average person who wants to find out the boundaries of the zone . . . or discover if their businesses is eligible.  Just use the HUD address locator.

The IRS instructions to Form 8844 go on to define a “Qualified empowerment zone employee” as a full or part-time employee who:

(1) Performs substantially all of the services for that employer within an empowerment zone in the employer’s trade or business and

(2) Has his or her principal residence within that empowerment zone while performing those services

The rules for the Washington DC zone, however, differ as to point number 2. 

Employees who work in the Washington, DC, empowerment zone may live anywhere in the District of Columbia.

I hope that’s helpful.  If any reader has additional information to clarify the nature of the Washington zone, I will be happy to considering posting it here.  Send me a note, or post a comment, with your sources.

Renewal of Key Tax Incentives Still Up In the Air

As reported by Jamie Dupree Washington Insider, Senate Majority Leader Harry Read’s office has released a summary of elements included in the Senate’s version of the tax compromise between President Obama and Congressional Republicans.  The list is long and may include other provision of interest to you.  For my purposes, however, this post focuses on employment-based tax incentives (and the much prized R&D credit).

The bad news (or maybe the good news, depending on your perspective and ability to read the future) is the House Democratic leadership seems to be digging in their heels against bringing a House version of the bill to the floor for a vote. 

I read through the Senate bill’s summary twice and bring you the follow excerpts:

R&D credit. The bill reinstates for two years (through 2011) the research credit.

Indian employment credit. The bill extends for two years (through 2011) the business tax credit for employers of qualified employees that work and live on or near an Indian reservation. The amount of the credit is 20 percent of the excess of wages and health insurance costs paid to qualified employees (up to $20,000 per employee) in the current year over the amount paid in 1993.

Empowerment Zones. The bill extends for two years (through 2011) the designation of certain economically depressed census tracts as Empowerment Zones. Businesses and individual residents within Empowerment Zones are eligible for special tax incentives.

District of Columbia Enterprise Zone. The bill extends for two years (through 2011) the designation of certain economically depressed census tracts within the District of Columbia as the District of Columbia Enterprise Zone. Businesses and individual residents within this enterprise zone are eligible for special tax incentives. The bill also extends for two years (through 2011) the $5,000 first-time homebuyer credit for the District of Columbia.

Work opportunity tax credit (WOTC). Under current law, businesses are allowed to claim a work opportunity tax credit equal to 40 percent of the first $6,000 of wages paid to new hires of one of nine targeted groups. These groups include members of families receiving benefits under the Temporary Assistance to Needy Families (TANF) program, qualified veterans, designated community residents, and others. The WOTC program is currently set to expire August 31, 2011. The bill extends this provision through December 31, 2011 and would be effective for employees hired after date of enactment.

Noticeably missing from the summary are extensions for a number of WOTC program target groups.  Current WOTC provisions provide for at least 12 targeted groups (A through K plus Hurrican Katrina employees), not merely the 9 mentioned in the summary. Specifically, missing from the summary are Hurricane Katrina Victims, Disconnected Youth, and Unemployed Veterans.  HOWEVER, I have not read the actual text of the bill.  These specific issues might be addressed there. 

Also, I see no mention of extending the HIRE Act’s employer payroll tax exemption into 2011.  I do, however, see a new Payroll Tax Holiday provision, which provides an automatic 2% reduction of the employee portion of the social security tax for all employees and self-employed individuals.

Keeping our fingers crossed . . ..

President Signs Small Business Jobs Bill

While the President’s and other government websites do not yet reflect an updated status for the bill, we were able to get this odd photograph from the President’s September Photos of the Day page.  The caption reads, “President Barack Obama greets small business owners after signing the Small Business Bill in the East Room of the White House, September 27, 2010.” 

I am guessing that is the President’s arm reaching out from the upper left corner.

So, it looks official.  The Small Business Jobs Bill has been signed into law.  See related posts.

Most of the media coverage about this bill has been focused on its small business loan provisions.   My primary interest, however, is in its tax credit provisions.  This bill significantly expands small business’ ability to utilize general business credits, including the Work Opportunity Tax Credit, Research and Development Tax Credit, and the Empowerment Zone Employment Credit, among many others.

Beginning with tax credits generated in 2010, the bill’s tax credit provisions:

  • Apply to businesses with $50 million or less in gross income (averaged over past 3 years)
  • Allow all “general business credits” generated in 2010 to be carried back 5 years to secure tax refunds.
  • Removes the alternative minimum tax (AMT) provision that previously limited the use of tax credits by businesses subject to AMT

As always, if you have questions feel welcome to contact me.  I am Vaughn Hromiko.  vah@wotcPlanet.com or (800) 655-5281, ext 101.

[Update 10-11-2011: Although the legislative summary by Senate Finance Committee does not mention this, the IRS website states that these provisions only apply to tax credit generated in 2010 or that was carried forward to 2010 from prior periods.  Here’s the IRS language

“This is a one year initiative applicable only to the tax year 2010 (For fiscal year filers, the effective tax year is the first tax year beginning after December 31, 2009). The five-year carryback period is available only for credits carried forward to the tax year 2010 and/or earned in the tax year 2010”

End update]

[Update 10/24/2011:  The day after I posted the previous update above, the IRS changed the language I quoted, creating a much different picture of the tax credit available for carry back.  As of October 12, 2011 the IRS site reads : 

“This is a one year initiative applicable only to the tax year 2010 (For fiscal year filers, the effective tax year is the first tax year beginning after December 31, 2009). The five-year carryback period is available only for credits earned in the tax year 2010.”

Note that it now explicitly states that only credit generated in tax year 2010 is able to be carried  back 5 years.

End update.]

Jobs Bill Passes House – Tax Credits Expanded Big Time!

As we anticipated, the U.S. House of Representatives has sent the Small Business Jobs Bill to President Obama’s desk for signing.  The Senate passed HR 5297 last week, sending it to the House where it was passed on Wednesday.  See previous post.  President Obama is expected to sign.

The bill significantly expands the usability of all of the General Business Credits established by Section 38 (b) of the Internal Revenue Code.   This includes the Work Opportunity Tax Credit (WOTC), the Empowerment Zone Employment Credit and the Research & Development Credit, among many others.

First, it’s important to understand that this is a “Small Business” jobs bill.  In other words, the tax credit provisions apply only to businesses whose average annual gross income does not exceed $50 million (averaged over the past 3 years). Note that it also does not apply to publically traded corporations.

Beginning with tax credits generated in 2010, the bill’s tax credit provisions:

  • Apply to businesses with $50 million or less in gross income (averaged over past 3 years)
  • Allow all “general business credits” generated in 2010 (and/ or carried forward to 2010) to be carried back 5 years to secure tax refunds
  • Removes the alternative minimum tax (AMT) provision that previously limited the use of tax credits by businesses subject to AMT

Now, we sit back and wait for President Obama to sign the bill so we can get to work!

[Update 10-11-2011: Although the legislative summary by Senate Finance Committee does not mention this, the IRS website states that these provisions only apply to tax credit generated in 2010 or that was carried forward to 2010 from prior periods.  Here’s the IRS language

“This is a one year initiative applicable only to the tax year 2010 (For fiscal year filers, the effective tax year is the first tax year beginning after December 31, 2009). The five-year carryback period is available only for credits carried forward to the tax year 2010 and/or earned in the tax year 2010”

End update]

[Update 10/24/2011:  The day after I posted the previous update above, the IRS changed the language I quoted, creating a much different picture of the tax credit available for carry back.  As of October 12, 2011 the IRS site reads : 

“This is a one year initiative applicable only to the tax year 2010 (For fiscal year filers, the effective tax year is the first tax year beginning after December 31, 2009). The five-year carryback period is available only for credits earned in the tax year 2010.”

Note that it now explicitly states that only credit generated in tax year 2010 is able to be carried  back 5 years.

End update.]

House to Vote on HR 5297 Small Business Jobs Bill Next Week

According to House Majority Leader Steny Hoyer (Dem) the U.S. House of Representatives will vote on the Small Business Jobs Bill next week.  HR 5297 was passed by the Senate earlier this week, and sent back to the House for approval.  It is believed that if the bill passes the House this time, it will also be signed by President Obama.

From Representative Hoyer’s press release:

Next week, we will take action on the Small Business Lending Act, which we are discussing with our Members. This bill will provide needed assistance to small businesses and help them expand and add jobs. There will be no votes in the House on Tuesday, September 21st. The House will meet for legislative business on Wednesday, September 22nd, at 2:00 p.m., with votes postponed until 6:00 p.m

As I mention in my post on Tuesday, this bill would provide a 5-year carryback for Work Opportunity Tax Credits and would expand the utilization of all other general business credits by removing limitations associated with the alternative minimum tax or AMT.

See other posts on this subject.

[Update 10-11-2011: Although the legislative summary by Senate Finance Committee does not mention this, the IRS website states that these provisions only apply to tax credit generated in 2010 or that was carried forward to 2010 from prior periods.  Here’s the IRS language

“This is a one year initiative applicable only to the tax year 2010 (For fiscal year filers, the effective tax year is the first tax year beginning after December 31, 2009). The five-year carryback period is available only for credits carried forward to the tax year 2010 and/or earned in the tax year 2010”

End update]

[Update 10/24/2011:  The day after I posted the previous update above, the IRS changed the language I quoted, creating a much different picture of the tax credit available for carry back.  As of October 12, 2011 the IRS site reads : 

“This is a one year initiative applicable only to the tax year 2010 (For fiscal year filers, the effective tax year is the first tax year beginning after December 31, 2009). The five-year carryback period is available only for credits earned in the tax year 2010.”

Note that it now explicitly states that only credit generated in tax year 2010 is able to be carried  back 5 years.

End update.]

Small Business Jobs Bill Passes Senate Includes WOTC 5-Year Carryback And More

The U.S. Senate has passed HR 5297, the Small Business Jobs Bill, by a vote of 61-37.  The bill, which will be highly beneficial to some of my clients, must now go back to the House of Representatives for reconsideration there.

If passed into law, this bill will include a number of provisions relevant to hiring-based tax incentives like the Work Opportunity Tax Credit and the federal Empowerment Zone Employment Credit.

First, it would allow for general business credits, including the Work Opportunity Tax Credit, to be carried back five years. In other words, if a small business generates more WOTC than it can use in 2010, that excess credit can be carried back and utilized against tax already paid in 2009, 2008, 2007, 2006, or 2005 — resulting in tax refunds.

The Senate Finance Committee’s summary explains as follows:

Under current law, a business’ unused general business credit may generally be carried back to offset taxes paid in the previous year, and the remaining amount may be carried forward for 20 years to offset future tax liabilities. This bill extends the one year carry back for general business credits to five years for certain small businesses. This applies to general business credits for those sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.

Also, the use of general business credits would no longer be limited by the Alternative Minimum Tax or AMT.

Under the Alternative Minimum Tax (AMT), taxpayers may generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. A few credits may be used to offset AMT liability, such as the credit for small business employee health insurance expense. This bill allows certain small businesses to use all types of general business credits against their AMT. This applies to general business credits for those sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.

An important note here is that utilization of the Work Opportunity Tax Credit is ALREADY NOT subject to the AMT limitations. The federal Empowerment Zone Employment Credit, on the other hand, would gain greater application under this bill.

For all provisions, see the Senate Finance Committee’s summary of HR 5297.