- What is the empowerment zone tax credit?
- What is an empowerment zone?
- Is the empowerment zone credit still available?
- Which startups qualify for the empowerment zone employment credit?
- Where are the federal empowerment zones located?
- How much is the empowerment zone credit worth?
- How to claim the empowerment zone credit with Form 8844
- Simplify tax credit tracking with automated expense management
Tax credits are some of the most powerful tax incentives available to startups, but they're also easy to overlook. The empowerment zone tax credit is a prime example. Although it's been around for decades, most business owners never take advantage of it.
If your startup operates in a designated economically distressed area and employs people who live there too, this credit can put real money back in your pocket—up to $3,000 per qualifying employee, per year.
What is the empowerment zone tax credit?
The empowerment zone employment credit is a federal tax credit that rewards you for hiring employees who both live and work in designated economically distressed areas. Unlike a deduction, which only reduces your taxable income, this credit reduces your federal income tax liability dollar-for-dollar.
The credit targets wages you pay to qualifying employees, making it especially valuable for startups that are hiring locally and building teams in underserved communities. It's a straightforward incentive: Employ people in the zone, and the government lowers your tax bill.
What is an empowerment zone?
Empowerment zones are specific geographic areas the federal government has designated as economically distressed communities. The program originated in the 1990s as part of the Omnibus Budget Reconciliation Act of 1993, with the goal of encouraging job creation and investment in underserved areas. Congress expanded and extended the initiative through the Taxpayer Relief Act of 1997 and the Community Renewal Tax Relief Act of 2000.
Empowerment zones fall into two categories:
- Urban empowerment zones: Located in major metropolitan areas with high poverty and unemployment rates. These typically cover specific neighborhoods within larger cities, not the entire city.
- Rural empowerment zones: Found in non-metropolitan counties facing persistent economic hardship, including areas in states such as Kentucky, Mississippi, and Texas
If you're familiar with opportunity zones, the concept is similar. Both programs use tax incentives to drive economic development in areas where poverty rates are high and economic opportunities are limited.
Is the empowerment zone credit still available?
Yes, the empowerment zone employment credit is currently available. The designation period for empowerment zones has been extended multiple times through congressional action and remains in effect through the end of 2025.
That said, you should verify your specific zone's active status before claiming the credit. Empowerment zone designations depend on continued congressional extensions, and the program's future beyond 2025 isn't guaranteed. Check with the IRS, HUD, or your CPA to confirm your zone is still active before filing.
Which startups qualify for the empowerment zone employment credit?
Two core requirements determine eligibility: Your business must operate within a designated empowerment zone, and you must employ workers who also reside in that zone. Any type of business entity can qualify, including corporations, partnerships, S corporations, and sole proprietorships, though there are some industry-specific restrictions, including farms and certain sin businesses.
Business location requirements
Your startup must conduct a trade or business within the boundaries of an empowerment zone. That means a headquarters or significant operations must physically exist in the zone. Remote work arrangements don't satisfy this requirement.
A common mistake is assuming the entire city qualifies. In most cases, only specific portions of a city fall within the designated zone. You need to confirm your exact business address is inside the boundaries, not just in the same city.
Employee residency requirements
Qualified employees must both work for your business and live within an empowerment zone. The employee's home address determines residency. An eligible employee must perform substantially all of their services within the zone and maintain their principal residence there during the period of employment.
For example, if your business is in the Seaport section of Boston, a qualifying zone, your employees must both work and live there. If an employee moves to the suburbs, they no longer generate qualifying wages for the credit.
Wage and employment thresholds
The credit applies to qualified zone wages—specifically, the first $15,000 of annual wages paid to each qualifying employee. Both full-time and part-time employees can qualify, as long as they meet the residency and work location criteria. There's no cap on the number of employees you can claim the credit for.
Where are the federal empowerment zones located?
The IRS and Department of Housing and Urban Development (HUD) maintain official lists and maps of designated empowerment zones. Always verify your specific address using official zone lookup tools before claiming credits. HUD offers a locator tool, though it can be frustrating to navigate given its age. Several third-party tools are also available.
Urban empowerment zones
The vast majority of empowerment zones cover portions of inner cities. The following cities currently have qualifying zones:
- Baltimore, MD
- Boston, MA
- Chicago, IL
- Cincinnati, OH
- Cleveland, OH
- Columbia/Sumter, SC
- Columbus, OH
- Cumberland County, NJ
- Detroit, MI
- El Paso, TX
- Fresno, CA
- Gary/Hammond/East Chicago, IN
- Huntington, WV/Ironton, OH
- Jacksonville, FL
- Knoxville, TN
- Los Angeles, CA (city and county)
- Miami/Dade County, FL
- Minneapolis, MN
- New Haven, CT
- New York, NY
- Norfolk/Portsmouth, VA
- Oklahoma City, OK
- Philadelphia, PA/Camden, NJ
- Pulaski County, AR
- San Antonio, TX
- Santa Ana, CA
- St. Louis, MO/East St. Louis, IL
- Syracuse, NY
- Tucson, AZ
- Yonkers, NY
Remember, these zones cover specific neighborhoods within each city, not the entire metropolitan area.
Rural empowerment zones
A smaller number of empowerment zones exist in rural areas, targeting counties with persistent economic distress outside metropolitan areas. These include zones in states such as Kentucky, Mississippi, and Texas. If your startup operates in a rural area, it's worth checking whether your county falls within a designated zone.
How much is the empowerment zone credit worth?
The credit equals 20% of the first $15,000 in qualified wages paid to each eligible employee per year. That means the maximum credit per employee is $3,000 annually. It's a nonrefundable credit, so it reduces the tax you owe but won't generate a refund on its own.
Here's a quick breakdown:
| Credit component | Details |
|---|---|
| Credit rate | 20% of qualified wages |
| Wage cap per employee | $15,000 per year |
| Maximum credit per employee | $3,000 per year |
| Cap on number of employees | None |
| Credit type | Nonrefundable (reduces tax owed) |
For example, if you pay an eligible employee $30,000 in a year, the credit applies only to the first $15,000, giving you a $3,000 credit for that employee. Multiply that across every qualifying employee on your payroll, and the savings add up quickly.
How to claim the empowerment zone credit with Form 8844
IRS Form 8844, Empowerment Zone Employment Credit, is the official form for claiming this credit. You'll file it with your annual business tax return. If you operate a pass-through entity (single-member LLC, partnership, or S corporation), the credit flows through to your personal tax return to offset your personal income taxes.
Step 1: Confirm your business operates in an empowerment zone
Verify your business address falls within designated zone boundaries using HUD's locator tool or your state's economic development resources. Don't rely on assumptions. Confirm the exact address qualifies, since zones often cover only specific portions of a city.
Step 2: Verify employee residency in the zone
Collect and retain proof of each employee's home address. W-4 forms, utility bills, or lease agreements all work as documentation. Update and verify employee residency status regularly. If someone moves out of the zone, they no longer generate qualifying wages.
Step 3: Calculate qualified wages and credit amount
Tally the wages paid to each qualifying employee during the tax year, up to the $15,000 cap per employee. Apply the 20% credit rate to determine your total credit amount. Keep detailed payroll records to substantiate your calculations in the event of an audit.
Step 4: Complete and file Form 8844
Fill out Form 8844 with your calculated credit and attach it to your business tax return. The credit flows through to your general business credit. If you missed the original filing deadline, talk to your CPA about amending prior-year returns to claim credits retroactively.
Simplify tax credit tracking with automated expense management
Claiming the empowerment zone credit requires organized payroll records, verified employee addresses, and accurate wage calculations. That's a lot easier when your financial records are already in order.
Ramp's expense management tools help you maintain clean, categorized financial data that supports tax credit claims. When your expense tracking and reporting are automated, pulling together the documentation your CPA needs at tax time takes minutes instead of hours.
Try an interactive demo to see how Ramp can help.
The information provided in this article does not constitute accounting, legal, or financial advice and is for general informational purposes only. Please contact an accountant, attorney, or financial advisor to obtain advice with respect to your business.
FAQs
Yes, but because the empowerment zone credit is nonrefundable, you can only use it to offset actual tax liability. If you don't owe taxes in a given year, you can't use the credit, but any unused amount may be carried forward to future tax years when you do have liability to offset.
Yes, you can claim the empowerment zone employment credit alongside other business credits like R&D or the Work Opportunity Tax Credit (WOTC). However, you can't use the same wages to claim multiple credits—no double-dipping. Your total credits are also subject to general business credit limitations.
Use the HUD Empowerment Zone lookup tool or contact your state's economic development office to confirm whether a business or employee address falls within zone boundaries. Several third-party tools can also help with verification.
Generally no. Employees must perform substantially all their work within the empowerment zone, so fully remote workers typically don't qualify even if they reside in a designated zone.
Maintain employee address verification documents, payroll records showing wages paid, and proof your business location falls within zone boundaries. Keep these records for at least 3 years after filing. In the event of an audit, the IRS puts the burden of proof on you.
Yes, the credit applies to both full-time and part-time employees, as long as they meet the residency and work location criteria.
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