FY 2003 

and Urban De

U.

and Enterprise Communities 

Empowerment Zones, 

in the Renewal Communities, 

Businesses 

Guide for

Ta

v

S. 

x Incenti

e

Depar

v

lopment 

tment of Housing 

e
The U.S. Department of Housing and Urban Development (HUD) has designated Renewal 

Communities (RCs), Empowerment Zones (EZs) and Enterprise Communities (ECs) in 

distressed urban and rural areas throughout the United States. Go to www.hud.gov/crlocator to 

determine if an address is located in one of these areas. To see maps, lists of census tracts, 

contacts, success stories, and more information on these designated areas, go to 

http://www.hud.gov/offices/cpd/economicdevelopment/programs/rc/tour/index.cfm. 

The following is a list of current HUD-designated RCs, EZs and ECs: 

State: Designee: State: Designee:

Alabama Birmingham EC Nebraska Omaha EC

Greene-Sumter RC

Mobile County RC Nevada Las Vegas EC

Southern Alabama RC

New Hampshire Manchester EC

Arizona Phoenix EC

Tucson EZ New Jersey Camden RC 

Cumberland County EZ 

Arkansas Pulaski County EC Newark RC

Pulaski County EZ 

New Mexico Albuquerque EC 

California Fresno EZ

Los Angeles EZ New York Buffalo-Lackawanna RC 

Los Angeles RC Jamestown RC 

Oakland EC Newburgh-Kingston EC

Orange Cove RC New York EZ 

Parlier RC Niagara Falls RC 

San Diego RC Rochester RC 

San Francisco RC Schenectady RC

Santa Ana EZ Syracuse EZ 

Yonkers EZ

Colorado Denver EC

North Carolina Charlotte EC 

Connecticut Bridgeport EC

New Haven EC

New Haven EZ

North Dakota Turtle Mountain Band of 

Chippewa RC 

Delaware Wilmington EC Ohio Akron EC

Cincinnati EZ

District of

Columbia Washington EC

Cleveland EC

Cleveland EZ 

Washington EZ Columbus EC

Locations of the Renewal Communities, 

Empowerment Zones and Enterprise Communities 

i 
ii 

State: Designee: State: Designee: 

Florida Jacksonville EZ Ohio Columbus EZ 

Miami EC Hamilton RC 

Miami-Dade EZ Youngstown RC 

Tampa EC 

Oklahoma Oklahoma City EC 

Georgia Albany EC Oklahoma City EZ 

Atlanta RC 

Oregon Portland EC 

Illinois Chicago EZ 

Chicago RC Pennsylvania Harrisburg EC 

East St. Louis EC 

Springfield EC 

Philadelphia/Camden EZ 

(Pennsylvania & New Jersey) 

Philadelphia RC 

Indiana Gary/Hammond/E. Chicago EZ Pittsburgh EC 

Indianapolis EC 

Rhode Island Providence 

Iowa Des Moines EC 

South Carolina Charleston RC 

Kentucky Eastern Kentucky RC Columbia/Sumter EZ 

Louisville EC 

Tennessee Chattanooga RC 

Louisiana Central Louisiana RC Knoxville EZ 

New Orleans RC Memphis RC 

Northern Louisiana RC Nashville EC 

Ouachita Parish RC 

Texas Corpus Christi RC 

Maryland Baltimore EZ Dallas EC 

El Paso EC 

Massachusetts Boston EC El Paso EZ 

Boston EZ El Paso County RC 

Lawrence RC Houston EC 

Lowell RC San Antonio EC 

Springfield EC San Antonio EZ 

Waco EC 

Michigan Detroit EZ 

Detroit RC Utah Ogden EC 

Flint RC 

Muskegon EC Vermont Burlington RC 

Minnesota Minneapolis EC Virginia Norfolk EC 

Minneapolis EZ Norfolk/Portsmouth EZ 

St. Paul EC 

Washington Seattle EC 

Mississippi Jackson EC Tacoma RC 

West-Central Mississippi RC Yakima RC 

Missouri Kansas City EC (Kansas & 

Missouri) 

West Virginia Huntington EC 

St. Louis EC 

St. Louis/E. St. Louis EZ 

(Illinois & Missouri) 

Huntington/Ironton EZ (West 

Virginia & Ohio) 

Wisconsin Milwaukee RC 
iii 

The U.S. Department of Agriculture (USDA) has designated EZs and ECs in distressed rural 

areas throughout the United States. Go to www.hud.gov/crlocator to determine if an address is 

located in one of these areas. To see maps, lists of census tracts, and more information on these 

designated areas, go to http://www.ezec.gov/ezec/mainmap.html. 

The following is a list of current USDA-designated EZs and ECs: 

State Designee State Designee 

Alabama Chambers County EC Montana Fort Peck Assiniboine & Sioux Tribe EC

Alaska Metlakatla Indian Community EC New Mexico City of Deming EC 

La Jicarita EC 

Arizona Arizona Border Region EC 

Four Corners EC North Carolina Halifax/Edgecombe/Wilson EC 

Robeson County EC 

Arkansas East Arkansas EC 

Mississippi County EC North Dakota Griggs-Steele EZ 

California City of Watsonville EC Ohio Greater Portsmouth EC 

Desert Communities EZ 

Huron-Tule EC Oklahoma Southeast Oklahoma EC 

Imperial County EC Tri-County Indian Nations EC 

Florida Empowerment Alliance of Southwest Florida EC Oregon Josephine County EC 

Jackson County EC 

Pennsylvania City of Lock Haven EC 

Georgia Crisp/Dooly EC Fayette EC 

Central Savannah River Area EC 

Southwest Georgia United EZ South Carolina Allendale ALIVE EC 

Williamsburg-Lake City EC 

Hawaii Molokai EC 

South Dakota Beadle/Spink EC 

Illinois Southernmost Illinois Delta EZ Ogala Sioux Tribe EZ 

Indiana Town of Austin EC Tennessee Clinch-Powell EC 

Fayette/Haywood County EC 

Kansas Wichita County EC Scott/McCreary Area EC 

Kentucky Bowling Green EC Texas FUTURO Communities EC 

Kentucky Highlands EZ FUTURO Communities EZ 

Rio Grande Valley EZ 

Louisiana Northeast Louisiana Delta EC 

Virginia Accomack-Northampton EC 

Maine Aroostook County EZ 

Empower Lewiston EC Washington Five Star EC 

Lower Yakima County EC
iv 

State Designee State Designee 

Michigan Clare County EC West Virginia Central Appalachia EC 

Lake County EC McDowell County EC 

Upper Kanawha Valley EC 

Mississippi Mid-Delta EZ 

North Delta Mississippi EC Wisconsin Northwoods NiiJii EC 

Missouri City of East Prairie EC 
Contents 

About the Empowerment Zone/Enterprise Community


and Renewal Community Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . .1


Empowerment Zone Employment Credit/


Renewal Community Employment Credit . . . . . . . . . . . . . . . . . . . . .11

Work Opportunity Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

Welfare to Work Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

Indian Employment Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

Increased Section 179 Deduction . . . . . . . . . . . . . . . . . . . . . . . . . . .41

Commercial Revitalization Deduction . . . . . . . . . . . . . . . . . . . . . . . .47

Environmental Cleanup Cost Deduction (Brownfields) . . . . . . . . . . .61

Depreciation of Property Used on Indian Reservations . . . . . . . . . . .65

Enterprise Zone Facility Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69

Qualified Zone Academy Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .81

Zero Percent Capital Gains Rate for Renewal Community


and District of Columbia Enterprise Zone Assets . . . . . . . . . . . . . . . .89

Nonrecognition of Gain on Sale of Empowerment


Zone Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95

Partial Exclusion of Gain on Sale of Empowerment


Zone Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .99

New Markets Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103

Low-Income Housing Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . .111

Appendix A: Questions & Answers on Enterprise Zone


Businesses and Renewal Community Businesses . . . . . . . . . . . . . . .113

Appendix B: Current Urban and Rural Empowerment


Zones and Enterprise Communities . . . . . . . . . . . . . . . . . . . . . . . .121

i

About the Empowerment Zone/

Enterprise Community and

Renewal Community Initiatives 

Round I and Round II Empowerment Zones and 

Enterprise Communities 

Launched in 1993, the Empowerment Zone and Enterprise Community (EZ/EC) Initiative 

is an interagency effort focused on the creation of self-sustaining, long-term development 

in distressed urban and rural areas throughout the Nation. The Initiative is based on a 

holistic, participatory approach that requires community stakeholders to work together 

to develop and implement comprehensive strategic plans for revitalization. Using a combination of Federal tax incentives and flexible grant funds, these partners are reinvigorating many communities that have been in decline for decades. Businesses are opening or 

expanding, residents have greater access to jobs, services, and new economic opportunities, and crime and violence are down. 

Currently, 28 urban communities and 12 rural communities have Renewal Community 

(RC) designations from the U.S. Department of Housing and Urban Development (HUD). 

In addition, 30 urban communities have HUD Empowerment Zone (EZ) designations 

and 49 more urban communities have HUD Enterprise Community (EC) designations. 

Part of Washington, D.C., has HUD’s only Enterprise Zone designation. The U.S. Department of Agriculture (USDA) has designated a total of 10 EZs and 48 ECs in rural areas 

throughout the country. 

In 1994, HUD designated its first 6 urban EZs and 65 ECs during the Round I competition. HUD designated parts of Cleveland and Los Angeles as supplemental EZs and these 

designees received full EZ status in January 2000. USDA designated 3 rural EZs and 30 

rural ECs in Round I. In 1999, HUD and USDA made additional designations in Round 

II. HUD designated 15 more urban EZs and USDA designated 5 more rural EZs and 20 

rural ECs. The DC Enterprise Zone, together with additional DC areas suffering from 20+ 

percent poverty, received HUD’s only Enterprise Zone designation, effective January 1998. 

Round III Empowerment Zones and Renewal 

Communities 

In December 2000, Congress authorized a third round of EZs, seven in urban areas and 

two in rural areas. Congress also approved the designation of 40 new RCs. The goal 

of the new RC program, like that of the EZ/EC Initiative, is to promote economic 

development in distressed communities. Businesses located in the RCs and in the new 

1

About the EZ/EC and RC Initiatives 

EZs are eligible for Federal tax incentives to hire local residents and to expand or improve 

their operations. 

On December 31, 2001, HUD designated 28 RCs in urban areas and 12 more in rural 

areas. The law required an EZ or EC to forfeit its designation if any of its geographic areas 

were included in one of the RCs. Due to this law, the Atlanta EZ, 16 urban ECs, and 3 

rural ECs lost their designations on December 31. The loss of the Atlanta EZ designation 

enabled HUD to designate 8 new EZs instead of just 7 in Round III. The 8-year designation 

period for the 40 RCs and 8 urban Round III EZs began January 1, 2002. USDA designated its two Round III EZs, located in Maine and Texas, on December 31 also. 

About This Publication 

The Federal tax benefits available in EZs, ECs, and RCs are designed to encourage businesses to invest in these areas. Expanding business development and commerce leads 

to greater job opportunities for residents and to improved access to goods and services, 

both of which help energize long-term revitalization. 

This guide summarizes the rules applicable to Federal tax incentives available to businesses operating in EZs, ECs, and RCs and to those hiring residents of these areas. As you use 

the guide, keep in mind that some tax incentives will work well for labor-intensive businesses, whereas others benefit those with capital needs. Some incentives make sense only 

for large companies while others work best for small ones. Several incentives discussed in 

this guide also apply to businesses and residents outside EZ/EC/RC communities. Please 

contact your tax attorney or accountant for details regarding your eligibility to claim 

these incentives. The following sections list the incentives discussed in this guide. 

Incentives 

Wage Credits 

■ Empowerment Zone Employment Credit (EZ Wage Credit). IRS Tax Form 8844. 

■ Renewal Community Employment Credit (RC Wage Credit). IRS Tax Form 8844. 

■ Work Opportunity Tax Credit (WOTC). IRS Tax Forms 5884 and 8850. 

■ Welfare to Work (WtW) Credit. IRS Tax Forms 5884, 8850, and 8861. 

■ Indian Employment Tax Credit. IRS Tax Form 8845. 

2

About the EZ/EC and RC Initiatives


Deductions


■ Increased Section 179 Expensing. IRS Tax Form 4562.


■ Commercial Revitalization Deduction. IRS Tax Form 4562.


■ Environmental Cleanup Cost Deduction (Brownfields). No applicable IRS tax forms.


■ Depreciation of Property Used on Indian Reservations. See IRS Publication 946.


Bond Financing 


■ Enterprise Zone Facility Bonds. No applicable IRS tax forms.


■ Qualified Zone Academy Bonds (QZABs). IRS Tax Form 8860.


Capital Gains 

■	 Zero Percent Capital Gains Rate for RC Assets and DC Enterprise Zone Assets. No 

applicable IRS tax form identified at time of publication. 

■	 Nonrecognition of Gain on Sale of Empowerment Zone Assets (EZAs). No applicable 

IRS tax form identified at time of publication. 

■	 Partial Exclusion of Gain from Sale of Empowerment Zone Stock. No applicable IRS 

tax form identified at time of publication. 

Other Incentives 


■ New Markets Tax Credit. No applicable IRS tax form identified at time of publication.


■ Low-Income Housing Tax Credit (LIHTC). IRS Tax Forms 8609 and 8586.


For More Information 

To find out more about the EZ/EC and RC Initiatives, to learn how to reach your 

local EZ/EC/RC contact person, or to obtain more copies of this guide, please call 

HUD’s Community Connections Hotline at 1–800–998–9999 or visit www.hud.gov/cr

for urban EZ/ECs and urban and rural RCs or www.ezec.gov for rural EZ/ECs. To obtain 

copies of IRS Publication 954, Tax Incentives for Empowerment Zones and Other Distressed 

Communities, and all other tax forms, call 1–800–829–3676 or visit www.irs.ustreas.gov. 

3

Table 1. Tax Incentive Matrix for Urban and Rural EZs/ECs/RCs 

2 Round I 

Supplemental 

EZs (Los Angeles 

and Cleveland) 

X X X X 

X X X X X X 

X X X X

X X X X

X X X X X X 

X X X4 X

X 

X 

X 

X X X X X X

X X X X X X 

X X X X X

X X 

X X 

X X 

X X 

X X 

X X 

. 

X

X

XX

4


HUD EDI grant/Section 108 Loan Guarantee HUD EZ grant 

X


X 1 

X2 

XX 

X


X3 

Grants/Loan Guarantees 

Round I EZs 

4 Round I 

Enhanced ECs Round I ECs Round II EZs Round 

Wage Credits

EZ Employment Wage Credit 

Renewal Community Employment Credit 

Work Opportunity Tax Credit 

Welfare to Work Wage Credit 

Indian Employment Tax Credit 

DeductionsIncreased Section 179 Deduction 

Commercial Revitalization Deduction 

Environmental Cleanup Cost Deduction 

Depreciation of Property Used on Indian Reservations 

Bond FinancingEnterprise Zone Facility Bonds Qualified Zone Academy Bonds (QZABs) Capital GainsZero Percent Capital Gains Rate for RC Assets and DC Enterprise Zone Assets Nonrecognition of Gain on Sale of
Empowerment Zone Assets Partial Exclusion of Gain on Sale of 
Empowerment Zone Stock Other IncentivesNew Markets Tax Credit 

Low-Income Housing Tax Credits 

1. Cleveland only 2. Los Angeles received $450 million; Cleveland received $177 million. 3. Subject to annual appropriation.4. After December 31, 2001. 5. Also applicable to District of Columbia Enterprise Zone. 

X X X X X X 

$3 million SSBG grant $100 million SSBG grant 

T ype of Benefit 
About the EZ/EC and RC Initiatives


Table 2. Summary of Tax Incentives: Tax Credits, Deductions, 

Bonds, and Capital Gains 

Wage Credits Description Availability 

Empowerment Zone Credit against Federal taxes up Available currently for Round I EZs; 

Employment Credit to $3,000 for businesses for each available for all EZs beginning 

(EZ Wage Credit) year of EZ designation for every January 1, 2002, through Decexisting employee and new hire ember 31, 2009. Cannot count 

who lives and works in the EZ. wages for both the WOTC and 

WtW credits and the EZ Wage 

Credit. 

Renewal Community Credit against Federal taxes up Available beginning January 1, 

Employment Credit to $1,500 for businesses for each 2002, through December 31, 2009. 

(RC Wage Credit) year of RC designation for every Cannot count wages for both the 

existing employee and new hire WOTC and WtW credits and the 

who lives and works in the RC. RC Wage Credit. 

Work Opportunity Tax Credit up to $2,400 against Expires for individuals who begin 

Credit (WOTC) Federal taxes for businesses for work after December 31, 2003. 

each new hire from groups that Business does not have to be in 

have high unemployment rates an EZ, EC, or RC to qualify. Cannot 

or other special employment be combined with WtW Credit. 

needs, including youth ages 18 State Employment Services Agency 

to 24 who live in an EZ, EC, or must certify employee is in 

RC, and summer hires ages 16 targeted group. 

to 17 who live in an EZ, EC 

or RC. 

Welfare to Work (WtW) Two-year credit against Federal Expires for individuals who begin 

Credit taxes for businesses that hire work after December 31, 2003. 

long-term family assistance Business does not have to be in an 

recipients. Credits up to $3,500 EZ, EC, or RC to qualify. Cannot 

for the first year, and $5,000 be combined with WOTC. State 

for the second year for each Employment Services Agency 

new hire. must certify employee is in targeted group. 

Indian Employment Tax Credit against Federal taxes A business does not have to be 

Credit calculated on wages (including located in an EZ, EC, or RC to 

employee health insurance costs) qualify for this credit. The majority 

up to $20,000 for each qualified of the services performed by the 

employee who is an enrolled employee must be on an Indian 

member of an Indian tribe (or reservation. The credit does not 

spouse) who lives on or near apply for taxable years beginning 

an Indian reservation. Available after December 31, 2003. 

for existing employees and 

new hires. 

(continued) 

5 
6

About the EZ/EC and RC Initiatives

Table 2. Summary of Tax Incentives: Tax Credits, Deductions,

Bonds, and Capital Gains (continued) 

Availability

(continued)

Deductions

Increased Section 

179 Deduction

Allows businesses to claim increased Section 179 deduction 

(up to $20,000 in additional 

expensing increasing to $35,000 

for property acquired after December 31, 2001) if the businesses 

qualifies as an Enterprise Zone

Business or Renewal Community

Business. Can be claimed on

certain depreciable property such

as equipment and machinery. 

Can be used only in EZs and RCs.

Cannot be used in developable 

sites until after December 31,

2001. Cannot be used in ECs. 

Description

Commercial Revitalization 

Deduction

Deduction of either one-half of 

qualified revitalization expenditures (QREs) in the first year a 

building is placed in service or 

all of QREs on ratable basis over 

10 years if QREs have been 

allocated to revitalization of a 

commercial building located in 

an RC.

Available in RCs for buildings 

placed in service after December 

31, 2001, and before January 1, 

2010. State may allocate up to 

$12 million in deductions (not 

more than $10 million per project) 

for each year 2002–2009 for each 

RC in the State. Business does not 

have to be a Renewal Community 

Business. 

Environmental Cleanup 

Cost Deduction 

(Brownfields)

Businesses can elect to deduct 

qualified cleanup costs of 

hazardous substances in certain 

areas (brownfields) in the tax 

year the business pays or incurs 

the costs.

Property is not required to be 

located in an EZ, EC, or RC. Need 

certification from State environmental agency. Includes costs 

paid or incurred prior to January 1, 

2004.

Depreciation of Property 

Used on Indian Reservations

Special accelerated depreciation 

rules apply to qualified property 

placed in service on an Indian 

reservation after 1993 and before 

2004. Certain public infrastructure used or located off the 

Indian reservation also qualifies.

A business does not have to use 

the property in an EZ, EC, or RC to

use these special rules, but generally

the property must be used on an

Indian reservation. Property must

be placed in service after 1993 

and before 2004.
7

About the EZ/EC and RC Initiatives

Table 2. Summary of Tax Incentives: Tax Credits, Deductions,

Bonds, and Capital Gains (continued) 

Enterprise Zone Facility

Bonds

(continued)

Bond Financing

State and local governments can 

issue Enterprise Zone Facility 

Bonds (a type of tax-exempt 

bond) to make loans at lower 

interest rates to Enterprise Zone 

Businesses to finance Qualified

Zone Property.

$3 million per borrower limit in

any Round I EZ for bonds issued 

prior to January 1, 2002, or in any

EC, with a $20 million per borrower

nationwide limit; must have State

volume cap allocated. $130 million

or $230 million available in urban 

Round II EZs ($60 million in rural 

Round II EZs) over designation 

period and for all EZs after 

December 31, 2001, including 

developable sites (no per-borrower

limit and bonds are not subject 

to State volume cap) for EZ- or 

EC-based commercial, retail, or 

industrial property; 35 percent 

of employees must be EZ or EC 

residents. 

Qualified Zone Academy 

Bonds (QZABs)

State or local governments can 

issue bonds at 0-percent interest 

cost to them to finance public 

school programs with private 

business partnerships. Private 

businesses must contribute 

money, equipment, or services 

equal to 10 percent of bond 

proceeds (which may qualify as 

a charitable contribution). The 

Federal Government pays interest in the form of tax credit to

banks, insurance companies, and

certain lending corporations that

hold QZABs.

Federal allocation to States annually 

from 1998–2003. State education 

agency allocates credit to a Qualified Zone Academy to finance

materials, teacher training, building

renovation, or equipment for 

programs that prepare students 

for jobs or college. Schools must 

be located in an EZ or EC or have 

35 percent of students eligible for 

free or reduced-cost lunch program.

Description Availability
About the EZ/EC and RC Initiatives


Table 2. Summary of Tax Incentives: Tax Credits, Deductions, 

Bonds, and Capital Gains (continued) 

Capital Gains Description Availability 

Zero Percent Capital Gains The holder, for a minimum of 5 Exclusion applies only to an interest 

Rate for RC and DC Enter- years, of a District of Columbia in, or property of, certain businesses 

prise Zone Assets Enterprise Zone (DC Enterprise operating in the District of ColumZone) asset acquired between bia or an RC. The following qualify 

January 1, 1998, and December as DC Enterprise Zone or RC assets: 

31, 2002, or an RC asset acquired DC Enterprise Zone or RC business 

between January 1, 2002, and stock, DC Enterprise Zone or RC 

December 31, 2009,will not have partnership interests, and DC Enterto include in its gross income any prise Zone or RC business properties. 

qualified capital gain from the Only gain attributable to the period 

sale or exchange of the asset. from January 1, 1998, through 

December 31, 2008, for the DC 

incentive, and from January 1, 

2002, through December 31, 2014, 

for RCs, may be excluded. 

Nonrecognition of Gain Capital gain on EZAs (stock, Election by taxpayer for EZA 

on Sale of Empowerment partnership interests, and busi­ acquired after December 21, 2000, 

Zone Assets (EZA) ness property) of an Enterprise and before January 1, 2010, for 

Zone Business held for more all EZs (not available in the DC 

than 1 year is not recognized Enterprise Zone, ECs, or RCs). 

(and is rolled over) if replacement EZA is acquired within 

60 days. 

Partial Exclusion of Gain on Exclusion of 60 percent of the Stock must be acquired after 

Sale of Empowerment Zone gain on sale of small business December 21, 2000, and before 

Stock stock of a C Corporation that January 1, 2010, at original issuance 

is an Enterprise Zone Business in exchange for cash. Sixty-percent 

located in an EZ if the stock is exclusion does not apply to gain 

held for at least 5 years. after December 31, 2014. Business 

must be an Enterprise Zone Business in an EZ (other than the 

DC Enterprise Zone). 

(continued) 

8

About the EZ/EC and RC Initiatives


Table 2. Summary of Tax Incentives: Tax Credits, Deductions, 

Bonds, and Capital Gains (continued) 

Other Incentives Description Availability 

New Markets Tax Credit Equity investors in qualified Allocations of the credit will be 

made annually from 2001 to 2007 

to qualified CDEs. Investors must 

purchase stock or partnership 

interest in a CDE for cash at 

original issuance. Credit available 

Community Development 

Entities (CDEs) can obtain a tax 

credit against Federal taxes of 

5 to 6 percent of the amount 

invested for each of the years 

the investment is held, for up at time of purchase (1 year) and 

to 7 years of the credit period. on 6 anniversary dates of acquisition of investment. 

Low-Income Housing Tax Ten-year credit against Federal Project must receive allocation of 

Credit (LIHTC) taxes for owners of newly State’s annual credit ceiling or use 

constructed or renovated rental multifamily housing tax-exempt 

housing who set aside a speci­ bonds that receive allocation of 

fied percentage of units for low- State’s bond volume cap. Alloincome persons for a minimum cations are made on basis of 

of 15 years. The credit varies for State plan. The project does not 

new construction and renovation. have to be located in an EZ, EC, 

or RC to qualify. 

9

Empowerment Zone 

Employment Credit/Renewal 

Community Employment Credit 

Applicable IRS Tax Form: Form 8844 

11


Wage Credit

Empowerment Zone Credit against Federal taxes of up Available currently for Round I 

Employment Credit to $3,000 for businesses for each EZs; available for all EZs beginning 

(EZ Wage Credit) year of EZ designation for every January 1, 2002, through 

existing employee and new hire December 31, 2009. Cannot count 

who lives and works in the EZ. wages for the WOTC and WtW 

credits and the EZ Wage Credit.

Renewal Community Credit against Federal taxes up to 

$1,500 for each year of Renewal

Community (RC) designation for 

every existing employee and new 

hire who lives and works in 

the RC.

RC Wage Credit available 

Employment beginning January 1, 2002,

(RC Wage Credit) through December 31, 2009. 

Cannot count wages for the 

WOTC and WtW credits and

the RC Wage Credit.

The Empowerment Zone Employment Credit (EZ Wage Credit) and

Renewal Community Employment Credit (RC Wage Credit) give businesses an incentive to retain or hire individuals who both live and work

in an Empowerment Zone (EZ) or a Renewal Community (RC), respectively. (Individuals who work in the DC Enterprise Zone may live anywhere in the District of Columbia.) Businesses can claim the credit if

they pay or incur “qualified zone wages” to a qualified employee. The

credit can be as much as $3,000 per qualified employee per year for the

EZ Wage Credit and up to $1,500 for the RC Wage Credit. The credit is

available with respect to all EZs and RCs beginning January 1, 2002.

Round I Zones are currently eligible for the EZ Wage Credit, continuing

through December 31, 2009.

Target Audience 

■ Businesses relocating to an EZ or RC that will have large hiring needs.

■ Businesses expanding within an EZ or RC that will be hiring new employees.

Description Availability

Credit
EZ Employment Credit/RC Employment Credit


■ Businesses with relatively high turnover that often need new employees. 

■ Businesses with a stable workforce of employees living in an EZ or RC. 

■ Businesses looking to reduce tax liability. 

■	 Businesses seeking to qualify as an Enterprise Zone Business or a Renewal 

Community Business that must meet the 35-percent EZ/RC resident employee 

requirement. 

Incentive Not Relevant to 

■ Startup businesses that may not have large tax liabilities. 

■ Nonprofit organizations. 

■	 Businesses whose employees spend the majority of their time (by pay period or on 

average over the year) working outside an EZ or RC. 

Additional Resources 

■ Accountants and lawyers preparing business tax returns. 

■	 Local bar associations or accountant groups to identify accountants or lawyers to 

field questions. 

■	 Local schools, vocational schools, junior or community colleges, 4-year colleges, and 

job-training programs that may have EZ or RC residents participating in their programs. These training programs should be linked to employment agencies and job 

banks working with businesses that have operations in an EZ or RC. 

■ Job banks that have established relationships with businesses located in an EZ or RC. 

■	 Instructions for IRS Form 8844. For copies call 1–800–829–3676 or visit 

www.irs.ustreas.gov. 

12

EZ Employment Credit/RC Employment Credit


Questions & Answers on Empowerment Zone and 

Renewal Community Employment Credits 

Are there any employer incentives for hiring 

employees who work in an EZ or RC? 

Yes. The tax code allows employers a credit against Federal taxes for 

hiring and retaining employees who live and work in an EZ or RC. 

The EZ Wage Credit has been available since 1994 for Round I EZs 

and since 1998 for the District of Columbia. The EZ Wage Credit and RC Wage Credit 

will be available in all EZs and RCs beginning January 1, 2002, and will continue for all 

EZs and RCs through December 31, 2009. 

Can a business use this credit for current 

employees? 

Yes. The EZ Wage Credit and RC Wage Credit are incentives to hire 

and retain individuals who live in an EZ or RC, so it is available each 

year throughout the EZ Wage Credit and RC Wage Credit periods. 

How does a business document that an 

employee is an EZ or RC resident? 

The employer should obtain a statement from the employee, under 

penalty of perjury, that gives the address of the employee’s principal 

residence and provides assurance that the employee will notify the 

employer of a change in the employee’s principal residence. The local EZ or RC can confirm that the address is in the EZ or RC or a business can obtain the information over 

the Internet using the EZ/EC/RC address locator at http://hud.esri.com/rcezec. The 

statements are not filed with the business’s tax return, but should be retained like any 

other documents supporting a tax return. 

What if the employee works part-time? 

The credit is available for both part-time and full-time employees as 

long as they have been employed by the employer for at least 90 days. 

The amount of the credit is tied to the amount of wages paid rather 

than to the number of hours worked. 

13

EZ Employment Credit/RC Employment Credit


What is the definition of qualified wages? 

Qualified wages are generally wages subject to the Federal Unemployment Tax Act (FUTA). The credit is calculated against a maximum 

of $15,000 in wages for the EZ Wage Credit and $10,000 for the RC 

Wage Credit. A business may pay the employee more than $15,000 for 

EZs or $10,000 for RCs, but the maximum for purposes of calculating 

the credit is $15,000 for an EZ or $10,000 for an RC. The instructions for IRS Form 

8844 provide additional information on qualified wages. 

What is the credit amount? 

The EZ Wage Credit amount is 20 percent of wages up to the $15,000 

wage amount. The credit amount for the RC Wage Credit is 15 percent 

of wages up to the $10,000 wage amount. 

Is there a limit on the number of employees 

for which a business can take the credit? 

An employer can take the credit for as many employees as qualify. 

What if the employee works in an EZ or RC 

for only part of the year? 

An employer can use either the pay-period or calendar-year method 

for determining the period of time the employee performs services in 

an EZ or RC. No other time periods can be used to prorate the credit. 

For example, if an employee works in several factory locations and is paid weekly, an 

employer can claim the wage credit for the weekly pay periods during which the employee works substantially all of his or her time in the factory located in an EZ or RC. 

“Substantially all” is defined as 85 percent for the purposes of some of the tax incentives 

discussed in this guide, but the regulations on the EZ and RC Wage Credits do not define 

substantially all. The employer must use the same method for all employees, but may 

change the method applied to all employees from one taxable year to another. 

14

EZ Employment Credit/RC Employment Credit


What if the business is located in an EZ or RC, 

but the employees spend part of their time 

working outside the boundaries of the EZ or RC? 

The credit is available only if substantially all of the services performed 

during the period (see answer to question above on pay-period and 

calendar year calculations) are in an EZ or RC. “Substantially all” is defined as 85 percent 

for purposes of some of the tax incentives discussed in this guide, but the regulations on 

the EZ and RC Wage Credits do not define substantially all. If an employee does not perform substantially all services inside an EZ or RC within the calculation period selected, 

the credit cannot be prorated and no portion of the wages for that period would qualify 

for the credit. 

What if the Federal tax liability of the business 

is less than the total credit amount? 

The EZ Wage Credit and RC Wage Credit generally are subject to the 

same rules as other business tax credits. As with other business tax 

credits, unused credit amounts can be carried forward for up to 20 

years and carried back a year. However, the credit cannot be carried back prior to the 

EZ or RC designation. 

Are there special procedures for taking the EZ 

or RC Wage Credit? 

The credit is accounted for on IRS Form 8844 and would be part of a 

business’s tax filing. 

Can nonprofit organizations benefit from the 

EZ or RC Wage Credits? 

Tax-exempt organizations, other than certain cooperatives, are ineligible for the credits. 

15

EZ Employment Credit/RC Employment Credit


Can a pass-through entity, such as a partnership 

or S-corporation, use the credit? 

The EZ Wage Credit and RC Wage Credit are general business tax 

credits for Federal tax purposes and may be passed through under 

the rules similar to other business tax credits. 

Does the EZ Wage Credit or RC Wage Credit 

reduce Alternative Minimum Tax (AMT) liability? 

AMT may be reduced by 25 percent of the EZ Wage Credit or RC 

Wage Credit amount. 

Can the EZ Wage Credit or RC Wage Credit for 

an employee be taken concurrently with Work 

Opportunity Tax Credits (WOTC) or Welfare to 

Work (WtW) credits? 

Yes, but wages are not taken into account for the EZ Wage Credit 

or RC Wage Credit if they are being used in determining WOTC or WtW. In addition, 

the $15,000 or $10,000 cap on wages taken into account for the EZ Wage Credit or 

RC Wage Credit, respectively, would be reduced by any wages taken into account in 

computing WOTC or WtW. 

Which categories of employees would not 

qualify for the EZ and RC Wage Credits? 

The EZ and RC Wage Credits cannot be taken for any individual 

employed at any private or commercial golf course, country club, 

massage parlor, hot tub facility, suntan facility, racetrack or other 

gambling facility, or store whose principal business is the sale of alcoholic beverages 

for consumption off premises. 

The EZ and RC Wage Credits are not available for family members of the employer, 

including sons, daughters, parents, stepchildren, stepmothers, stepfathers, in-laws, and 

other persons treated as dependents under the tax code. Similar exclusions apply to 5-

percent owners related to the employer and family members of majority shareholders 

or partners of the employer. 

16

EZ Employment Credit/RC Employment Credit


Can entities that lease their employees use 

the credit? 

Employers should check with their tax advisors. The EZ and RC Wage 

Credits are based on FUTA wages, so the ability to take the credit will 

depend on who the employer is for purposes of the FUTA wages. 

Is there a definition of employee? 

The credit is tied to wages as defined for purposes of FUTA. Any individual treated as an employee under FUTA would generally be treated 

as an employee for purposes of the EZ Wage Credit. 

Can the EZ Wage Credit and RC Wage Credit be 

taken for farmworkers? 

If the employer’s principal activity is farming, the credit is available 

for employees only if the sum of value of the assets owned or leased 

by the employer for use in the farming business does not exceed 

$500,000. The definition of farming and the method for calculating the value of the 

assets are found in the tax laws, and the employer should consult its legal advisor on 

this matter before taking the credit. 

How does the credit affect the deduction for 

salaries and wages? 

A business must reduce the deduction for salaries and wages by the 

amount of the credit taken. 

Can a business benefiting from the EZ Wage 

Credit or RC Wage Credit transfer those 

credits to another business entity, such as 

a flowthrough entity? 

No. There is no provision in the Internal Revenue Code that allows 

one entity to transfer an unused EZ Wage Credit or RC Wage Credit to another entity. 

17

Empowerment Zone Employment Credit/Renewal 

There is, however, a provision that allows the unused credits—that is, credits exceeding 

tax liability—to be carried forward 20 years and back 1 year. 

With respect to the wage credit, can an employer 

count the time an employee is outside of the EZ 

or RC, for example on a tour boat in a lake, if the 

employee starts and stops its tours in the EZ or RC? 

To qualify for the credit, substantially all of the services performed by 

the employee for the employer during the period must be performed within the EZ or RC. 

Any services that are performed outside of the EZ or RC geographic boundaries would not 

count under this test. If an employer treated the pay period as the measurement period, the 

employer could take the wage credit for the pay period only if the employee performed 

substantially all services within the EZ or RC. For example, if an employee performed 

50 percent of his or her services in the EZ or RC and 50 percent on the lake outside of 

the EZ or RC during a pay period, no credit would be allowed for that pay period. 

Can both the RC Wage Credit and the Indian 

Employment Credit be taken for an employee 

who qualifies for both credits? 

Neither the RC Wage Credit nor the Indian Employment Credit provisions prohibit taking both credits for the same employee. 

Can an employer receive the RC Wage Credit for 

an employee who lives in one RC and works in 

another, or lives in an RC and works in an EZ, 

or vice versa? 

No. Wages must be paid to a qualified zone employee to qualify for the 

credit. To be a qualified zone employee, the employee must live in the same EZ or RC in 

which substantially all of the services are performed for the employer. 

18

Empowerment Zone Employment Credit/Renewal 

With respect to EZ Wage Credit and RC Wage 

Credit, is the 90-day period calculated based on 

the calendar or on days worked? 

The 90-day test is based on calendar days, not days worked. 

Are tips considered qualified wages in order to 

determine the EZ Wage Credit or RC Wage Credit? 

No. The definition of wages for this purpose does not include tips. 

How is the EZ Wage Credit or RC Wage Credit 

calculated if the fiscal year of the business is not 

the calendar year? 

The credit is based on the qualified wages paid or incurred during the 

calendar year that ends during the taxpayer’s fiscal year. For example, 

a business with a fiscal year ending on September 30 would take the credit for wages 

paid or incurred from January 1 through December 31, 2001, on the tax return for the 

fiscal year that begins on October 1, 2001, and ends on September 30, 2002. For the 

wages paid or incurred from January 1 through December 31, 2002, the credit would be 

claimed on the return for the fiscal year that begins on October 1, 2002, and ends on 

September 30, 2003. Therefore, even though the taxpayer’s deduction is for fiscal year 

wages, the credit is for calendar year wages. 

Note: This rule applies only to the EZ Wage Credit and the RC Wage Credit. The WOTC, 

WtW credit, and Indian Employment Tax Credit all use fiscal year wages. 

Can a company with employees working at a 

building construction site in an RC qualify for 

the RC Wage Credit? 

The RC Wage Credit is available for any employee who performs substantially all of his/her services in the RC during the period and who 

also lives in the RC. The Internal Revenue Service (IRS) has interpreted the language 

19

Empowerment Zone Employment Credit/Renewal 

“the period” to include pay periods. Thus, if an employee is working at a construction 

site for substantially all specified pay periods, the wages paid during those pay periods 

would be qualified wages eligible for the 15-percent credit against up to $10,000 per year 

in wages. The employee must live in the RC during that same time period. 

With regard to the EZ Wage Credit and RC Wage 

Credit, what does substantially all mean with 

regard to services performed? 

Although there is no published guidance on this question that specifically relates to the EZ Wage Credit or RC Wage Credit, the IRS recently 

ruled that “substantially all” means “80 percent or more” as it relates to identical statutory 

language regarding services performed by New York Liberty Zone business employees for 

purposes of a different wage incentive. 

Could a tax-exempt organization take advantage 

of the EZ Wage Credit or RC Wage Credit? 

Tax-exempt organizations (other than farmers’ cooperatives) are not 

eligible to claim the EZ Wage Credit or RC Wage Credit. 

What if the sister of an employer works at a company that wishes to use the EZ Wage Credit or RC 

Wage Credit? If she is married and files her taxes 

separately from the employer, will she qualify? 

No. Wages paid to certain family members, including sisters, brothers, 

mothers, fathers, and spouses of the taxpayer, are not qualifying wages for purposes of 

the EZ Wage Credit or RC Wage Credit, regardless of the filing status of the relative. In 

addition, the tax rules prohibit taking a wage credit for a broader list of relatives (including sons, daughters, stepsons, stepdaughters, a father or mother [or an ancestor of either], 

a stepfather or stepmother, aunts, uncles, nieces, nephews, and various in-laws) if that 

individual is claimed as a dependent. 

20

Empowerment Zone Employment Credit/Renewal 

The EZ Wage Credit and RC Wage Credit indicate 

the employee must live in the EZ or RC. How, 

then, would an EZ or RC use these credits when 

providing employment for a homeless individual? 

There seems to be no definition in the IRS Code, committee reports, 

or other published IRS guidance defining the “principal place of abode” of the employee, 

which must be located in the EZ or RC. The employer is responsible for proving that the 

employee’s principal place of abode was within the EZ or RC during the period the services were performed for the employer. Presumably, this is the address that the employee 

entered on Form W–4 on starting work. There seems to be no reason why a homeless 

shelter could not be considered a “principal place of abode.” This is a compliance matter 

and would be raised only (if at all) during an audit of the employer’s tax return. 

Which are the “certain cooperatives” that may 

qualify to use EZ Wage Credit or RC Wage Credit? 

Are telephone and electrical cooperatives included? 

The cooperative must be a farmers’ cooperative as described in section 

521 of the tax code. 

In defining nonqualifying zone employees in its 

discussion on the employment credits, IRS Publication 954 refers to employees of a farming trade 

or business. What is the definition here of farming? Does this include those employed in horse 

farming, cattle farming, tobacco farming, goat producer 

cooperatives, etc.? Does the definition include tree farmers? 

Yes. Farming is defined as cultivating the soil or raising or harvesting any agricultural or 

horticultural commodity (including animals) on a farm, or handling, drying, packing, grading, or storing on a farm any agricultural or horticultural commodity in its unmanufactured state if the farmer regularly produces more than one half of the commodity so treated. 

Not all farming operations are excluded from the definition. Small farms are eligible. 

Small farms are those whose business assets (greater of unadjusted basis or fair market 

value) plus the value of leased business assets does not exceed $500,000. 

21

Empowerment Zone Employment Credit/Renewal 

What documentation is required if an employer 

wants to claim the EZ Wage Credit or RC Wage 

Credit? If the business has employee records showing residence during employment is this sufficient? 

There is no prescreening for the EZ Wage Credit or RC Wage Credit. 

The taxpayer files would need a signed statement by the employee attesting to residence, 

which is usually found in the employment application. At some point, the taxpayer 

would have to determine if the residence is in the EZ or RC, but the employer is not 

required to submit any particular IRS form to substantiate this. Many employers use the 

HUD address locator available from HUD’s Web site at www.hud.gov/cr. There are also 

consulting firms that verify addresses. 

Where can a business obtain more information 

on this incentive? 

A business should consult with its tax advisor. IRS Publication 

954 and IRS Form 8844 describe this incentive. For copies call 

1–800–829–3676 or visit www.irs.ustreas.gov. 

22

Work Opportunity

Tax Credit 

Applicable IRS Tax Forms: Forms 5884 and 8850 

Wage Credit Description 

The Work Opportunity Tax Credit (WOTC) provides businesses with an incentive to hire


individuals from groups that have particularly high unemployment rates or other special


employment needs. Businesses do not have to be located in an Empower­


ment Zone (EZ), Enterprise Community (EC), or Renewal Community


(RC) to qualify for this credit. They can claim the credit if they pay or


incur qualified first-year wages to a targeted-group employee who began


work after September 1996. Groups that qualify include:


■ High-risk youth (ages 18 to 24 who live in an EZ, EC, or RC). 

■ Veterans. 

■ Ex-felons. 

■ Vocational rehabilitation referrals. 

■ Summer youth employees (ages 16 and 17) who live in an EZ, EC, or RC. 

■ Food stamp recipients. 

■	 Recipients of assistance under Aid to Families with Dependent Children (AFDC) 

or its successor program, Temporary Assistance for Needy Families (TANF). 

■ Supplemental security income (SSI) recipients. 

23


Availability

Work Opportunity Credit up to $2,400 against Expires for individuals who begin 

Tax Credit (WOTC) Federal taxes for businesses for work after December 31, 2003. 

each new hire from groups that Business does not have to be in an 

have high unemployment rates EZ, EC, or RC to qualify. Cannot 

or other special employment be combined with WtW credit. 

needs, including: youth ages 18 State Employment Services Agency 

to 24 who live in an EZ, EC, or must certify employee is in 

RC, and summer hires ages 16 

or RC. 

targeted group. 

to 17 who live in an EZ, EC, 
Work Opportunity Tax Credit


Each qualifying category has specific requirements. Employers should consult their tax 

advisors and the State Employment Services Agency (SESA). 

Target Audience 

■ Businesses outside an EZ, EC, or RC that will have large hiring needs. 

■ Businesses expanding within an EZ, EC, or RC that will be hiring new employees. 

■ Businesses with relatively high turnover that often need new employees. 

■ Businesses looking to reduce tax liability. 

■ Businesses participating in summer youth employment programs. 

■	 Businesses seeking to qualify as an Enterprise Zone Business or a Renewal Community 

Business that must meet the 35-percent EZ, EC, or RC resident employee requirement. 

Incentive Not Relevant to 

■ Startup businesses that may not have large tax liabilities. 

■ Nonprofit organizations. 

■	 Businesses with highly specialized employees, unless a local training program can 

supply appropriately trained employees. 

Additional Resources 

■ Accountants and lawyers preparing business tax returns. 

■	 Local bar associations or accountant groups to identify accountants or lawyers to 

field questions. 

■	 The SESA assigned to handle WOTC certifications (may be at State or local level). 

The SESA staff should be included in informational meetings held for employees 

and EZ, EC, and RC residents as well as in job-training programs. The SESA is also 

likely to have materials prepared on the incentives. 

■	 Local schools, vocational schools, junior or community colleges, 4-year colleges, 

and job-training programs that may have EZ, EC, or RC residents of the appropriate 

age participating in their programs. The training programs should be linked to the 

SESA or other employment agencies and job banks. 

24

Work Opportunity Tax Credit


■	 Job banks with established relationships with the SESA so that EZ, EC, and 

RC residents can have conditional certification as qualifying for WOTC. 

■	 Instructions for IRS Forms 8850 and 5884. For copies call 1–800–829–3676 or 

visit www.irs.ustreas.gov. 

Questions & Answers on the Work Opportunity 

Tax Credit 

Are there any incentives for hiring residents 

of an EZ, EC, or RC? 

Yes. The tax code gives employers a credit (WOTC) against Federal 

taxes for hiring residents of an EZ, EC, or RC ages 18 to 24. WOTC 

also applies to EZ, EC, and RC residents ages 16 and 17 who are hired 

for summer work and is available for the hiring of certain other groups identified as having difficulty entering the job market. 

Can a business use this credit for current 

employees? 

No. WOTC is an incentive to hire individuals, and the credit is calculated against wages paid only during the first year an employee works 

for an employer. To take advantage of the credit, the business must 

obtain information from the employee prior to offering him or her a job. 

What paperwork is involved? 

A business must have a prospective employee fill out IRS Form 8850 

prior to making a job offer. The employer also signs the form. In some 

cases, the prospective employee may bring a precertification form to 

the interview. Form 8850 must be forwarded to the SESA within 21 

days of the date the employee starts work. WOTC may be taken only for employees who 

have been certified by the SESA as qualifying for the incentive. 

25

Work Opportunity Tax Credit


How does a business document that an EZ, EC, 

or RC resident is qualified? 

In most cases, a driver’s license will serve to establish the age and 

address of a prospective employee. The EZ, EC, or RC can confirm 

that the address is within designated boundaries, or a business can 

obtain the information using the EZ/EC/RC address locator at http://hud.esri.com/rcezec. 

The SESA can provide a business with other ways to establish the age and address when 

a prospective employee does not have a driver’s license. 

What if the employee leaves during the first 

year of employment? 

The credit is available for any person who works at least 120 hours for 

a business. The credit rate is 25 percent of wages paid to an individual 

who works at least 120 hours. If the employee works at least 400 hours, 

the credit rate is increased to 40 percent of first-year wages. 

What if the employee works part-time? 

The credit is available for both part-time and full-time employees. 

The credit percentage is tied to the total number of hours worked. 

What is the definition of qualified wages? 

Qualified wages are generally wages subject to the Federal Unemployment Tax Act. The credit is calculated against a maximum of 

$6,000 in first-year wages or $3,000 in the case of summer youth. 

A business may pay the employee more than $6,000 in the first year, 

but the maximum for purposes of calculating the credit is $6,000. The instructions for 

IRS Form 5884 provide additional specific information on qualified wages. 

26

Work Opportunity Tax Credit


Is there a limit on the number of employees 

for which a business can take the credit? 

An employer can take the maximum $2,400 credit (40 percent of 

$6,000) for as many new hires as are qualified. 

What if the Federal tax liability of the business 

is less than the total credit amount? 

WOTC is one of several business credits and generally is subject to 

the same rules as other business tax credits. As with other business 

tax credits, unused WOTC amounts can be carried forward for up 

to 20 years and carried back 1 year. 

Can nonprofit organizations benefit from WOTC? 

Tax-exempt organizations, other than certain cooperatives, are ineligible for the credits. 

Can a pass-through entity, such as a partnership 

or S-corporation, use the credit? 

WOTC is a general business credit for Federal tax purposes and may 

be passed through under the rules similar to other business credits. 

Is there a time limit for taking WOTC? 

WOTC is not a permanent provision of the tax code; rather, it is available for individuals who start work by a specified date. A business 

should check with its tax preparer or visit www.doleta.gov to determine 

that date. Currently, individuals must start work before January 1, 2004, 

but the date is likely to be extended. 

27

Work Opportunity Tax Credit


Can both WOTC and Welfare to Work (WtW) 

credits be claimed for the same employee? 

If an employer takes the WtW credit, that individual does not qualify 

as a member of a WOTC-targeted group. An employer cannot claim 

both credits with respect to the same individual in any 1 taxable year. 

The WtW credit may be claimed for the second-year wages of a qualifying individual 

regardless of whether the employer took WOTC or WtW for the first-year wages. 

How does the credit affect the deduction for 

salaries and wages? 

A business must reduce the deduction for salaries and wages by the 

amount of the credit taken. 

Are there special procedures for taking the 

tax credit? 

The credit is accounted for on IRS Form 5884 and would be part of 

a business’s tax filing. Form 8850 and certification by the SESA are 

not filed with the tax return but should be retained by the business 

to substantiate the credit. 

Where can a business obtain more information 

on this incentive? 

A business should consult its tax advisor. IRS Publication 954 and 

IRS Forms 5884 and 8850 describe this incentive. For copies call 

1–800–829–3676 or visit www.irs.ustreas.gov. Questions about the 

certification process should be directed to the SESA. 

28

Welfare to Work Tax Credit 


Applicable IRS Tax Forms: Forms 5884, 8850, and 8861 

Wage Credit

certify employee is a long-term 

The Welfare to Work (WtW) credit provides businesses with an incentive to hire 

long-term family assistance recipients. Businesses do not have to be located in an 

Empowerment Zone (EZ), Enterprise Community (EC), or Renewal Community 

(RC) to qualify for this credit. They can claim the credit if they pay or 

incur qualified wages (during the first 2 years of employment) to a longterm family assistance recipient who began work after December 1997 

but before January 1, 2004. This incentive applies only to new hires. 

Target Audience 

■ Businesses with large hiring needs. 

■ Businesses expanding that will be hiring new employees. 

■	 Businesses with relatively high turnover that often need new 

employees. 

■ Businesses looking to reduce tax liability. 

Incentive Not Relevant to 

■ Startup businesses that may not have large tax liabilities. 

■ Nonprofit organizations. 

29


Description Availability

Welfare to Work Two-year credit against Federal Expires for individuals who begin 

(WtW) Credit taxes for businesses that hire work after December 31, 2003. 

long-term family assistance Business does not have to be in an 

recipients. Credits up to $3,500 EZ, EC, or RC to qualify. Cannot 

for the first year, and $5,000 be combined with WOTC. State 

for the second year for each Employment Ser

family assistance recipient. 

vices Agency must 

new hire. 
Welfare to Work Tax Credit 

Additional Resources 

■ Accountants and lawyers preparing business tax returns. 

■	 Local bar associations or accountant groups to identify accountants or lawyers to 

field questions. 

■	 The State Employment Services Agency (SESA) assigned to handle Welfare to Work 

certifications (may be at State or local level). SESA staff should be included in informational meetings held for employees and EZ, EC, and RC residents as well as in 

job-training programs. The SESA is also likely to have materials prepared on the 

incentives. 

■	 Local schools, vocational schools, junior or community colleges, 4-year colleges, and 

job-training programs for members of families who have been long-term recipients of 

family assistance (Aid to Families with Dependent Children (AFDC) or Temporary 

Aid for Needy Families (TANF) payments) participating in their programs. The 

training programs should be linked to the SESA or other employment agencies and 

job banks. 

■	 Job banks with established relationships with the SESA so that long-term welfare 

recipients can have conditional certification as qualifying for Welfare to Work. 

■	 Instructions for IRS Forms 5884, 8850, and 8861. For copies call 1–800–829–3676 

or visit www.irs.ustreas.gov. 

Questions & Answers on Welfare to Work 

Tax Credit 

Are there any incentives for hiring individuals 

who have received family assistance payments? 

Yes. The tax code gives employers a Welfare to Work (WtW) Credit 

against Federal taxes for hiring members of families who have been 

long-term recipients of family assistance (AFDC or TANF payments), 

or who have ceased to qualify for such assistance because of time limitations imposed by 

Federal or State laws. 

30

Welfare to Work Tax Credit 

Can a business use this credit for current 

employees? 

No. WtW is an incentive to hire individuals, and the credit is calculated against wages paid only during the first and second years an 

employee works for an employer. To take advantage of the credit, a 

business must obtain information from a prospective employee prior to offering him 

or her a job. 

What paperwork is involved? 

A business must have the prospective employee fill out IRS Form 

8850 prior to making a job offer. The employer also signs that form. 

In some cases, the prospective employee may bring a precertification 

form to the interview. Form 8850 must be forwarded to the SESA 

within 21 days of the date the employee starts work. WtW may be 

taken only for employees who have been certified by the SESA as qualifying for the 

incentive. 

How does a business document that a 

prospective employee is qualified? 

The SESA will verify that an employee is eligible based on information 

from Form 8850. 

What if an employee leaves during the first year 

of employment? 

The credit is available for any person who works at least 400 hours or 

180 days for a business. If the minimum is not met, the credit may not 

be taken with respect to that employee. 

31

Welfare to Work Tax Credit 

What if the employee works part-time? 

The credit is available for part-time and full-time employees. The 

credit is available once the minimum 400-hour/180-day test is met. 

What is the definition of qualified wages? 

Qualified wages are generally wages subject to the Federal Unemployment Tax Act. The credit is calculated against a maximum of 

$10,000 per year in first- and second-year wages. A business may 

pay the employee more than $10,000 in either year, but the maximum 

for purposes of calculating the credit is $10,000. The instructions for 

IRS Form 5884 provide additional specific information on qualified wages. Wages for 

this purpose include employer-provided health and accident insurance, educational 

assistance, and dependent care assistance. 

Is there a limit on the number of employees 

for which a business can take the credit? 

An employer can take the maximum $8,500 credit over 2 years 

(35 percent times $10,000 for the first year plus 50 percent times 

$10,000 for the second year) for as many new hires as qualify. 

Table 3. Welfare to Work Tax Credits for Long-Term 

Family Assistance Recipients 

Years Employed 

1 

2 

Are there special procedures for taking the 

tax credit? 

The credit is accounted for on IRS Form 8861 and would be part of a 

business’s tax filing. Form 8850 and certification by the SESA are not 

filed with the tax return but should be retained by the business to 

substantiate the credit. 

32


Years Employed Maximum Rate Qualified Wages Maximum Credit 

35% $10,000 $3,500 

50% $10,000 $5,000 
Welfare to Work Tax Credit 

Is there a time limit for taking WtW? 

WtW is not a permanent provision of the tax code; rather, it is available for individuals who start work by a specified date. A business 

should check with its tax preparer or visit www.doleta.gov to 

determine that date. Currently, individuals must start work before 

January 1, 2004, but the date is likely to be extended. 

Can both Work Opportunity Tax Credit (WOTC) 

and WtW credits be claimed for the same 

employee? 

If an employer takes the WtW credit, that individual does not qualify 

as a member of a WOTC-targeted group. An employer cannot claim 

both credits with respect to the same individual in any 1 taxable year. The WtW credit 

may be claimed for the second-year wages of a qualifying individual regardless of 

whether the employer took WOTC or WtW for the first-year wages. 

How does the credit affect the deduction for 

salaries and wages? 

A business must reduce the deduction for salaries and wages by the 

amount of the credit taken. 

Where can a business obtain more information 

on this incentive? 

A business should consult its tax advisor. IRS Publication 954 and 

IRS Forms 8861 and 8850 describe this incentive. For copies call 

1–800–829–3676 or visit www.irs.ustreas.gov. Questions about the 

certification process should be directed to the SESA. 

33

Indian Employment Tax Credit 


Applicable IRS Tax Form: Form 8845 

Wage Credit Description Availability 

Indian Employment A business does not have to be 

Tax Credit

The Indian Employment Tax Credit provides businesses with an incentive 

to hire and retain individuals who are enrolled members of an Indian tribe 

(or the spouse of an enrolled member) who live on or near an Indian 

reservation. The majority of the services performed by the employee must 

take place on the Indian reservation. The business does not have to be 

located in an Empowerment Zone (EZ), Enterprise Community (EC), or 

Renewal Community (RC) to qualify for this credit. The credit is calculated on wages (including employee health insurance costs) of up to $20,000 

per employee. 

an Indian 

reservation. The majority of the services performed by the employee must 

take place on the Indian reservation. The business does not have to be 

located in an Empowerment Zone (EZ), Enterprise Community (EC), or 

Renewal Community (RC) to qualify for this credit. The credit is calculated on wages (including employee health insurance costs) of up to $20,000 

per employee. 

Target Audience 

■ Businesses new to an Indian reservation that will have substantial hiring needs. 

■ Businesses expanding within an Indian reservation that will be hiring new employees. 

■	 Businesses with operations on an Indian reservation that have relatively high 

turnover and often need new employees. 

■ Businesses looking to reduce tax liability. 

Incentive Not Relevant to 

■ Businesses that do not have employees who perform services on an Indian reservation. 

■ Startup businesses that may not have large tax liabilities. 

■ Nonprofit organizations. 

35


Credit against Federal taxes

calculated on wages (including

employee health insurance costs)

up to $20,000 for each qualified

employee who is an enrolled

member of an Indian tribe (or

spouse) who lives on or near an

Indian reser

existing employees and new hires. 

vation. Available for after December 31, 2003. . 

located in an EZ, EC, or RC to 

qualify for this credit. The majority 

of the services performed by the 

employee must be on an Indian 

reservation. The credit does not 

apply for taxable years beginning 
Indian Employment Tax Credit 

■	 Businesses that pay a qualified employee more than the maximum wage 

($30,000 in 1993, to be adjusted by cost of living). 

Additional Resources 

■ Accountants and lawyers preparing business tax returns. 

■	 Local bar associations or accountant groups to identify accountants or lawyers to 

field questions. 

■	 Local schools, vocational schools, junior or community colleges, 4-year colleges, and 

job-training programs that may have Indian reservation residents participating in 

their programs. 

■ Job banks with established relationships with Indian tribal members. 

■	 Instructions for IRS Form 8845. For copies call 1–800–829–3676 or visit 

www.irs.ustreas.gov. 

Questions & Answers on the Indian Employment 

Tax Credit 

Are there any incentives to increase employment 

of members of Indian tribes? 

Yes. The tax code gives employers a credit against Federal taxes for 

employees that are enrolled members of an Indian tribe, or the spouse 

of an enrolled member. The employee must perform substantially all 

of its services for the employer on an Indian reservation and must live 

on or near that reservation. 

Can a business use this credit for current 

employees? 

Yes. The credit is an incentive for both hiring and retaining employees 

and may be taken so long as the enrolled member works on the Indian 

reservation and lives on or near the reservation. 

36

Indian Employment Tax Credit 

What is the amount of credit? 

The credit is calculated as a percentage of increases in wages. The 

credit is 20 percent of the excess of the current year wages (including 

certain employee health insurance costs) for all qualifying employees 

over the sum of the corresponding amounts paid or incurred by an 

employer during calendar year 1993 for qualifying employees. If no 

qualified employees worked for a business in 1993, the 20-percent credit would be 

applied to the current year wages. 

Is there any cap on the credit? 

The aggregate amount of wages (including health insurance) taken 

into account for any employee cannot exceed $20,000. 

What if an employee is paid more than $20,000 

in a year? 

An employee’s wages can exceed $20,000, but the credit cannot be 

taken with respect to an employee that a business pays more than 

$30,000 (a 1993 figure adjusted for cost of living) during a taxable 

year, or at a rate that, if applied for the entire year, would cause an employer to pay an 

employee more than $30,000. 

What is the definition of qualified wages? 

Qualified wages are generally wages subject to the Federal Unemployment Tax Act. Wages for the purpose of this credit also include 

any qualified health insurance costs a business pays or incurs on 

behalf of an employee. Costs for health insurance under a salary 

reduction plan do not count. 

37

Indian Employment Tax Credit 

Is there a minimum time the employee must 

work for a business before the credit can be 

taken? 

Generally, if you terminate a qualified employee less than 1 year after 

the date of initial employment, you cannot claim a credit for that 

employee for the tax year the employment is terminated. Also, you may have to recapture 

credits allowed in earlier years. These rules do not apply in the following situations: 

■ The employee voluntarily quits. 

■ The employee is terminated because of misconduct. 

■	 The employee becomes disabled. However, if the disability ends before the end of the 

first year of employment, a business must offer reemployment to its former employee. 

How does an employer determine if an employee 

is an enrolled member of an Indian tribe? 

Indian tribe means any Indian tribe, band, nation, pueblo, or other 

organized group or community, including any Alaska Native village or 

regional or village corporation, as defined in, or established under, the 

Alaska Native Claims Settlement Act, that is recognized as eligible for the special programs and services provided by the United States to Indians because of their status as 

Indians. The list of federally recognized Indian tribes is published annually in the Federal 

Register. (See, for example, the Federal Register dated March 13, 2000 (65 FR 13298)). 

What if the Federal tax liability of the business is 

less than the total credit amount? 

The Indian Employment Tax Credit is one of several business credits 

and generally is subject to the same rules as other business tax credits. 

As with other business tax credits, unused Indian Employment Tax 

Credits can be carried forward for up to 20 years and carried back 1 year. 

38

Indian Employment Tax Credit 

Can a nonprofit organization benefit from 

the credit? 

Tax-exempt organizations, other than certain cooperatives, are 

ineligible for the credit. 

Can a pass-through entity, such as a partnership 

or S-corporation, use the credit? 

The Indian Employment Tax Credit is a general business tax credit 

and may be passed through under the rules similar to other business 

credits. 

Can gambling establishments located within 

an Indian reservation use the credit? 

The credit is not available for any individual who performs services 

involving the conduct of Class I, II, or III gaming as defined in section 

4 of the Indian Gaming Regulatory Act and any individual performing 

any services in a building housing such gaming activity. 

Are there other categories of employees who 

would not qualify for the credit? 

The credit is not available for family members of the employer, including sons, daughters, parents, stepchildren, stepmothers, stepfathers, 

in-laws, and other persons treated as dependents under the tax code. 

Similar exclusions apply to 5-percent owners of the business and majority shareholders 

or partners of the employer and any family members of majority shareholders or partners. 

39

Indian Employment Tax Credit 

Can the credit be used against Federal 

Alternative Minimum Tax (AMT) liability? 

The credit may not be used to reduce AMT tax liability. 

Can both the Work Opportunity Tax Credit 

(WOTC) and the Indian Employment Tax 

Credit be taken for an employee who 

qualifies for both credits? 

Any portion of wages used to determine the WOTC does not 

qualify for the Indian Employment Tax Credit. An employer must choose between 

the two credits. 

How does the credit affect the deduction for 

salaries and wages? 

A business must reduce the deduction for salaries and wages and 

health insurance costs by the amount of the credit taken. 

Is there a time limit on the credit? 

The Indian Employment Tax Credit will expire for taxable years beginning after December 31, 2002. A business should check with its tax 

advisor to see if the expiration date is extended. 

How can a business get more information on 

this credit? 

The credit is taken on IRS Form 8845 and the instructions to this form 

provide additional information. For copies call 1–800–829–3676 or 

visit www.irs.ustreas.gov. A business should also check with its tax 

advisor with respect to the specific details. 

40

Increased Section 

179 Deduction 

Applicable IRS Tax Form: Form 4562 

Description Availability 

Increased Section Allows businesses to claim Can be used only in EZs and RCs. 

179 Deduction increased Section 179 deduction Cannot be used in developable 

(up to $20,000 in additional sites until after December 31, 

expensing increasing to $35,000 2001. Cannot be used in ECs. 

for property acquired after December 31, 2001) if the business 

qualifies as an Enterprise Zone 

Business or Renewal Community 

Business. Can be claimed on 

certain depreciable property such 

as equipment and machinery. 

Section 179 of the Internal Revenue Code allows businesses to choose to deduct all


or part of the cost of certain qualifying property in the year they place it in service.


Businesses can do this instead of recovering the cost by taking depreciation deductions


over a specified recovery period. There are limits, however, on the amount businesses


can deduct in a tax year. Businesses may be able to claim an increased


Section 179 deduction of as much as $20,000 (increasing to $35,000


after December 31, 2001) if they qualify as Enterprise Zone Busi­


nesses or Renewal Community Businesses. A business cannot claim


this increased deduction, however, if it operates in an Enterprise


Community (EC). 


Target Audience 

■	 Businesses with relatively small (less than $200,000) equipment 

needs in any taxable year, such as labor-intensive businesses with 

computer costs. 

■	 Existing businesses that need to update equipment but are not otherwise purchasing 

equipment. 

■	 Businesses moving into an Empowerment Zone (EZ) or Renewal Community (RC) 

from another location that own the majority of their equipment but have additional 

new equipment needs. (Note: see appendix A, Questions & Answers on Enterprise 

Zone Businesses and Renewal Community Businesses.) 

41


Deduction 
Increased Section 179 Deduction 

Incentive Not Relevant to 

■	 Businesses in ECs, or in developable site portions of Round II EZs, until after 

January 1, 2002. 

■	 Businesses that cannot meet the definition of an Enterprise Zone Business or 

Renewal Community Business (see appendix A). 

■	 Consolidated companies with large equipment needs within the entire consolidated group. 

■ Equipment that will be used outside of an EZ or RC (such as delivery equipment). 

■ Companies with large or expensive equipment needs on yearly basis. 

■	 Startup businesses that expect tax losses or other normal business expenses to 

equal income. 

■ Businesses with equipment that has a short economic life. 

Additional Resources 

■ Accountants and lawyers preparing business tax returns. 

■	 Local bar associations or accountant groups to identify accountants or lawyers to 

field questions. 

■	 Instructions for IRS Form 4562. For copies call 1–800–829–3676 or visit 

www.irs.ustreas.gov. 

Questions & Answers on Increased Section 

179 Deduction 

What assistance is available to businesses located 

in an EZ or RC for equipment purchases? 

The tax code allows an Enterprise Zone Business or Renewal Community Business to take an additional expense deduction of up to 

$20,000 per year (increasing to $35,000 after December 31, 2001) on 

purchases of tangible personal property (equipment) for use in an EZ or RC, respectively. 

42

Increased Section 179 Deduction 

The President signed the Jobs and Growth Tax 

Relief Reconciliation Act on May 28, 2003. The 

law increases the expense deduction on purchases of tangible personal property (equipment) for 

small businesses to $100,000 and expands the 

deduction to include off-the-shelf computer software. Are 

Renewal Community and Enterprise Zone Businesses still able 

to increase their Section 179 expense deduction by an additional $35,000? 

Yes. A business that meets the definition of a Renewal Community Business or Enterprise 

Zone Business can take a Section 179 expense deduction of up to $135,000. The 

$100,000 limit is increased by the smaller of $35,000 or the cost of Section 179 property 

placed in service during the year that it is Qualified Renewal Property or Qualified Zone 

Property. The increase in the deduction to $100,000 is effective for tax years beginning 

after 2002 and before 2006. 

What is the benefit of additional expensing? 

Expensing permits a business to take a deduction for the full cost of 

equipment in the year it is purchased. In addition, this writeoff of 

costs means that a business does not have to set up a tax depreciation 

schedule and deduct the expense over time. Expensing is particularly 

helpful for equipment with a long recovery period. 

Are some businesses ineligible for this incentive? 

Certain business activities do not qualify, such as residential rental 

activity; commercial real estate, unless at least 50 percent of the 

gross rental income is from Enterprise Zone Businesses or Renewal 

Community Businesses; rental of personal property, such as car rental 

agencies, unless at least 50 percent of the rentals are to Enterprise 

Zone Businesses or Renewal Community Businesses, or to EZ or RC residents; businesses 

that predominantly hold or develop intangibles for sale or license; country clubs; liquor 

stores; golf courses; racetracks; or gambling facilities. 

43

Increased Section 179 Deduction 

Is expensing available in the Round II 

developable sites? 

Expensing is not available for property located in a Round II 

developable site until after December 31, 2001. 

What type of property qualifies? 

The additional expensing allowance is available only for a Qualified 

Zone Property (QZP) or Qualified Renewal Property (QRP), defined as 

the following: 

■ Eighty-five percent of the use of the property must be in the active 

conduct of an Enterprise Zone Business or Renewal Community Business 

by a taxpayer in an EZ or RC. 

■	 The taxpayer acquired the property by purchase after the date of EZ or RC 

designation. 

■	 Original use of the property in an EZ or RC commences with the taxpayer (that 

is, the taxpayer is the first person to use the property inside an EZ or RC), or the 

taxpayer meets the substantial renovation rule. Property is substantially renovated if, 

during any 24-month period beginning after EZ or RC designation, there are additions to the basis of the property equal to either 100 percent of the adjusted basis 

of the property or $5,000, whichever is greater. 

How do the expensing phase-out limits work? 

For tax years beginning before 2003, the general tax rule was that the 

maximum Section 179 expense deduction was reduced by the excess 

of the cost of Section 179 property placed in service during the year 

over $200,000. For Enterprise Zone and Renewal Community 

Businesses, only 50 percent of the cost of QZP or QRP counts when 

figuring the cost of Section 179 property in excess of $200,000. For tax years beginning 

after 2002 and before 2006, the Jobs and Growth Tax Relief Reconciliation Act of 2003 

increases the $200,000 threshold to $400,000. The reduction for 50 percent of the cost 

of QZP or QRP (and 100 percent of the cost of other Section 179 property) remains 

unchanged. 

44

About the Empowerment Zone/Enterprise Community 

How does a business file for this incentive? 

The additional expensing amount is recorded on IRS Form 4562. 

This form has a special line, along with instructions, for QZP and 

QRP. A business should consult with its tax advisor. 

45

Commercial Revitalization 

Deduction 

Deduction

Commercial Revitalization

Deduction

Businesses that construct or rehabilitate commercial property in Renewal Communities 

(RCs) can deduct a portion of the costs of acquisition and rehabilitation over a shorter 

period of time than permitted under standard depreciation rules. A business can elect a 

deduction of one-half of “qualifying revitalization expenditures” (QRE) up to $10 million 

for any one project in the year the building is placed in service or can deduct all QRE pro 

rata over 10 years. The project must receive an allocation from the State (up to $12 million allocated for each RC in the State from 2002 through 2009). 

Target Audience 

■	 Developers and businesses specializing in redeveloping abandoned 

and underutilized buildings in RCs. 

■	 Developers and businesses undertaking new building construction 

projects in RCs. 

■	

47


Available in Renewal Communities 

Description

in an RC. 

(RCs) for buildings placed in service 

after December 31, 2001, and 

before January 1, 2010. State 

may allocate up to $12 million in 

deductions (not more than $10 

million per project) for each year 

be a Renewal Community Business. 

2002–2009 for each RC in the 

State. Business does not have to 

Availability 

Applicable IRS Tax Form: No applicable IRS tax form identified 

at time of publication; see IRS Publication 946

Businesses located in RCs that cannot meet the Renewal Community 

Business definition (that is, their employees perform services outside 

the RC, they do not meet the 35-percent RC resident employee 

requirement, or too much of their gross income is earned outside 

the RC). 

Deduction of either one-half of 

qualified revitalization expenditures (QREs) in the first year a 

building is placed in service or 

all of QREs on ratable basis over 

10 years if QREs have been 

allocated to revitalization of a 

commercial building located 
Commercial Revitalization Deduction 

Incentive Not Relevant to 

■ Developers of residential rental projects. 

■ Building acquisitions that do not involve substantial renovation expenditures. 

■ Land speculation purchases. 

■	 Startup or similar businesses with insufficient income to take advantage of 

accelerated depreciation. 

Additional Resources 

■ Accountants and lawyers preparing business tax returns. 

■	 Local bar associations or accountant groups to identify accountants or lawyers to 

field questions. 

■ Real estate developers familiar with local property markets. 

■	 Local chambers of commerce or business associations involved in economic 

development. 

■	 Tax lawyers and accountants associated with developers and current or prospective 

business owners in RCs. 

■ IRS Publication 946. For copies call 1–800–829–3676 or visit www.irs.ustreas.gov. 

Questions & Answers on Commercial 

Revitalization Deduction 

Are there any incentives for commercial building 

investment in an RC? 

In 2000, Congress created a new “commercial revitalization deduction” (CRD) that is intended to increase economic development in 

RCs. The incentive is a deduction from income before calculating 

Federal income tax liability, and provides a way to deduct costs on an accelerated basis. 

48

Commercial Revitalization Deduction 

Are there limits on the deduction? 

The amount of the deduction is subject to a State limitation of up 

to $12 million of “commercial revitalization expenditures” (CREs) 

for each RC located within a State for each calendar year after 2001 

and before 2010. In addition, the CREs for a particular building 

cannot exceed the actual qualifying costs and there is an overall limit per building 

of $10 million. 

Is the CRD available only for new construction? 

The deduction is calculated on the basis of qualifying CREs. CREs 

include the depreciable costs of a new building or the costs associated 

with an existing building that is substantially rehabilitated. Substantial 

rehabilitation means that, within a 24-month period, rehabilitation 

expenditures exceed the greater of the adjusted basis of the building (and its structural 

components) or $5,000. For purposes of determining whether a building has been substantially rehabilitated, rehabilitation expenditures do not include enlarging a building. 

If the substantial rehabilitation test is met (without taking into account the costs of 

expansion), the cost of expanding the building could qualify as a CRE. 

To what extent do building acquisition costs 

qualify for the CRD? 

A taxpayer can include the cost of the building acquisition in taking a 

CRD, but only to the extent that the acquisition cost does not exceed 

30 percent of the aggregate qualifying CREs (determined without regard 

to the acquisition cost). For example, if the building cost $500,000 to acquire and renovations eligible for CREs were $1 million, up to $300,000 of the acquisition cost could 

qualify as a CRE. 

Could an investor obtain special tax advantages 

for land speculation in an RC? 

The CRD is permitted only for the cost of acquiring a building and 

rehabilitating it, not for land costs. Acquisition of land for speculation 

would not qualify. 

49

Commercial Revitalization Deduction 

Is the CRD available for residential rental property? 

The building must be used for commercial purposes, so a residential 

rental property would not qualify. However, if a developer were to 

provide commercial facilities at or near the residential rental property, 

these expenditures might be eligible, assuming the commercial development is located in an RC. 

Who will make the allocation of the CRD? 

This incentive requires that each State identify an entity to act as 

the commercial revitalization agency. The commercial revitalization 

agency will develop the procedures for allocating the $12 million in 

CRDs permitted for each RC. 

How can a developer determine if a particular 

project might be competitive for obtaining 

the CRD? 

The commercial revitalization agency must develop a plan for allocating the CRD and must submit the plan to a public hearing. The plan 

must then be approved by the governmental unit of which the RC is a part. The Federal 

statute provides guidelines for the qualified allocation plan, requiring the commercial 

revitalization agency to take into account full-time jobs created by the project, active community involvement and contribution to the implementation of the Strategic Plan of the 

RC. The developer of a potential project should obtain a copy of the plan to determine 

the priorities of the commercial revitalization agency where the project might be located. 

What is the accelerated period for the CRD? 

The taxpayer may elect one of two permitted accelerated deduction 

methods. A taxpayer can elect either to (a) deduct one-half of the 

CREs for the taxable year the building is placed in service or (b) 

amortize all the CREs ratably over a 120-month period beginning the 

month the building is placed in service. The method selected will depend on a taxpayer’s 

particular tax situation. This special deduction provision would be in lieu of depreciating 

the property over a period up to 39 years. 

50

Commercial Revitalization Deduction 

What if the building was purchased and renovated 

prior to RC designation? 

The CRD is available only to buildings placed in service after the RC 

designation and before January 1, 2010. If the building was purchased 

before RC designation, but the renovation was not completed until 

after RC designation, the renovation expenditures would be treated as a separate building 

for purposes of determining when it was placed in service and could qualify for the CRD 

on that basis. 

What other tax consequences arise from using 

the CRD? 

No depreciation is allowed for amounts deducted as a CRD. The 

adjusted basis of the building is reduced by the amount of the CRD, 

and the deduction is treated as a depreciation deduction in applying 

the depreciation recapture rules. 

Does a CRD affect Alternative Minimum Tax 

(AMT) liability? 

The CRD is allowed as a deduction in computing a taxpayer’s AMT 

income. 

Do the passive loss limitation rules apply to 

the CRD? 

The CRD is treated in the same manner as the Low-Income Housing 

Tax Credit in applying the passive loss rules. That means that an individual taxpayer can have up to $25,000 of passive activity deductions 

(the CRD together with the other deductions and credits not subject to the passive loss 

limitation), regardless of the taxpayer’s adjusted gross income. Corporations are not 

subject to the $25,000 passive loss limitation. 

51

Commercial Revitalization Deduction 

Are there any special rules for 2002 or 2003 commercial revitalization expenditure ceilings? 

Yes. The $12 million commercial revitalization expenditure ceiling for 

2003 for an RC is increased by any portion of the 2002 commercial 

revitalization expenditure ceiling for that RC not allocated in 2002. 

For example, if State A has only one RC and only $7 million of the $12 million commercial revitalization expenditure ceiling for 2002 for the RC was allocated, the commercial 

revitalization expenditure ceiling for 2003 for the RC in State A is $17 million. 

In addition, the 2002 commercial revitalization expenditure ceiling for each RC within 

a State may be aggregated and apportioned to any RC within the State. However, after 

2002, no aggregation of the ceiling is permitted, including any portion of the 2003 ceiling attributable to the unallocated portion of the 2002 ceiling. For more information, 

please refer to the June 16, 2003, Internal Revenue Bulletin. 

If an RC cannot award the $12 million total in 

any given year, is there a carry forward provision 

to the next year? 

No. If an RC cannot award all of the $12 million for an RC for any 

given year, the unused amount of the $12 million may not be carried 

forward to a later year. However, if the RC did not award all of the $12 million for 2002, 

see the special rule in the answer to the previous question. 

If an RC cannot award all of the $12 million in any given year to qualified revitalization 

buildings placed in service in that year, the RC may consider making a carryover allocation. A carryover allocation is made with respect to a qualified revitalization building 

placed in service by a taxpayer not later than the close of the second calendar year following the calendar year in which the allocation is made. The carryover allocation is 

contingent on the provision that the taxpayer’s basis in the project of which the building 

is a part (as of the 6 months after the date that the allocation is made or the close of the 

calendar year in which the allocation is made, whichever is later) is more than 10 percent 

of the taxpayer’s reasonably expected basis in the project as of the close of the second calendar year following the calendar year in which the allocation is made. 

A carryover allocation may be for either a single-building project (a building-based allocation) or a multibuilding project (a project-based allocation). A carryover allocation 

52

Commercial Revitalization Deduction 

reduces the commercial revitalization expenditure ceiling for the calendar year in which 

the allocation is made. 

If a carryover allocation is made after June 30, 2002, and before January 1, 2003, the taxpayer must meet the 10-percent basis requirement set forth above by December 31, 2003. 

If a State finishes appointing a commercial revitalization agency and receiving public approval 

of the CRD allocation plan during the second half 

of a calendar year, can it still make CRD allocations 

available retroactively to a business that purchased 

or rehabilitated qualified RC property earlier in the year? 

Yes. 

Are CRD allocations made only after projects are 

placed into service so that actual costs are used, 

or are allocations based on estimated costs? If 

proposed projects are used, how will any discrepancies between actual qualifying expenses versus 

estimated qualifying expenses be reconciled? 

The statute does not require allocations to be based on either actual or estimated costs. 

Each State will handle the procedures differently, as all allocations must be made pursuant 

to a qualified allocation plan approved by the governmental unit of which the agency is 

a part. The procedures may include a preliminary allocation based on projected expenditures, with a final allocation made based on the actual qualifying expenditures. Actual 

expenditures eligible for the CRD could never exceed the amount that is allocated, but 

in some instances, the allocation process may result in more being allocated than can 

ultimately be used. 

53

Commercial Revitalization Deduction 

If the commercial revitalization agency for the 

State allocates, for example, $8 million of an 

available $12 million to one project, does the 

entire $8 million count against the total available 

allocation of $12 million for that year, regardless 

of the deduction method used by the business (50 percent 

in the first year or 10 percent over 10 years)? Also, would the 

amount of allocation for the RC the next year be impacted 

by the amount and the deduction method (that is, 50 percent 

or 10 percent) used? 

The entire $8 million counts against the $12 million available allocation. The amount or 

method chosen by the business to claim the CRD has no effect on the amount of the allocation for any given year. 

The CRD states that a company can exercise one 

of two options for taking accelerated deductions, 

either a 50-percent writeoff or a 100-percent 

writeoff of all of its investment over a 10-year 

period. Is the stipulation under the latter limited 

to the $10 million per project cap, or if a company had an 

expense of, for example, $38 million, could it write off 

(depreciate) this entire amount over a 10-year period? 

No. Under either method, the company cannot take accelerated deductions in excess of 

the expenditure amount allocated to the building by the commercial revitalization agency 

or $10 million, if less. The remaining expenditures must be capitalized and depreciated 

under the applicable Modified Accelerated Cost Recovery Systems recovery period (generally 39 years). 

Is the depreciation in the CRD based on straightline accounting? 

Yes. If the taxpayer elects to depreciate over the 120-month period, the 

deduction is allowed ratably over that period. 

54

Commercial Revitalization Deduction 

Can a business in the RC take both the CRD and 

the Federal tax credits available for the rehabilitation of historic buildings? 

Yes. However, the expenditures used to calculate the rehabilitation 

credit may not also be included in the amount that is used for the 

CRD. For example, if the total rehabilitation costs were $20 million and the taxpayer 

took rehabilitation credits on $12 million of those expenditures, the maximum amount 

of expenditures eligible for the CRD would be $8 million. 

How does the CRD apply to mixed-use buildings? 

What is the amount of residential space that is 

allowed? Are there any other limits on the mix 

of uses? 

The CRD applies to any nonresidential real property. Nonresidential 

real property is any real property other than residential rental property or property with a 

class life of less than 27.5 years. Residential rental property is a building or structure for 

which at least 80 percent of the gross rental income is rental income from dwelling units. 

Therefore, if less than 80 percent of a building’s gross rental income is rental income 

from dwelling units, the building would qualify for the CRD. Thus, the determination is 

made on the source of gross rentals rather than on square footage of the building. If the 

building is considered a nonresidential building, qualifying expenditures are eligible for 

the CRD regardless of whether they are made to the residential or the commercial portion of the building. 

Part of the qualified allocation plan requires the 

RC to have a monitoring piece in place. What 

level of monitoring will be required by the State 

commercial revitalization agency? 

The qualified allocation plan is required to provide the procedures that the agency will 

use in monitoring compliance. There is no federally mandated “level” of monitoring. 

55

Commercial Revitalization Deduction 

What forms are required to claim the CRD? 

There is no specific form for the CRD. IRS Publication 954 provides 

information on claiming the CRD. 

If a business has a net operating loss as a result 

of using this deduction, is it treated in the same 

manner as a net operating loss under the current 

tax code? 

Yes. 

Does the tax code require RC States to adopt 

the CRD (and other RC incentives) for State tax 

purposes, so that when a business determines its 

Federal taxable basis with use of RC deductions, 

the taxable basis is carried over to the State tax 

return? (This does not pertain to the State process for allocating credits, but rather, to a State’s recognition of Federal tax 

incentives for the State’s taxable basis. 

No. The Internal Revenue Code does not require any State to follow Federal income tax 

law on RC or EZ tax provisions for State tax purposes. 

What factors should a State consider in 

determining the recipients of the CRD and 

the amount per recipient? 

The Federal statute requires the State to develop a qualified allocation 

plan with criteria appropriate to local conditions. Specifically, the plan 

must consider: 

■	 The degree to which a project contributes to the implementation of a Course of 

Action that is devised for an RC through a citizen participation process. 

56

Commercial Revitalization Deduction


■	 The amount of any increase in permanent, full-time employment by reason of 

any project. 

■ The active involvement of residents and nonprofit groups within the RC. 

For an RC located on an Indian Reservation, 

does the tribe act as the State in allocating 

the CRD? 

The reservation governing body (as determined by the Secretary of the 

Interior) is treated as being both the State and local governments with 

respect to the RC. 

What is the earliest date on which a CRD allocation can be made? 

The CRD allocation can be made at any time, starting in 2002, provided 

it is made under a qualified allocation plan that has been approved by 

the governmental unit of which the commercial revitalization agency is 

a part. The commercial revitalization agency must also notify the chief executive officer 

of the local jurisdiction in which the building is located of the allocation and give that 

individual a reasonable opportunity to comment on the allocation. 

If the allocation is made in calendar year 2002, Internal Revenue Code requires that 

either the building is placed in service by December 31, 2002, or the building is placed 

in service no later than December 31, 2004, and the taxpayer’s basis in the project in 

which the building is a part (as of 6 months after the date the allocation was made or, 

if later, December 31, 2002) is at least 10 percent of the taxpayer’s reasonably expected 

basis in the project (as of the end of 2004). 

However, if it is determined that the building may not meet either deadline, the Internal 

Revenue Code allows the commercial revitalization agency to make a “binding commitment” to allocate a specified dollar amount to the building in a specified later tax year. 

The binding commitment must constitute a binding contract under local law and be signed 

by both parties. If the binding commitment is made, the building does not have to be 

placed in service until the end of the specified later tax year (which cannot be later than 

2009). Please note that a binding commitment is not considered an allocation for the 

current year and does not reduce the State commercial revitalization expenditure ceiling 

until the specified later tax year in which it is actually allocated. A building commitment 

made in 2002 cannot be used to reduce the 2002 State ceiling. 

57

Commercial Revitalization Deduction 

If an allocation is made for a project that is never 

put into service, can the RC reallocate unused 

incentives? 

No provision in the Internal Revenue Code allows a reallocation of unused 

CRDs once there is a final allocation by the end of the calendar year. 

What should the commercial revitalization 

agency give to businesses that receive a CRD 

allocation? Is there a required form or letter from 

the commercial revitalization agency to substantiate the allocation? 

No specific Internal Revenue Service (IRS) form is available or under development to 

inform the taxpayer of an allocation. A letter or other notice signed by an authorized 

commercial revitalization agency official reporting the date and dollar amount of the 

allocation, the address of the building, and the name and address of the owner of the 

building would be a valid allocation as of the date it is mailed to the building owner. 

The taxpayer should retain this letter for the full depreciation period. 

In a mixed-use project (less than 80 percent of 

gross rental income from dwelling units) that 

is CRD eligible, are all capital expenses eligible 

or only the expenses from construction or rehabilitation of the commercial component of the 

property? 

The same rules that apply to exclusively commercial buildings also apply to mixed-use 

buildings (assuming less than 80 percent of the gross rent comes from dwelling units). 

Both types of buildings are considered nonresidential real property and therefore, no 

allocation is made between the residential portion and the commercial portion. 

Please note that not all capital expenditures are eligible for the deduction. The expenditures described in section 1400I(b)(2)(B) (relating to part of the acquisition cost of a rehabilitated building and expenditures used to compute any tax credit) cannot be included 

as qualified revitalization expenditures. 

58

Commercial Revitalization Deduction 

A developer is looking to build a new $7 million 

hotel in the RC. One half of the building will be 

located in the RC with the remainder outside the 

RC. Would this business qualify for the entire 

CRD, for a pro rata portion, or not at all? 

The statute does not address how to treat a building that is included in more than one census tract for purposes of claiming the CRD. The taxpayer should request a private letter 

ruling rather than relying on informal advice. The first Internal Revenue Bulletin that the 

IRS issues each year provides procedures on requesting private letter rulings. 

59

Environmental Cleanup Cost

Deduction (Brownfields) 

Applicable IRS Tax Form: No applicable IRS Tax Forms. For more 

information about the Environmental Cleanup Cost Deduction, 

see IRS Publication 954. 

This deduction provides businesses with an incentive to clean up certain sites that are 

contaminated with hazardous substances. Businesses can choose to deduct qualified 

environmental cleanup costs in the tax year they pay or incur the cost. A business can do 

this instead of adding the cost to the basis of its property (and, if the property is depreciable, recovering the cost by taking depreciation deductions over a specified recovery 

period). Businesses do not have to be located in an Empowerment Zone (EZ), Enterprise 

Community (EC), or Renewal Community (RC) to qualify for this deduction. This special tax treatment is generally available for qualified environmental cleanup costs that 

businesses pay or incur after August 5, 1997, and before January 1, 2004. 

Target Audience 

■	 Prospective purchasers of contaminated property willing to pay the 

cost of cleanup rather than having the seller pay. 

■	 Businesses with sufficient income to be able to use the full deduction of cleanup costs in the year expenditures are paid or incurred. 

■	 Current owners of contaminated property who wish to expand or 

improve property. 

■ Businesses interested in developable sites. 

61


Deduction Description Availability 

Environmental Cleanup 

Cost Deduction 

(Brownfields) 

Businesses can elect to deduct 

qualified cleanup costs of hazardous substances in certain 

areas (brownfields) in the tax 

year the business pays or incurs 

the costs. 

Property is not required to be 

located in EZ, EC, or RC. Need 

certification of State environmental 

agency. Includes costs paid or 

incurred prior to January 1, 2004. 
Environmental Cleanup Cost Deduction (Brownfields) 

Incentive Not Relevant to 

■	 Startup businesses that may not generate enough income initially to deduct 

remediation expenses. 

■	 Sites listed on the National Priorities List under the Comprehensive Environmental 

Response, Compensation, and Liability Act (CERCLA) of 1980 (Superfund sites). 

■ Sites with cleanup that does not involve hazardous substances. 

■ Businesses with cleanup costs that are not capitalized costs. 

Additional Resources 

■ Accountants and lawyers preparing business tax returns. 

■	 Local bar associations or accountant groups to identify accountants or lawyers to 

field questions. 

■ State environmental agency staff who will be involved in certification procedures. 

■	 Local environmental agency staff who maintain a list of brownfield sites in the 

jurisdiction. 

■ Real estate developers familiar with local property markets. 

■	 Local tax lawyers and accountants who can serve as speakers on the topic at informational meetings or whose clients can take advantage of the incentive. For copies call 

1–800–829–3676 or visit www.irs.ustreas.gov. 

Questions & Answers on Environmental Cleanup 

Cost Deduction 

Is there any tax incentive for cleaning up contaminated industrial sites in an EZ, EC, or RC? 

The tax code allows a business to elect to deduct qualified environmental cleanup costs in the tax year the business pays or incurs the 

cost. The deduction enhances the bottom line if a business can take 

a deduction for the full amount when paid, rather than recovering the amount over time 

in the form of depreciation deductions. 

62

Environmental Cleanup Cost Deduction (Brownfields) 

Does the business have to meet any special 

requirements, such as being an Enterprise Zone 

Business or Renewal Community Business, to 

take advantage of this incentive? 

The ability to expense cleanup expenditures depends on the hazardous 

substance status of the land and the nature of the expenditures. The business does not 

have to be an Enterprise Zone Business or Renewal Community Business to qualify for 

this deduction or even be located in an EZ, EC, or RC. 

What sites qualify for this incentive? 

A site qualifies if it meets all of the following requirements: 

■	 It is held for use in a trade or business, for the production of 

income, or as inventory. 

■	 There has been a release (or threat of release) of a hazardous 

substance at or on the site. 

Does a business need to obtain a designation 

from any government official? 

The State environmental agency must certify that there has been a 

release, or a threat of release, of a hazardous substance or substances. 

What is meant by hazardous substances? 

The tax code generally uses the same definition of hazardous substances as that used in CERCLA. Some additional limitations apply 

to asbestos and similar substances within buildings, certain naturally 

occurring substances such as radon, and certain other substances 

released into drinking water supplies due to deterioration through ordinary use. 

63

64

Environmental Cleanup Cost Deduction (Brownfields) 

What costs qualify for this incentive? 

Qualified environmental cleanup costs are generally costs paid or 

incurred to abate or control a hazardous substance at the site. The 

costs must be expenditures that would otherwise be chargeable to 

capital accounts. The incentive is governed by the normal tax rules 

relating to the deduction or capitalization of expenditures. A business should consult 

with its tax advisor. 

Is there a time limit for deducting these 

expenditures? 

This special tax treatment is generally available for qualified environmental cleanup costs paid or incurred after August 5, 1997, and before 

January 1, 2004. This period may be extended by Federal tax legislation, so a business should consult with its tax advisor or an accountant to be assured 

that expenditures will qualify. 

Are the costs expensed even for purposes of 

Alternative Minimum Tax (AMT)? 

Expensing of these remediation costs applies for both regular taxes 

and AMT tax liability. 

What happens if a business later sells the 

property? 

The deduction may have to be recaptured as ordinary income when 

property is sold or the owner otherwise disposes of it. 

What forms must a business file for this 

incentive? 

There are no separate tax forms for this incentive. The qualified 

environmental remediation expenditures are included as Other 

Deductions on a business tax return (or Other Expenses if on an 

individual tax return) with a notation that these represent a Section 198 Election. 

64

Depreciation of Property

Used on Indian Reservations 

Applicable IRS Tax Form: For more information, 

see IRS Publication 946, How to Depreciate Property. 

Special accelerated depreciation rules apply to qualified property placed in service on 

an Indian reservation after 1993 and before 2004. A business does not have to use the 

property in an Empowerment Zone (EZ), Enterprise Community (EC), or Renewal 

Community (RC) to use these special rules. The property generally must be used on an 

Indian reservation, but certain public infrastructure used on and off an Indian reservation 

may qualify. (See description under Target Audience.) These rules allow a business to use 

shorter recovery periods to calculate a depreciation deduction for the qualified property. 

As a result, the annual deduction is larger. 

Target Audience 

■	 Businesses with real property and equipment used in the active conduct of business, 

including rental of real property, on an Indian reservation. 

■	 Businesses that own infrastructure (for example, power lines, water 

systems, or communication facilities) used in conjunction with business on an Indian reservation (even if a portion is not located on the 

reservation) if the property is available to the general public. 

Incentive Not Relevant to 

■ Property placed in service before 1993 and after December 31, 2003. 

■	 Equipment that will be used outside of an Indian reservation (such as 

delivery equipment). 

■ Business property used in certain gaming activities. 

65


Deduction Description 

Special accelerated depreciation 

rules apply to qualified property 

used on an Indian reservation. 

Certain public infrastructure used 

or located off the Indian reservation also qualifies. 

Availability 

1993 and before 2004. 

Depreciation of Property

Used on Indian Reservations

A business does not have to use 

the property in an EZ, EC, or RC to

use these special rules, but generally the property must be used on

an Indian reservation. Property

must be placed in service after
Depreciation of Property Used on Indian Reservations 

Additional Resources 

■ Accountants and lawyers preparing tax returns for businesses. 

■	 Bar associations or accountant groups in areas that include an Indian reservation, 

which can identify accountants or lawyers who can answer questions. 

■	 Instructions for IRS Form 4562 and IRS Publication 946. For copies call 

1–800–829–3676 or visit www.irs.ustreas.gov. 

Questions & Answers on Depreciation of Property 

Used on Indian Reservations 

Are there any special depreciation provisions for 

property used by a business within an Indian 

reservation? 

The tax code provides for an accelerated depreciation schedule for 

property used predominantly in the active conduct of business on an 

Indian reservation. Real property rented to others on an Indian reservation is also eligible 

for an accelerated depreciation schedule. 

Are there any categories of property that would 

not qualify? 

The following property is not qualified property: 

■	 Property used or located outside an Indian reservation on 

a regular basis. 

■ Property acquired directly or indirectly from certain related persons. 

■	 Property placed in service for purposes of conducting or housing certain 

gaming activities. 

66

Depreciation of Property Used on Indian Reservations 

What about infrastructure property used both 

on and off an Indian reservation? 

Infrastructure property includes, but is not limited to, roads, power 

lines, water systems, railroad spurs, and communications facilities. 

A business can take accelerated depreciation on property used off the 

Indian reservation if it is used to connect “qualified infrastructure” within the reservation 

and it meets all of the following requirements: 

■	 It meets the requirements listed in the previous answer under qualified property 

(except that it can be outside the reservation). 

■ It benefits the tribal infrastructure. 

■ It is available to the general public. 

■	 It was placed in service in connection with the active conduct of a trade or business 

within a reservation. 

What is the definition of Indian reservation? 

An Indian reservation is defined in section 3(d) of the Indian 

Financing Act of 1974 or section 4(10) of the Indian Child Welfare 

Act of 1978. 

How does the accelerated depreciation affect 

Federal Alternative Minimum Tax (AMT)? 

The shortened period also applies for purposes of determining AMT 

so that this depreciation is not a tax preference. 

Is there a time limit for qualifying for accelerated 

depreciation? 

This depreciation incentive is available only for property placed in 

service after calendar year 1993 and before January 1, 2004. 

67

Depreciation of Property Used on Indian Reservations 

How does a business obtain more information 

on this tax incentive? 

IRS Publication 946 and the instructions to IRS Form 4562 contain 

additional information. For copies, call 1–800–829–3676 or visit 

www.irs.ustreas.gov.

68

Enterprise Zone 

Facility Bonds 

Applicable IRS Tax Form: No applicable IRS Tax Forms. For more 

information about the Enterprise Zone Facility Bonds, see IRS 

Publication 954. 

State or local governments can issue Enterprise Zone Facility Bonds (a type of exempt


facility tax-exempt bond) to make loans to an Enterprise Zone Business to finance


Qualified Zone Property. At least 95 percent of the net proceeds from the


bond issue must be used to finance Qualified Zone Property principally


used by an Enterprise Zone Business, and certain land used for a related


purpose (for example, land where the business and its customer and


employee parking lot is located). Tax-exempt bonds generally have


lower interest rates than conventional financing because the purchaser


of the bonds does not have to pay Federal income tax on the interest


income received from the bonds.


Target Audience 

■	 Zone businesses with a capital project of sufficient cost for going to the public bond 

market (generally $2 million or more) with a good credit rating or a letter-of-credit 

bank. (Note: For Round I Empowerment Zones (EZs) prior to January 1, 2002, and 

all Enterprise Communities (ECs), the maximum amount in a Zone is $3 million 

69


Enterprise Zone 

Facility Bonds 

Financing Description 

State and local governments can 

issue Enterprise Zone Facility 

Bonds (a type of tax-exempt 

bond) to make loans at lower 

interest rates to Enterprise Zone 

Businesses to finance Qualified 

Zone Property. 

Availability 

$3 million per borrower limit in any 

Round I EZ for bonds issued prior 

to January 1, 2002, or in any EC, 

with $20 million per borrower 

nationwide limit; must have State 

volume cap allocated. $130 

million or $230 million available in 

urban Round II EZs ($60 million in 

rural Round II EZs) over the EZ 

designation period and for all EZs 

including developable sites for 

bonds issued after December 31, 

2001 (no per-borrower limit and 

bonds are not subject to State 

volume cap), for EZ- or EC-based 

commercial, retail, or industrial 

property; 35 percent of employees 

must be EZ or EC residents. 
Enterprise Zone Facility Bonds 

per borrower. It is $15 million per borrower in the District of Columbia’s Enterprise Zone.) 

■ Large national businesses setting up branch stores or operations in a Zone. 

■	 Local banks that may be interested in lower cost capital to lend to qualifying businesses (and may need to meet their Community Reinvestment Act requirements). 

Incentive Not Relevant to 

■	 Businesses that cannot meet the definition of an Enterprise Zone Business (see 

appendix A) and are not leasing to tenant businesses that meet the definition. 

■ Startup businesses with minimal equity. 

■	 Businesses with employees likely to perform most of their work outside the Zone 

(such as delivery services or offsite services). 

■	 501(c)(3) tax-exempt organizations (unless the financing would be for an activity 

that generates unrelated business income). 

■ Businesses with small capital needs. 

■ Businesses seeking operating or working capital funds. 

■	 Closely held businesses unwilling to make public disclosures about finances in 

securities marketing documents. 

■ Businesses seeking grant monies rather than loans. 

Additional Resources 

■	 Local issuers of tax-exempt bonds. These may be State or local governments, State or 

local industrial or economic development boards or authorities, or State bond banks. 

Issuers will have established procedures for applications, evaluation of projects, and 

fee arrangements. 

■	 Bond counsel to issuers. Many issuers have attorneys under contract who specialize 

in tax-exempt bonds or who may also be able to refer businesses to firms with 

experience in this type of legal work. 

■	 Investment banking firms and local bankers. These firms make their money by 

marketing tax-exempt bonds. Many regional investment banking firms specialize 

70

Enterprise Zone Facility Bonds 

in placing or marketing smaller principal amounts of tax-exempt bonds or have 

pooled borrowings together for larger issuance amounts. 

■	 Local developers and real estate agents. Both developers and real estate agents are 

aware of capital projects and building or site acquisitions. The availability of taxexempt financing in the EZ or EC may help them sell or develop property. 

■ IRS Publication 954. For copies call 1–800–829–3676 or visit www.irs.ustreas.gov. 

A Tax-Exempt Bond Transaction 

■	 All Enterprise Zone Businesses using tax-exempt bonds may be required to pay an 

administrative fee to the respective State and local governments or industrial development authorities authorized by the Federal tax code to confer tax-exempt status 

on the bond issuance. 

■	 A State or local bond issuer sells bonds (debt) through an underwriter to investors 

in the market. 

■ The issuer lends the bond proceeds to an Enterprise Zone Business. 

■ The Enterprise Zone Business makes loan payments to the issuer. 

■ The issuer passes the payments through to the investor. 

Technical Steps, Documents, and Players 

■	 A private business that meets the definition of an Enterprise Zone Business makes 

an application to its State or local government issuer. 

■	 The business obtains an Inducement Resolution or Intent Declaration from the 

bond issuer. 

■	 The issuer reviews and approves the financing after a published notice and a 

public hearing. 

■	 The issuer enters into a bond purchase agreement with an underwriter or placement 

agent (investment banking firm). 

■	 The investment banker, Enterprise Zone Business, and issuer prepare securities offering documentation for the bonds, describing the terms of the bonds, the project to 

be financed, and the security for repayment. 

■	 Legal counsel specializing in Federal tax laws related to municipal bonds reviews the 

transaction and delivers an opinion that interest income bond purchasers receive will 

71

Enterprise Zone Facility Bonds 

be exempt from Federal income tax (and also usually exempt from State and local 

income taxes in the issuer’s State). 

■	 The investor is willing to charge a lower interest rate for the issuer’s debt because the 

interest income is exempt. (The investor gets a higher return with exempt income.) 

■	 The underwriter sells the issuer’s bonds in the public debt market based on the credit 

of the Enterprise Zone Business (or a letter-of-credit bank). 

■	 The issuer enters into a loan agreement with the Enterprise Zone Business to lend 

the money from the sale of the bonds to the Enterprise Zone Business. 

■	 The issuer passes on a lower rate on the issuer’s bonds to the Enterprise Zone 

Business, but the issuer may charge the Enterprise Zone Business an upfront or 

continuing fee for its debt program. 

■	 The loan agreement will have financial and tax covenants that the Enterprise Zone 

Business must comply with throughout the term of the bonds. Financial covenants 

will be based on what the underwriter believes is needed to sell the bonds to 

the public. 

■	 The issuer enters into a trust indenture with a trustee bank to carry out the issuer’s 

obligations to the investors. 

■	 The Enterprise Zone Business requisitions money from the trustee bank to pay the 

costs of the project. 

■	 The Enterprise Zone Business makes loan payments to the trustee, who passes the 

payments on to investors. 

Some Suggestions for Making a Bond 

Program Work 

■	 Determine who will be the issuer of the bonds (a State or local government unit or 

agency) and involve the issuer’s staff and bond counsel in marketing this program. 

They will review the transaction and determine whether the project qualifies for 

financing under the tax laws. 

■	 Do not assume that all Enterprise Zone Businesses will be small startup businesses. 

Look to market the bond program to national chain stores or businesses with strong 

credit ratings that are interested in low-cost financing. 

■	 Involve the financial institutions that participated in the Strategic Plan in the bond 

program. They can participate by: 

72

Enterprise Zone Facility Bonds


— Buying the bonds for their own portfolios. 

—	 Placing the bonds with trust customers (particularly in States where the trust 

customer may benefit from having interest on the bonds exempt from State and 

local taxes). 

—	 Providing a letter of credit to secure payment of the bonds. The bank analyzes 

the credit risk and charges a fee for the letter of credit. The bonds are more 

marketable because they are based on the bank’s credit. 

—	 Participating in a “loans to lenders” program. The issuer loans the money to the 

bank, giving the bank a source of lower cost funds. The bank then loans this 

money to Enterprise Zone Businesses. The bank must repay the bonds, but it 

expects to use payments from its EZ loans to make those bond payments. 

■	 Identify an investment banking firm that has experience with tax-exempt bonds. 

Prior to 1986 tax law changes, investment banks successfully marketed similar types 

of bonds called industrial development bonds, or IDBs. They can now apply this 

experience to these bond offerings. 

■	 Place the bonds with local businesses that want to invest in their community. They 

will receive tax-exempt income and be closer to evaluating the potential for the success of the Enterprise Zone Business. Many cities have successfully sold so-called 

mini bonds to their residents for various municipal projects. 

■	 Pool or do a composite issue of bonds for several EZs or ECs (or for several businesses 

within EZs or ECs) in one offering. This permits the smaller borrowers to share costs 

associated with offering the bonds. Timing the projects so that they are all offered at 

once can be difficult, but a bank may be able to provide taxable bridge financing 

until a sufficient number of projects are ready to proceed. 

Questions & Answers on Enterprise Zone 

Facility Bonds 

What is tax-exempt financing? 

A tax-exempt bond is a debt instrument issued by a State or local 

government that is sold in the public market or placed with investors 

by an investment banking firm. Bond purchasers do not have to pay 

Federal income tax on the interest income received from a tax-exempt 

bond if certain tax rules are met. Interest on the bond may also be exempt from State and 

local income taxes. 

73

Enterprise Zone Facility Bonds 

Who can issue a tax-exempt Enterprise Zone 

Facility Bond? 

Only a State or local government unit, or an economic or industrial 

development authority authorized by a State or local government unit 

to issue bonds, can issue a tax-exempt Enterprise Zone Facility Bond. 

A borrower cannot issue debt on its own and qualify it as tax-exempt debt. 

Who purchases tax-exempt bonds? 

At present, the majority of tax-exempt bonds are purchased by individuals, but corporations, mutual funds, and insurance companies also 

purchase a large portion of tax-exempt bonds. Technically, the investment banking firm serving as the underwriter of the bonds will purchase the bonds from the State or local government issuer, then re-offer the bonds for 

sale to the public. A bank or investment banking firm may also place the bonds with a 

small group of purchasers. 

How will businesses in the Zone benefit from 

tax-exempt financing? 

The primary benefit of tax-exempt financing is a lower interest rate 

than the rate on a conventional loan. Bond purchasers are willing to 

take a lower interest rate because they will not have to pay tax on the 

interest income that they receive from the bond. The government issuer loans the proceeds of the bonds to a business, passing on the lower interest rate. Lower interest rates 

mean a better cash flow for Enterprise Zone Businesses. Another benefit is the time period of the debt. Tax-exempt bonds may be issued for 120 percent of the average useful 

life of the capital investment. It is also possible—depending on many financial circumstances—to issue tax-exempt bonds to finance 100 percent, or nearly 100 percent, of the 

transaction. In addition, up to 2 percent of the issuance can be used to pay for the costs 

of issuance, thus allowing the borrower to finance those expenses instead of paying them 

out of pocket. 

74

Enterprise Zone Facility Bonds 

Can real estate developers use this bond 

financing? 

Real estate developers would have to meet the qualified business 

definition. At least 50 percent of the developer’s gross rental income 

must be derived from Enterprise Zone Businesses. If the developer 

then meets all of the income and property locational tests of the Enterprise Zone 

Business definition, tax-exempt financing could be used to finance the whole project. 

If the developer, as owner of the project, does not meet the Enterprise Zone Business 

test but does have 50 percent of the gross rentals from Enterprise Zone Businesses, 

regulations permit the developer to finance the portion of the project allocable to 

Enterprise Zone Business tenants. 

At what point in the process should a business 

contact the government issuer? 

Tax-exempt financing typically takes longer to complete than a standard conventional loan. To expedite the process, a business should 

contact the government issuer in the very early planning stages. The 

issuer will select attorneys (bond counsel) who specialize in tax-exempt bonds to work 

with the borrower on understanding the tax, securities, and other rules associated with 

the financing. Once the borrowing and repayment details are determined, the bond counsel will give an opinion stating that interest on the bonds is excludable from Federal 

income taxes. In addition, a business will need an intent declaration or inducement resolution from the issuer indicating its intent to finance costs with tax-exempt bonds if the 

business expects to use tax-exempt bond proceeds to reimburse itself for any costs paid 

before tax-exempt bonds are issued. 

What types of businesses can take advantage 

of bond financing? 

Only an Enterprise Zone Business can use this type of tax-exempt 

bond financing. In general, a business has to meet several criteria to 

demonstrate it is an Enterprise Zone Business. This definition is discussed in appendix A. 

These requirements may be met by treating operations of a business within the Zone as 

if it were separately incorporated. Certain business activities are not qualified Zone 

Business activities, including residential rental activities; commercial real estate rentals, 

75

Enterprise Zone Facility Bonds 

unless at least 50 percent of the gross rental income is from Enterprise Zone Businesses 

meeting the qualifications described above; rental of personal property, such as car 

rentals, unless 50 percent of the rental income is from Enterprise Zone Businesses or 

Zone residents; businesses that hold or develop intangibles for sale or license; country 

clubs; liquor stores; golf courses; racetracks; or gambling facilities. Nonprofit organizations are not automatically precluded merely because the activities carried on by them 

are on a not-for-profit basis. 

Must a business meet the Enterprise Zone 

Business test when the bonds are issued? 

A business is allowed a startup period for coming into compliance 

with the Enterprise Zone Business test. Generally, a business would 

have 2 years from the date the bonds were issued or the date the 

financed property is placed in service, whichever is later. A business must make bona 

fide efforts to meet the definition by the end of the startup period. 

How long must a business meet the Enterprise 

Zone Business definition? 

A business must meet all the requirements for at least 3 taxable years 

(beginning after any startup period) and must meet the requirement 

that 35 percent of its employees be Zone residents throughout the 

term of the bonds. This 3-year period is called the testing period. 

Do the 3 years of the testing period have to be 

consecutive? 

The testing period is the 3 consecutive taxable years of the business 

following the startup period (if any). 

76

Enterprise Zone Facility Bonds 

What happens if a business ceases to be an 

Enterprise Zone Business within the 3-year 

testing period or it fails the Zone resident 

employee requirement at a later date? 

If the failure to meet the tests is corrected within a year of when the 

failure is discovered, a business is deemed to have met the rules. If the EZ or EC designation is terminated early or the business goes into bankruptcy, the business is not treated 

as failing the tests. The tax laws allow a borrower a reasonable time to cure any noncompliance. If the noncompliance is not cured, the borrower will lose the deduction for its 

interest expense on the loan of the bond proceeds from the issuer, and interest on the 

bonds received by the purchasers of the bonds may become taxable. If interest becomes 

taxable, the borrower may be required to redeem the bonds as soon as possible, pay a 

penalty to the Internal Revenue Service, or pay a higher taxable interest rate to the 

purchasers. 

What is considered a reasonable time to cure 

any noncompliance? 

Reasonable time to cure is defined in the tax regulations as up to a 

year from the date the failure to comply is discovered. To take advantage of this period, the borrower must annually demonstrate to the 

issuer of the bonds that the borrower is monitoring compliance. Presumably, each issuer 

will establish its own procedures. 

What types of projects can be financed with 

Enterprise Zone Facility Bonds? 

Bond proceeds can be used only to construct a building; renovate an 

existing building or equipment; or acquire land, new equipment, or 

a new building. However, bond proceeds can be used to acquire used 

equipment or an existing building if an amount equal to 15 percent of the adjusted basis 

of the equipment or building or $5,000, whichever is greater, is spent to recondition or 

rehabilitate the equipment or building within a 2-year period. 

77

Enterprise Zone Facility Bonds 

Can a business use bond proceeds for working 

capital purposes? 

At least 95 percent of the bond proceeds (including any investment 

earnings) must be used to pay costs that are capitalized for Federal tax 

purposes. Any amounts available for working capital would be minimal. 

Are there any limits on the amount that can be 

borrowed on a tax-exempt basis? 

For Enterprise Zone Facility Bonds issued by Round I EZs (prior to 

January 1, 2002) and ECs, a business entity (including any related persons) can have no more than $3 million ($15 million in the District of 

Columbia Enterprise Zone) in Enterprise Zone Facility Bonds outstanding in the Zone. 

An entity could have bonds issued in other EZs or ECs around the Nation, but the total 

amount outstanding in those EZs and ECs per borrower can be no more than $20 million. In addition, before any bonds can be issued, the State in which the EZ or EC is 

located must allocate a portion of the State’s annual private activity bond volume cap in 

an amount equal to the amount of the bonds. 

Every Round II EZ (and after December 31, 2001, every EZ except the District of 

Columbia) has a limit on the total principal amount of tax-exempt Enterprise Zone 

Facility bonds that can be issued over the period of designation. For example, rural 

EZs may issue $60 million, urban EZs with a population less than 100,000 may issue 

$130 million, and urban EZs with a population of 100,000 or more may issue $230 

million. Beyond this overall limit, there is no tax law limit on the size of borrowing 

for any one borrower. The size of any borrowing will also, of course, be limited by the 

business’s ability to repay the loan. 

What costs are involved in tax-exempt financing? 

Certain costs involved in tax-exempt financing may be higher than 

those involved in a conventional loan. A business may need to consider the costs of tax-exempt borrowing compared with interest savings 

over the term of the bond. These costs include fees to a bond counsel 

who reviews the transaction and delivers an opinion that interest on the bonds is exempt 

from Federal income taxes; fees to an underwriter who markets the bond; and fees to a 

trustee who disburses bond proceeds and collects loan payments from the business. The 

tax laws allow up to 2 percent of the bond proceeds to be used to pay costs of issuance of 

the bond. Additional amounts must come from the equity of the business or from taxable 

78

Enterprise Zone Facility Bonds 

financing. An Enterprise Zone Business using tax-exempt bonds may be required to pay 

an administrative fee to the State or local government industrial development authorities 

authorized by Federal tax code to confer tax-exempt status on the bond issuance. 

What information must a business make 

available to the public? 

The tax laws require a public notice and hearing regarding the bond 

issuance, including the amount to be borrowed, the name of the borrower, and the nature and location of the financed property. Following 

the hearing, the bond issue must be approved by an elected executive or the legislative 

body of the issuer. Other proceedings of the issuer and documents submitted to the 

issuer may be subject to public disclosure requirements. The financial condition of the 

borrower will also be included in offering materials made available to prospective purchasers of a bond. 

Will tax-exempt financing affect any other tax 

rules of a business? 

A business will not be able to take advantage of accelerated depreciation for any depreciable property purchased with proceeds of the 

bonds. Bond-financed property must be depreciated over the class 

life of the property using the straight line method. 

What forms would a business have to file 

with the Internal Revenue Service (IRS) for 

tax-exempt financing? 

The business would not file any specific forms with the IRS beyond 

forms usually filed with a tax return. When bonds are issued, the 

issuer files an information return on the bonds with the IRS, and there may be certain 

other informational filings. However, all filings will be made by the issuer based on information supplied by the borrower. For example, any investment income earned on bond 

proceeds above the yield on the bonds must be paid to the IRS every 5 years, but the 

filing itself would be signed by the issuer. If the IRS audits the bond transaction, the 

business would likely be called on to submit documentation. 

79

Enterprise Zone Facility Bonds 

Can nonprofit organizations take advantage 

of Enterprise Zone Facility Bonds when they 

develop facilities such as shopping centers or 

mixed-use residential/commercial centers? 

Would the rent generated from these centers 

be considered unrelated business income? 

Nothing in the Enterprise Zone Facility Bond provisions directly precludes nonprofit 

organizations from taking advantage of Enterprise Zone Facility Bonds. However, a nonprofit organization must obtain a determination from the IRS that its activities are within 

the exemption categories of the tax laws. A nonprofit organization considering this type 

of activity would need to consult its own legal advisor to determine whether conducting 

such an activity would be within its exempt purpose, whether the activity would generate unrelated business income in light of that exempt purpose, and whether involvement 

in the activity might jeopardize its nonprofit status. 

In an EZ with a population of less than 100,000, 

is the total allocation of Enterprise Zone Facility 

Bonds $130 million? 

For urban EZs, the allocation for the EZ over the period of designation 

is $130 million if the population of the EZ (not the population of the 

city or county) is less than 100,000 people. If the EZ population is 100,000 or more, the 

allocation is $230 million. There are no per-borrower limits. For rural EZs, regardless of 

population, the allocation is $60 million. 

80

Qualified Zone


Academy Bonds 


Applicable IRS Tax Form: Form 8860 

Beginning in 1998, State or local governments can issue Qualified Zone Academy Bonds 

(QZABs) to raise funds for a Qualified Zone Academy. However, these bonds require that 

the Qualified Zone Academy receive a private business contribution (which may be tax 

deductible as a charitable contribution). Certain banks, insurance companies, and corporations actively engaged in the business of lending money can receive a tax credit as an 

incentive to hold these bonds. 

Target Audience 

■	 Banks, insurance companies, or corporations in the business of lending 

money that are eligible to receive tax credits (in lieu of receiving interest payments) as holders of the bonds. 

■	 Local businesses with specific employee skill sets that could be taught 

at the secondary school level. 

■	 Businesses interested in providing mentorship or internship opportunities to secondary school students. 

■	 School districts seeking to upgrade schools located in Empowerment 

Zones (EZs), Enterprise Communities (ECs), or Renewal Communities (RCs). 

81


Bond Financing 

Qualified Zone 

Academy Bonds 

Description 

State or local governments can 

issue bonds at 0-percent interest 

cost to them to finance certain 

public school programs with 

private business partnerships. 

Private businesses must contribute 

money, equipment, or services 

equal to 10 percent of bond proceeds (which may qualify as a 

charitable contribution). The 

Federal government pays interest 

in the form of tax credit to banks, 

insurance companies, and certain lending corporations that 

hold QZABs. 

Availability 

Federal allocation to States annually 

from 1998 to 2003. State education agency allocates credit to 

Qualified Zone Academy to finance 

materials, teacher training, building 

renovation, or equipment for programs that prepare students for 

jobs or college. Schools must be 

located in an EZ or EC, or have 

35 percent of students eligible for 

free or reduced-cost lunch program. 
Qualified Zone Academy Bonds 

Incentive Not Relevant to 

■	 Potential holders (banks or insurance companies) that have insufficient Federal tax 

liability to use the tax credit or are interested only in receiving tax-exempt income. 

■	 Businesses unable to benefit from charitable deductions if contributions are made 

to schools. 

Additional Resources 

■	 Local school districts (the real beneficiaries of this incentive) that are willing to take 

on the primary marketing role. 

■	 Chambers of commerce or business associations that can help identify the educational 

programs needed by the local labor force. 

■	 State or local job-placement agencies that may help identify job-skill gaps and the 

employers that would be most interested in seeing appropriate programs established 

in schools. 

■	 State education agencies (SEAs) that are responsible for allocating the State’s volume 

cap for QZABs. These agencies should be contacted to determine the application 

process and selection criteria. 

■	 Instructions for IRS Form 8860. For copies call 1–800–829–3676 or visit 

www.irs.ustreas.gov. 

Questions & Answers on Qualified Zone 

Academy Bonds 

How can a business improve the training and 

skill levels of potential employees coming from 

the public schools in an EZ or EC? 

Public schools located in an EZ or EC can obtain interest-free loans if 

they partner with private businesses to establish programs within public schools. A business can partner through contributions or, in certain cases, by lending 

money to schools to improve the academic curricula, enhance graduation and employment rates, and better prepare students for college and the workforce. 

82

Qualified Zone Academy Bonds 

What schools can qualify? 

A Qualified Zone Academy must be a public elementary or secondary 

school located in either an EZ or an EC, or the school must have a reasonable expectation when the bonds are issued that at least 35 percent 

of the school’s students (or Qualified Zone Academy participants) will 

be eligible for free or reduced-cost lunches. The Qualified Zone Academy must receive an 

allocation of the State’s QZAB limit from the SEA. The academy must have a comprehensive education plan approved by its local education agency (LEA). 

How does a business benefit from lending 

money to public schools? 

If the loan is structured as a QZAB, the interest on the bond is paid 

by the Federal Government in the form of an annual tax credit to the 

lender. This tax credit is available only to banks, insurance companies, 

and companies in the business of lending money. The credit rate is generally equivalent 

to the market taxable interest rate. The bond is not a tax-exempt bond. The interest 

QZAB credit is treated as taxable income but is also a credit against Federal tax liability. 

What contributions can a business make to a 

school to qualify the school for QZAB financing? 

Before a QZAB can be issued, the school must obtain written commitments from private entities for qualified contributions with a present 

value (as of the bond issue date) of not less than 10 percent of the 

proceeds of the bond issue. Qualifying contributions include: 

■ Equipment for use in a Qualified Zone Academy. 

■	 Technical assistance in developing curricula or in training teachers to promote appropriate market-driven technology in the classroom at a Qualified Zone Academy. 

■ Employee services as volunteer mentors in a Qualified Zone Academy. 

■	 Internships, field trips, or other educational opportunities for students outside a 

Qualified Zone Academy. 

83

Qualified Zone Academy Bonds 

What can the school finance with the proceeds 

of the QZAB? 

The proceeds from the bond issue are to be used to rehabilitate or 

repair facilities at Qualified Zone Academies, obtain equipment, 

develop course materials, or train teachers and other school personnel. 

Proceeds cannot be used for new construction. 

Are there any other tax benefits to participating 

private entities? 

The contributions to the school from the business would be treated 

(for Federal tax purposes) like any other charitable deductions to a 

State or local government. 

Who issues the bond? 

The bond must be issued by a State or local government, including 

the District of Columbia and any possessions of the United States. 

How does the school repay a QZAB? 

A school would likely repay the QZAB from the school system’s general revenues. The entire principal amount could be repaid in a lump 

sum at maturity to maximize the credit to the holder, or the bondholder can negotiate intermediate principal repayments. If the entire 

amount is due at maturity, the bondholder may require that the borrower deposit payments of principal in a sinking fund pledged to repayment of principal at maturity. 

Is the creditworthiness of the borrower an issue? 

The tax laws provide for single interest regardless of the creditworthiness of the school. A purchaser may feel the interest rate is too low 

for borrowers with a lower credit rating. To reflect this increased risk 

of not being repaid, the purchaser may reduce the amount borrowed 

by purchasing the bonds at a discount. This has the effect of increasing the yield on the 

bond to the purchaser but reduces the amount of proceeds for the project that the borrower receives. For borrowers with better credit ratings, QZAB may be sold at a premium. 

84

Qualified Zone Academy Bonds 

Are “charter” schools eligible for these tax 

credits? 

Whether charter schools qualify varies from jurisdiction to jurisdiction. The tax laws require that a Qualified Zone Academy be established by and operated under the supervision of an eligible LEA, that 

the comprehensive educational plan of the academy be approved by the LEA, and that 

the students in the academy be subject to the same academic standards and assessments 

as other students educated by the LEA. Charter schools seeking to use QZAB financing 

must consult with and obtain the approval of the LEA. 

Certain banks, insurance companies, and investment corporations receive tax credits to offset 

the interest payment of the bond, thus lowering 

the cost to the borrower. What types of organizations can use these credits, and what criteria 

are used to determine which companies can participate? 

A holder of a QZAB must anticipate that it will have a Federal tax liability that could be 

offset by the tax credit it receives from the QZAB. Some banks may also be able to obtain 

Community Reinvestment Act credit for a QZAB. Such a credit would make the QZAB an 

attractive investment. 

Some of the employment tax credit provisions 

expire on December 31, 2003. Do QZABs have 

a similar expiration date? 

The QZAB provision has a termination date based on when the bonds 

are issued. QZAB allocations to the States have been extended through 

2003. The allocation of a State’s QZAB volume cap can be carried forward for up to 2 or 

3 years after its termination. For updates on any extensions or increases in QZAB allocations, visit www.ed.gov/offices/OESE/SST/qzab.html. 

85

Qualified Zone Academy Bonds 

How can QZABs be used to create apprenticeship programs in schools to develop skills 

needed by area employers? 

Both the contribution requirements and the permitted uses of QZAB 

proceeds can be used to develop an apprenticeship program at a 

Qualified Zone Academy. QZAB proceeds can be used to develop curricula and train 

teachers, and a business can contribute mentorship opportunities and employee time. 

The employee time could be used to assist the academy in developing curricula related to 

the background skills (such as math, computers, or drafting) necessary for a particular 

apprenticeship opportunity. The business can contribute equipment and training materials to be used in the academy to support initial or continuing training. The business 

can also provide personnel, workspace, and equipment at a worksite to train academy 

students. 

86


Qualified Zone Academy Bond Example 

A for-profit hospital is a major employer in the EZ. During the development of the 

Strategic Plan for Federal designation as an EZ, the hospital indicated a willingness 

to cooperate with an EZ school to establish a special academic program that would 

prepare students for jobs at the hospital. The hospital indicated that it is willing to 

donate state-of-the-art medical equipment and computer software to the school 

and to provide internship and mentoring experiences for students. The school 

determined that it needs to renovate a classroom to accommodate the donated 

equipment, purchase appropriate instructional materials, and train teachers to 

instruct students on the use of the equipment and oversee the internship and mentoring components of the program. The school estimates its costs at $500,000. 

To obtain the benefits of the low-cost capital afforded through the QZAB tax credit, 

the school needs to take the following steps. 

■ The school obtains from the hospital an estimate of the value of the equipment, 

personnel time, and facility cost associated with the internship and mentorship 

opportunities. As a for-profit organization, the hospital will be able to take a 

charitable deduction for the equipment and should readily be able to value this 

part of the donation. The determination of the value of the time of personnel 

and any facility cost involved in an internship and mentoring program may 

require more of an effort. 
Qualified Zone Academy Bonds


87


■ If the value of the hospital’s donation is equal to at least 10 percent of the cost

the school expects to incur for the training program (simplified in this example

to 10 percent of $500,000, or $50,000), the hospital would provide the school

with a written commitment for this donation.

■ The school contacts the financial officer and other school system personnel

responsible for debt issuance. The QZAB must be issued by a State or local 

governmental unit. In most cases, the likely issuer would be the school system

but the local or State government may be the issuer in other cases.

■ The parties must determine the source of repayment of the $500,000. The

QZAB tax credit mechanism basically eliminates any interest cost, but QZABs

are still loans that must be repaid; they are not grants.

■ The school system seeks an allocation from the State department of education

(DOE) of the State’s QZAB allocation equal to $500,000 (the amount the school

expects to borrow). The State DOE must provide written verification of an allocation of the QZAB volume limitation.

■ The school identifies a financial institution, insurance company, or corporation

in the business of lending money to purchase the QZAB. In this case, assume

the school sells the QZAB to a financial institution in the area that commits to

providing assistance in the strategic planning process associated with acquiring

EZ designation. The financial institution and the school system enter into a loan

agreement for the $500,000. 

■ The credit rate on the loan and the maximum term for the loan are set under

the QZAB provisions. Assume the rate posted for the date the QZAB is issued is

7 percent. The school system agrees to pay the $500,000 back in 10 years. The

loan documents, the hospital’s written commitment, and the school’s cost estimate are reviewed by a tax lawyer to obtain an opinion for the financial institution that the transaction is a QZAB and enables the holder to take the tax credit.

Continued on page 88
Qualified Zone Academy Bonds


88


■ The financial institution requires the school system to set aside $50,000 each 

year into a segregated fund to ensure that the debt will be repaid when the 

loan matures. Any interest on this fund belongs to the school system. In each 

of the 10 years the QZAB is outstanding, the financial institution receives a tax 

credit equal to $35,000 (7 percent times $500,000) and can reduce its Federal 

tax liability by that amount each year. The school does not pay interest. 

Continued from page 87 
Zero Percent Capital Gains 

Rate for Renewal Community

and District of Columbia 

Enterprise Zone Assets 

Applicable IRS Tax Form: For more information, see IRS Publication 

954, Tax Incentives for Empowerment Zones and Other Distressed 

Communities. 

If a business holds a District of Columbia Enterprise Zone (DC Enterprise Zone) Business


asset acquired between January 1, 1998, and December 31, 2003, or a Renewal Community


Business asset acquired after December 31, 2001, and before January 1, 2010, for a


minimum of 5 years, the business does not have to include any “quali­


fied capital gain” from the asset’s sale or exchange in its gross income.


This exclusion applies only to an interest in, or property of, certain


businesses operating in the District of Columbia or a Renewal Com­


munity (RC). The following qualify as DC Enterprise Zone or RC 


assets: DC Enterprise Zone or RC business stock, DC Enterprise Zone 


or RC partnership interests,or DC Enterprise Zone or RC business


properties. Only gain attributable to the period from January 1, 1998,


through December 31, 2008, may be excluded for the DC Enterprise


Zone and to the period from January 1, 2002, through December 31,


2014, for RCs.


89


Capital Gains 

Zero Percent Capital Gains 

Rate for Renewal Community Assets and District 

of Columbia Enterprise 

Zone Assets 

Description 

The holder, for a minimum of 5 

years, of a District of Columbia 

Enterprise Zone (DC Enterprise 

Zone) asset, acquired between 

January 1, 1998, and December 

31, 2003 or an RC asset, acquired 

between January 1, 2002, and 

December 31, 2009, will not have 

to include in its gross income any 

“qualified capital gain” from the 

sale or exchange of the asset. 

Availability 

Exclusion applies only to an interest 

in, or property of, certain businesses 

operating in the DC Enterprise Zone 

or an RC. The following qualify as DC 

Zone or RC assets: DC Enterprise 

Zone or RC business stock, DC 

Enterprise Zone or RC partnership 

interests, and DC Enterprise Zone 

or RC business properties. Only 

gain attributable to the period 

from January 1, 1998, through 

December 31, 2008, for the DC 

incentive, and from January 1, 

2002, through December 31, 

2014, for RCs, may be excluded. 
Zero Percent Capital Gains Rate 

Target Audience 

■	 New business partnerships or corporations that issue new stock or ownership interests for entities with operations in the expanded DC Enterprise Zone or in an RC. 

■	 Existing businesses with operations in the expanded DC Enterprise Zone or in an 

RC that issue new stock or acquire new ownership interests. 

■	 Qualified business entities that purchase real estate in the expanded DC Enterprise 

Zone or in an RC. 

Incentive Not Relevant to 

■	 Businesses that cannot meet the definition of an Enterprise Zone Business or the 

definition of a Renewal Community Business. With the expanded DC Enterprise 

Zone, the 35-percent resident employee requirement does not apply, and 80 percent 

rather than 50 percent of gross income must come from the active conduct of business in the expanded DC Enterprise Zone. 

■	 Businesses that acquire stock or partnership interests issued before or after the DC 

Enterprise Zone or RC designation period. 

■	 Businesses that purchase existing assets (such as buildings) that will not be rehabilitated substantially within a 2-year period. 

■	 Taxpayers who do not expect to hold stock, partnership interests, or assets for the 

minimum 5-year holding period. 

■	 Taxpayers with capital gains on intangible assets or who own land that is not an 

integral part of a DC Enterprise Zone Business or an RC Business. 

Additional Resources 

■ Accountants and lawyers preparing business tax returns. 

■	 Local bar associations or accountant groups to identify accountants or lawyers to 

field questions. 

■	 Developers and real estate brokers who have knowledge of DC Enterprise Zone or 

RC boundaries. 

■ Tax attorneys and accountants in the District of Columbia or an RC area. 

■ IRS Publication 954. For copies call 1–800–829–3676 or visit www.irs.ustreas.gov. 

90

Zero Percent Capital Gains Rate 

Questions & Answers on Zero Percent Capital 

Gains Rate for Renewal Community and District 

of Columbia Enterprise Zone Assets 

Is there any special capital gain treatment 

for property in an Empowerment Zone (EZ), 

Enterprise Community (EC), or RC? 

The capital gain on certain assets is eligible for 0-percent capital gains 

rate in all RCs and the DC Enterprise Zone. Assets in other EZs or 

ECs are not eligible. 

What assets are eligible for 0-percent capital 

gains in RCs and the DC Enterprise Zone? 

The 0-percent capital gains rate applies to gain from the sale of a DC 

Enterprise Zone asset acquired after December 31, 1997, and before 

January 1, 2004, or for an RC asset acquired after December 31, 2001, 

and before January 1, 2010. Qualifying assets include (1) stock in a domestic company 

acquired by the taxpayer at its original issue from the corporation solely in exchange 

for cash, (2) any capital or profits interest in a domestic partnership if the interest was 

acquired by the taxpayer from the partnership solely in exchange for cash, and (3) tangible business property acquired by the taxpayer by purchase, in which either the original 

use of the property in an RC or the DC Enterprise Zone commences with the taxpayer 

or the taxpayer substantially improves the property. In the case of stock or partnership 

interests and ownership of the tangible business property, the business must be a Renewal 

Community Business or DC Enterprise Zone Business when the stock, interest, or property is acquired (or be formed with the purpose of being a Renewal Community Business 

or DC Enterprise Zone Business) and must remain a Renewal Community Business or DC 

Enterprise Zone Business for substantially all of the holding period. (See appendix A.) 

If the asset was purchased before an area receives 

an RC or DC Enterprise Zone designation does 

the 0-percent capital gains rate apply? 

No. The asset must be purchased after designation. If additional stock


or partnership interests of an entity are purchased at original issuance


after the RC or the DC Enterprise Zone designation, these additional interests might qualify.


91

Zero Percent Capital Gains Rate 

What if a taxpayer purchased a DC Enterprise 

Zone asset or RC asset, such as an existing 

building, from the taxpayer’s parents? 

The 0-percent capital gains rate is not available for transactions 

between related parties. “Related persons” include sons, daughters, 

parents, stepchildren, stepmothers, stepfathers, in-laws, and other persons treated as 

dependents under the tax code. Similar restrictions apply to sales to majority shareholders or partners of the business. 

What if a business ceases to meet the definition 

of a DC Enterprise Zone Business or Renewal 

Community Business? 

The business must meet the requirements for substantially all of the 

5-year holding period. “Substantially all” generally means 85 percent 

of the period. If the business ceases to meet the test after the 5-year holding period, the 

0-percent rate applies, but only to the extent of the gain to the date the business failed 

to meet the requirements. 

How long must the asset be held? 

The minimum holding period is 5 years. 

If the asset is sold before the end of the 

5-year period, can the 0-percent gain feature 

be preserved for the subsequent holder? 

A subsequent purchaser of an asset that otherwise qualifies for 

0-percent capital gain treatment is eligible for the incentive. The 

original purchaser would not be able to exclude any gain attributable to the period the 

asset was held, however, because the asset was not held by that original purchaser for 

the minimum period. 

92

Zero Percent Capital Gains Rate 

What if the asset is held beyond the DC 

Enterprise Zone or RC designation period? 

The 0-percent rate applies only to gain attributable to the period 

after December 31, 1997, and before January 1, 2009, in the case of 

a DC Enterprise Zone asset and after December 31, 2001, and before 

January 1, 2015, in the case of an RC asset. The taxpayer is not required to sell the asset 

in 2008 (in the case of a DC Enterprise Zone asset) or in 2015 (for an RC asset), but 

must determine and substantiate the gain attributable to that period and may apply the 

0-percent rate to that amount. 

What if the stock or partnership interest is 

redeemed before the end of the minimum 

holding period? 

The asset would not be eligible for the 0-percent capital gains rate. 

The 0-percent capital gains rate is available to 

Renewal Community businesses. What happens 

if, during the 5-year period that the asset must 

be held, the status of the business changes? For 

example, a business buys a building January 1, 

2002, and meets the RC Business definition at that time and 

in 2007 after holding it for more than 5 years. Does the business still get the 0-percent tax rate on the capital gains? 

No. To qualify for the capital gain exclusion, substantially all of the use of the property 

during substantially all of the taxpayer’s holding period must have been by an RC business. Although substantially all is not defined in the Internal Revenue Code for this purpose, it seems clear that qualifying as an RC business for only 3 of 5 years would not be 

considered substantially all of the taxpayer’s holding period. 

93

Zero Percent Capital Gains Rate 

To qualify for the 0-percent capital gains rate, 

what percentage of a business’ gross income 

must come from the active conduct of business 

within the RC? Is it 50 percent or 80 percent? 

The 80-percent rule is an Enterprise Zone benefit that applies only to 

businesses operating in the District of Columbia. For RC businesses, at least 50 percent 

of gross income must come from the active conduct of business within the RC. That 

does not mean that the customers or products of the business must come from the RC; 

it means that the business must actively conduct its business in the RC. For the purposes of determining gross income, this income would be the same figure that a business 

would use for other Federal tax purposes. 

94

Nonrecognition of Gain on Sale

of Empowerment Zone Assets 

Applicable IRS Tax Form: No applicable IRS tax form identified at 

time of publication. 

A taxpayer can elect to postpone gain on the sale of certain stock, partnership interests, 

or business property of an Enterprise Zone Business if replacement property is purchased 

within 60 days. The amount of gain rolled over cannot exceed the cost of the replacement asset. The incentive does not eliminate the payment of tax but postpones payment, 

which can be advantageous for tax planning purposes. 

Target Audience 

■	 Businesses in Empowerment Zones (EZs) that frequently replace 

property used by the business with similar property. 

■	 Investors interested in holding stock or partnership interests in an 

Enterprise Zone Business for a short term. 

■	 Businesses interested in locating in an EZ and postponing gain on 

investments for tax planning purposes. 

Incentive Not Relevant to 

■ Businesses that cannot meet the definition of an Enterprise Zone Business. 

■ Investors seeking long-term stock or partnership investments. 

95


Capital Gains 

Nonrecognition of Gain 

on Sale of Empowerment 

Zone Assets (EZAs) 

Description 

Capital gain on EZAs (stock, partnership interests, and business 

property) of an Enterprise Zone 

Business held for more than 1 

year is not recognized (and is 

is acquired within 60 days. 

rolled over) if a replacement EZA 

Availability 

Election by taxpayer for EZAs 

acquired after December 21, 2000, 

and before January 1, 2010, for 

all EZs (not available in the DC 

Enterprise Zone, ECs, or RCs). 
Nonrecognition of Gain on Sale of EZAs 

Additional Resources 

■ Accountants and lawyers preparing business tax returns. 

■	 Local bar associations or accountant groups to identify accountants or lawyers 

to field questions. 

■ Tax attorneys and accountants with clients in EZs. 

■ Investment advisors familiar with EZs and EZ businesses. 

Questions & Answers on Nonrecognition of 

Gain on Sale of Empowerment Zone Assets 

Are there any special provisions for 

nonrecognition of gain for property 

in an EZ, Enterprise Community (EC), 

or Renewal Community (RC)? 

In 2000, Congress created a new incentive for EZs that permits a taxpayer to roll over 

gain from the sale of certain assets held for more than 1 year. The incentive is not available for ECs, the District of Columbia Enterprise Zone, or RCs. The tax law permits the 

“nonrecognition” or so-called “rollover” of gain, at the taxpayer’s election, for a qualifying Empowerment Zone Asset (EZA) if the proceeds from the sale are used to purchase 

other qualifying EZA in the same Zone (“replacement zone asset”) within 60 days of the 

sale of the original EZA. 

What is the advantage of rollover of gain? 

A business may be able to delay payment of capital gains to a taxable 

year where the gain is netted against a capital loss or to a year when 

the gain is otherwise beneficial to the taxpayer’s calculation of taxes. 

96

Nonrecognition of Gain on Sale of EZAs 

Can gain on any asset used in the EZ qualify 

for the rollover treatment? 

Only certain assets of a business that meet the definition of Enterprise 

Zone Business will qualify. (See appendix A.) EZA includes (1) stock 

in a domestic company acquired by the taxpayer after December 21, 

2000, and before January 1, 2010, at its original issue from the corporation solely in 

exchange for cash, (2) any capital or profit interest in a domestic partnership if the interest was acquired by the taxpayer after December 21, 2000, and before January 1, 2010, 

from the partnership solely in exchange for cash, and (3) tangible business property 

acquired by the taxpayer by purchase after December 21, 2000, and before January 1, 

2010, where either the original use of the property in the EZ commences with the taxpayer or the taxpayer substantially improves the property. 

Does the incentive apply to gain on sale of 

real property or intangible property? 

Any gain attributable to real property or an intangible asset can be 

rolled over only if it is an integral part of an Enterprise Zone Business. 

Are there any limits on the dollar amount of gain 

that can be rolled over? 

The amount of gain rolled over cannot exceed the cost of the replacement EZA, and that cost is reduced by any gain that previously has 

not been recognized under this special rollover provision. 

Are there any other tax consequences? 

Any gain that is not recognized reduces the basis of the replacement EZA. 

97

Nonrecognition of Gain on Sale of EZAs 

Is replacement EZA eligible for the same rollover 

treatment? 

The gain on the replacement EZA may also be rolled over, but only if 

the actual holding period of the replacement EZA is more than 1 year. 

How is the incentive reflected on a tax return? 

There is no special form for this provision, and the gain that is not 

being recognized would be accounted for in the same manner that 

capital gains generally are taken into account. 

98

Partial Exclusion of Gain on Sale 

of Empowerment Zone Stock 

Applicable IRS Tax Form: No applicable IRS tax form identified at 

time of publication; see IRS Publication 550. 

A taxpayer can exclude 60 percent of gain realized on the sale of stock in a small business that meets the definition of an Enterprise Zone Business and is located in an 

Empowerment Zone (EZ). The exclusion of gain encourages investment in small EZ 

businesses whose stock is expected to appreciate prior to 2014. 

Target Audience 

■ Small corporations starting up or seeking additional cash infusion that locate in EZs. 

■ Startup corporations that expect rapid appreciation in the value of their stock. 

■	 Investment banking firms that specialize in selling stock of emerging, 

small corporations. 

■ Local investment clubs seeking to invest in small businesses in an EZ. 

■ Taxpayers with stock portfolios looking to reduce capital gain. 

99


Capital Gains 

Partial Exclusion of Gain 

on Sale of Empowerment 

Zone Stock 

Description 

Exclusion of 60 percent of gain 

on sale of small business stock of 

a C Corporation that is an Enterprise Zone Business located in an 

EZ if the stock is held for at least 

5 years. 

Availability 

Stock must be acquired after 

December 21, 2000, and before 

January 1, 2010, at original 

issuance in exchange for cash. 

Sixty-percent exclusion does 

not apply to gain after December 31, 2014. Business must be 

an Enterprise Zone Business in 

Enterprise Zone). 

an EZ (other than the DC 
Partial Exclusion of Gain on Sale of EZ Stock 

Incentive Not Relevant to 

■ Businesses formed as partnerships. 

■ Investors interested in investments in partnerships. 

■ Investors with large capital losses. 

■	 Investors in businesses that are not likely to meet the definition of an Enterprise 

Zone Business for the 5-year holding period. 

Additional Resources 

■ Accountants and lawyers preparing business tax returns. 

■	 Local bar associations or accountant groups to identify accountants or lawyers to 

field questions. 

■ Investment advisors familiar with small corporations and businesses within an EZ. 

■ IRS Publication 550. For copies call 1–800–829–3676 or visit www.irs.ustreas.gov. 

Questions & Answers on Partial Exclusion of 

Gain on Sale of Empowerment Zone Stock 

Are there any incentives for investing in small 

startup companies located in economically 

depressed areas? 

In 2000, Congress extended an existing tax incentive encouraging investment in small companies to target small corporations located in EZs. 

What is meant by “small companies”? 

This is generally a C corporation with gross assets of $50 million 

or less. A business should consult its tax advisor for more specific 

requirements. 

100

Partial Exclusion of Gain on Sale of EZ Stock 

What if the taxpayer already owns stock in the 

company? 

The stock qualifies only if the taxpayer acquires the stock upon 

original issuance. Gain would not qualify for the 60-percent 

exclusion if the stock was purchased before December 21, 2000. 

Must the business be an Enterprise Zone 

Business when the stock is purchased? 

The corporation must either be an Enterprise Zone Business when 

the stock is purchased or be formed for purposes of meeting the 

definition and must meet the definition for substantially all of the 

taxpayer’s 5-year holding period. (See appendix A.) 

What amount of gain is excluded? 

The tax code will permit 60 percent of the gain realized to be excluded. This exclusion would not apply to gains after December 31, 2013. 

What if the stock is held for less than 5 years? 

The favorable exclusion treatment applies only if the stock is held for 

more than 5 years. 

What if the business ceases to be an Enterprise 

Zone Business? 

The exclusion is available only if the business meets the Enterprise 

Zone Business definition for substantially all of the 5-year holding 

period. Substantially all generally means 85 percent of the period. 

An investor would not be eligible for the benefit if the business was not able to meet 

the requirements. 

101

Partial Exclusion of Gain on Sale of EZ Stock 

How is the incentive shown on a tax return? 

The exclusion is included in the general portion of taxpayer’s return 

related to capital gain and loss (such as Schedule D of IRS Form 1040) 

when the stock is sold or otherwise disposed of. There are no regulations on how an investor should document that a business met the 

small stock and Enterprise Zone Business requirements. An investor may want to consult 

his or her tax advisor for advice on documenting compliance. 

Which tax form should EZ businesses use to 

itemize rolled-over gains on the sale of EZ assets 

that are purchased after December 21, 2000, 

held for more than 1 year, and then replaced 

within 60 days? 

An EZ should use IRS Schedule D or Form 4797 (the same form that would normally 

be used in the absence of a rollover). Instructions for reporting the rollover of gain on 

the sale of EZ assets for Schedule D filers are included in IRS Publication 550. 

102

New Markets Tax Credit 

Applicable IRS Tax Form: No applicable IRS tax form identified at 

time of publication. 

The New Markets Tax Credit provides individuals and corporations with an incentive 

to invest in a community development entity (CDE) that provides capital and financial 

advisory services to low-income communities. The investor receives a credit against 

Federal tax liability equal to a percentage of the amount invested in the CDE. The credit 

can be taken for up to 7 years. The credit will be available for up to $15 billion in investments in CDEs designated by the U.S. Treasury Department over the 2001–2007 period. 

Target Audience 

■	 Corporations and individuals looking to reduce Federal tax liability up to a 

7-year period. 

■ Investors wanting to invest in low-income community businesses. 

■	 Financial institutions seeking to reduce Federal tax liability and 

obtain Community Reinvestment Act credit through the same 

investment. 

■	 Investors in Low-Income Housing Tax Credit (LIHTC) projects 

that may want a similar tax credit investment for commercial 

development. 

■	 Community development corporations seeking to broaden their 

source of capital through investments in for-profit subsidiaries. 

103


Tax Credit 

New Markets Tax Credit 

Description 

Equity investors in qualified 

Community Development 

Entities (CDEs) can obtain a tax 

credit against Federal taxes of 

5 to 6 percent of the amount 

invested for each of the years 

the investment is held, for up 

to 7 years of the credit period. 

Availability 

Allocations of the credit will be 

made annually from 2001 to 2007 

to qualified CDEs. Investors must 

purchase stock or partnership 

interest in a CDE for cash at original issuance. Credit available at 

time of pur

of investment. 

chase (1 year) and on 

6 anniversary dates of acquisition 
New Markets Tax Credit 

Incentive Not Relevant To 

■ Startup or similar businesses that may not have large tax liabilities. 

■	 Individuals who are unable to benefit from the investment because of passive 

loss limitations. 

■ Individuals or corporations paying the Federal Alternative Minimum Tax. 

Additional Resources 

■ Accountants and lawyers preparing business tax returns. 

■	 Local bar associations or accountant groups to identify accountants or lawyers to 

field questions. 

■	 Community development corporations, community bankers, and business associations that are familiar with business opportunities in low-income communities. 

■ Syndicators of low-income housing tax credits familiar with credit syndication. 

Questions & Answers on New Markets Tax Credits 

Are there any incentives for persons wishing 

to invest in commercial enterprises located 

in economically distressed communities? 

In 2000, Congress added a New Markets Tax Credit against Federal 

tax liability for taxpayers who hold an equity investment in certain 

CDEs. The CDE, in turn, makes loans to, or investments in, qualifying businesses in 

low-income communities. The investor in the CDE obtains the tax benefit based on 

the amount invested in the CDE. 

What type of entity qualifies as a CDE? 

A CDE is any domestic corporation or partnership for Federal tax 

purposes that 

■	 Has a primary mission serving or providing investment capital for 

low-income communities or low-income persons. 

104

New Markets Tax Credit


■	 Maintains accountability to residents of low-income communities through their 

representation on any governing board or on any advisory board of the CDE. 

■ Is certified by the Treasury Department as an eligible CDE. 

In allocating the credits, the Treasury Department will give priority to entities with 

records of having successfully provided capital or technical assistance to disadvantaged 

businesses or communities, as well as to entities that intend to invest substantially all 

of the proceeds from their investors in businesses in which persons unrelated to the 

CDE hold the majority of the equity interest. A “small business investment company” 

(as defined in the tax laws) and a “community development financial institution” 

(as defined in Federal banking laws) are treated as meeting these requirements. 

How does an investor get an allocation of 

the credit? 

The investor does not receive the credit directly from the Federal 

Government. Instead, CDEs that are eligible for the credit will be 

selected by the U.S. Treasury Department. The Treasury Department 

can allocate credits to qualified CDEs of $1 billion for 2001, $1.5 billion each year 

for 2002–2003, $2 billion each year for 2004–2005, and $3.5 billion each year for 

2006–2007. The CDE will have up to 5 years to allocate the credit to specific investments. The credit is available when the investor makes an equity contribution to the 

qualified CDE. 

How does an investor determine which CDEs 

have received an allocation of the credit? 

The Treasury Department will publish a list of CDEs designated 

each year. 

How will the CDE use the equity that qualifies 

for the New Markets Tax Credit? 

The CDE must use at least 85 percent of the cash infusion to make 

a “qualified low-income community investment” (a Qualified Investment). A Qualified Investment includes 1) a capital or equity investment in, or loan to, a “qualified active low-income community business” or a qualified 

CDE, 2) the purchase of a loan made by another qualified CDE to a qualified active 

105

New Markets Tax Credit 

low-income community business, or 3) the provision of financial counseling and other 

similar services to businesses and residents located in low-income communities. There 

are no limits on the use of the remaining 15 percent of the equity raised by the CDE. 

What is a “qualified active low-income community 

business” (Qualified Active Business)? 

A “qualified active low-income community business” is defined as 

a corporation, partnership, or sole proprietorship that meets the 

following tests: 

■	 At least 50 percent of its gross income comes from the active conduct of a qualified 

business within any low-income community. 

■	 A “substantial portion” of the use of tangible property of the business (whether 

owned or leased) must be located within a low-income community. 

■	 A substantial portion of employee services must be performed in a low-income 

community. 

■	 No more than 5 percent of the property of the business can be “nonqualified financial 

property,” generally defined as debt, stock, partnership interests, and various financial instruments (other than reasonable amounts of working capital held in cash or 

short-term debt instruments or accounts receivable arising from sales of inventory). 

■	 No more than 5 percent of the property of the business can be works of art or other 

“collectibles,” unless held for sale to customers. 

This definition is a modification of the definition of an Enterprise Zone Business (see 

appendix A). There is no requirement that a specified percentage of employees live in 

the low-income community, however. 

Are there any types of business operations that 

do not qualify as a Qualified Active Business? 

Certain businesses cannot qualify, including residential rental property; 

a business, whose predominant activity of which is the development 

or holding of intangibles for sale or license; a golf course, country 

club, massage parlor, hot tub facility, suntan facility, race track, or a facility used for gambling; or a store, whose principal business is selling alcoholic beverages for consumption 

offpremises. In addition, as distinguished from the Enterprise Zone Business definition, 

rental of improved commercial real estate located in a low-income community is a 

Qualified Active Business regardless of the characteristics of the commercial tenants 

106

New Markets Tax Credit 

of the property. The purchase and holding of unimproved real estate is not a Qualified 

Active Business. A Qualified Active Business can include a nonprofit organization. 

Where must a Qualified Active Business 

be located? 

The tax credit is based on assistance to certain businesses in a lowincome community. A low-income community is defined as census 

tracts with either (1) poverty rates of at least 20 percent (based on the 

most recent census data), or (2) a median family income that does not exceed 80 percent 

of the greater of metropolitan area income or statewide median family income (for a 

nonmetropolitan census tract, 80 percent of nonmetropolitan statewide median family 

income). In addition, the Treasury Department may designate any area within any census 

tract as a low-income community provided that (1) the boundary of the area is continuous, (2) the area (if it were a census tract) would satisfy the poverty rate or median 

income requirements within the targeted area, and (3) an inadequate access to investment capital exists in the area. 

How long must an investor hold the investment? 

There is no minimum holding period. The investment is eligible for 

the credit on the date the investment is made and on six subsequent 

anniversary dates. The credit is equal to 5 percent of the amount 

invested for the first three allowance dates, with an increase to 6 percent for the remaining four allowance dates. The investor must hold the investment on 

the “credit allowance date,” which is the date on which the investment is initially made 

and on each of the six subsequent anniversaries of the date on which the investment is 

initially made. If the investment is not held on the credit allowance date, the investor is 

not eligible to take the New Markets Tax Credit. 

What if an investor is unable to use the credit in 

a specific tax year? 

The New Markets Tax Credit is a general business tax credit, and can 

be carried forward 20 years and carried back 1 year (except for tax 

years ending prior to January 1, 2001). 

107

New Markets Tax Credit 

Will an investor be able to sell the investment 

in the CDE with the credit attached? 

The credit is available to subsequent purchasers of the investment. If 

an initial investor is unable to use the tax credit, the investment can 

be transferred with the credit available to the subsequent purchaser. 

Are there any tax benefits for an owner of a 

potential Qualified Active Business? 

The tax benefit itself does not go to the business. There is no requirement that the CDE pass through the value of the benefit of the tax 

credit, for example, in the form of a lower interest rate on a loan. The 

credit merely provides an incentive for creating a source of capital for organizations that 

have a mission and a proven track record for stimulating economic development in economically depressed areas. The ultimate benefit to the business owner will be access to 

the new capital infusion in low-income communities. 

Is the New Markets Tax Credit subject to 

recapture like other credits? 

The credit is subject to recapture during the 7-year credit period if 

the entity invested in ceases to be a CDE, the proceeds of the investment are not used to make Qualified Investments, or the investment 

in the CDE is redeemed by the CDE. The recapture amount is generally based on tax 

benefit derived from the credit. 

Are there any other tax consequences to holding 

this tax credit investment? 

The taxpayer’s basis in the investment is generally reduced by the 

amount of the credit. The credit is subject to the general business 

credit and passive loss limitation rules. 

108

New Markets Tax Credit 

Can this credit be used to reduce Federal 

Alternative Minimum Tax (AMT) liability? 

No. The credit cannot be used to reduce the AMT liability of an 

individual or corporation. 

Can an investor contribute property to a CDE 

to obtain an equity investment that qualifies 

for the credit? 

The credit is available only in cases in which the stock of a corporation, a membership interest of a limited liability company, or capital 

interest in a partnership is acquired at original issuance for cash. An investment acquired 

through an underwriter at original issuance would meet this requirement. 

How is this credit different from LIHTC? 

LIHTC is based on the eligible costs of a residential rental project that 

sets aside units for low- and moderate-income persons. It cannot be 

used for commercial projects. An investor receiving the New Markets 

Tax Credit receives the credit based on its investment in the CDE. 

Investment by the CDE in residential rental real estate is not a Qualified Investment 

for purposes of meeting the requirement that 85 percent of the cash be used to acquire 

Qualified Investments. 

109

Low-Income Housing

Tax Credit 

Applicable IRS Tax Form: Forms 8609 and 8586 

The Low-Income Housing Tax Credit (LIHTC) is available over a 10-year period to the


tax owners of rental projects who set aside a specified percentage of units for low-income


persons for a minimum of 15 years. The project owner must receive an


allocation of tax credits to qualify for this incentive. Information on the


LIHTC can be obtained from IRS Publication Form 8586 and from the


National Council of State Housing Agencies on their Internet site at


www.ncsha.org. (Little information on this credit is provided here


because LIHTC is not included in the Internal Revenue Service (IRS)


publication 954. Because this is a very complicated tax credit, please


contact the IRS for more information.)


111


Housing Tax Credit 

Low-Income Housing 

Tax Credit (LIHTC) 

Description 

Ten-year credit against Federal 

taxes for owners of newly constructed or renovated rental 

housing who set aside a specified 

percentage of units for lowincome persons for a minimum 

of 15 years. The credit varies for 

new construction and renovation. 

Availability 

Project must receive allocation of 

State’s annual credit ceiling or use 

multifamily housing tax-exempt 

bonds that receive allocation of 

State’s bond volume cap. Allocations are made on basis of 

State plan. The project does not 

have to be located in an EZ, EC, 

or RC to qualify. 
Appendix A


Questions & Answers on Enterprise Zone 

Businesses and Renewal Community Businesses 

Tax incentives are generally designed to encourage businesses to locate or expand


operations in an Empowerment Zone (EZ), Enterprise Community (EC), or Renewal


Community (RC) and to hire residents of an EZ, EC, or RC. Five of the Federal tax


incentives—Increased Section 179 Deduction, Enterprise Zone Facility Bonds, Zero


Percent Capital Gains Rate for DC Enterprise Zone Assets, Nonrecognition of Gain


on Sale of Empowerment Zone Assets, and Partial Exclusion of Gain on Sale


of Empowerment Zone Stock—require that the business meet the defi­


nition of “Enterprise Zone Business.” Two of the RC incentives—


Increased Section 179 Expensing Deduction and Zero Percent Capital


Gains for RC Assets—require that the business meet the definition of


“Renewal Community Business” in order to qualify for the incentive. 


A business qualifies as an Enterprise Zone Business or Renewal


Community Business if it actively conducts business in an EZ, EC, or


RC, has its tangible and intangible property located and used in the


active conduct of business in an EZ, EC, or RC, employs residents of


an EZ, EC, or RC (a required 35 percent of its employees), and has its


employees perform services in an EZ, EC, or RC. The business can be a


sole proprietorship, partnership, or corporation for Federal tax purposes. Some business­


es are excluded from qualifying. The business must meet the requirements of being an


Enterprise Zone Business or Renewal Community Business continuously for several


years, depending on the incentive.


What is an Enterprise Zone Business or Renewal 

Community Business? 

In general, an Enterprise Zone Business or Renewal Community 

Business is a corporation, partnership, or sole proprietorship that, 

for each taxable year, meets the following tests: 

■	 Except with respect to a sole proprietorship, every trade or business of the entity is 

actively conducted in an EZ, EC, or RC (legally separate entities are not aggregated 

with related entities for these tests). 

■	 At least 50 percent of the total gross income of the entity is derived from the active 

conduct of business within an EZ, EC, or RC. 

113

Appendix A 

■	 A substantial portion of the use of the tangible property of the entity (whether owned 

or leased) is within an EZ, EC, or RC. 

■	 A substantial portion of the intangible property of the business is used in the active 

conduct of the business. 

■	 A substantial portion of the services performed for the employer by its employees 

occur within an EZ, EC, or RC. 

■	 At least 35 percent of the employees reside in an EZ, EC, or RC. (This does not apply 

in the DC Enterprise Zone.) 

■	 No more than 5 percent of the property is nonqualified financial property (such as 

debt, stock, and various financial instruments) except for reasonable amounts of 

working capital held in cash, cash equivalents, or debt instruments with a term of 

18 months or less and certain accounts receivable arising from sales of inventory. 

■	 No more than 5 percent of the property is works of art or other collectibles unless 

held for sale to customers. 

How does a business know whether its building 

is in the Zone or an RC? 

The local EZ, EC, or RC entity can provide businesses with information on its boundaries, or businesses may obtain the information over 

the Internet at www.hud.gov/cr for urban EZ/ECs and for urban and 

rural RCs or www.ezec.gov for rural EZ/ECs. 

Are there any types of businesses that cannot 

be Enterprise Zone Businesses or Renewal 

Community Businesses? 

Yes. The tax laws exclude certain businesses from the definition, 

including liquor stores, golf courses, racetracks, gambling facilities, 

country clubs, residential rental properties, businesses that predominantly hold or 

develop intangibles for sale or license, or businesses that rent personal property, such 

as car rental agencies (unless at least 50 percent of the rentals are to Enterprise Zone 

Businesses or Renewal Community Businesses or to EZ, EC, or RC residents). Nonprofit organizations are not automatically precluded merely because the activities 

carried on by the organization are conducted on a nonprofit basis. 

114

Appendix A 

Can a high-technology company qualify as an 

Enterprise Zone Business or Renewal Community 

Business? 

The answer depends on its operations. The tax law states that no 

business consisting predominantly of the development or holding 

of intangibles for sale or license can qualify as an Enterprise Zone Business or Renewal 

Community Business. 

Can a real estate developer qualify as an 

Enterprise Zone Business or Renewal 

Community Business? 

A business that develops and owns commercial real estate can qualify 

only if at least 50 percent of its gross rental income from real property 

is from Enterprise Zone Businesses or Renewal Community Businesses. The owner is 

permitted to accept certifications of lessees in determining whether the lessee is an 

Enterprise Zone Business or Renewal Community Business. If the project is residential 

rental property, the business is automatically excluded by statute from the definition of 

an Enterprise Zone Business or Renewal Community Business. 

Is farming a qualified business for purposes 

of the Enterprise Zone Business or Renewal 

Community Business definition? 

Farming is a qualified business only if the sum of the value of the 

assets owned or leased by the employer for use in the farming business 

does not exceed $500,000. The definition of farming and the method for calculating the 

value of the assets are found in the tax laws. An employer should consult its legal advisor 

on this matter. 

115

Appendix A 

How does a business apply the tests if it has 

several locations? 

The tests generally apply to legally separate entities. If a single business entity has locations both within and outside an EZ, EC, or RC, 

all of the tests apply to the overall operations. If the various locations 

are operated by legally separate entities, the tests apply only to that location’s operations 

even if the various legal entities are related for Federal tax purposes. For example, if a 

national chain store or restaurant set up operations in an EZ, EC, or RC, the tests would 

be measured with respect to the EZ, EC, or RC location store only if that store or restaurant was separately incorporated from other stores or restaurants in the chain. 

What does it mean that “legally separate entities 

are not aggregated with related entities for the 

Enterprise Zone Business tests?” 

This rule permits businesses to set up separate corporations or partnerships to conduct business in an EZ, EC, or RC. All Enterprise Zone 

Business or Renewal Community Business tests would be measured based on the EZ, EC, 

or RC business, and a business would not have to include any activities of other related 

entities outside of the EZ, EC, or RC. Many other tax law provisions treat related entities 

as one business and require adding together the activities of all entities. This rule for 

Enterprise Zone Businesses and Renewal Community Businesses is more lenient than 

other tax rules. 

How does a business apply the active conduct 

of business within an EZ, EC, or RC test if raw 

materials and customers come from outside 

the EZ, EC, or RC? 

The tax regulations relating to Enterprise Zone Facility Bonds describe 

a mail-order clothing business that is located in an EZ. The business purchases the supplies for its clothing business from suppliers located both within and outside the EZ and 

expects that orders will be received both from customers who will reside or work within 

the EZ and from others outside the EZ. All orders are received, filled at, and shipped 

from the clothing business located in the EZ. The income generated from the sales would 

be treated as gross income derived from the active conduct of business within an EZ. 

116

Appendix A 

How do the tests apply if a business makes 

deliveries inside and outside an EZ, EC, or RC? 

The tax regulations for Enterprise Zone Facility Bonds give an example of a printing operation located in an EZ. All orders are taken and 

completed, and all billing and accounting activities are performed, at 

the print shop located in the EZ. The business, on occasion, uses its equipment (including its trucks) and employees to deliver large print jobs to customers who reside outside 

the EZ. As long as the business is able to establish that its trucks are used in the EZ 

a substantial portion of the time and that its employees perform a substantial portion 

of their services for the business in the EZ, the business meets the requirements with 

respect to the use of tangible property and location of services performed by employees. 

How does a business calculate the requirement 

that 35 percent of its employees be EZ, EC, or 

RC residents? 

The tax regulations relating to tax-exempt bonds permit calculation 

either on a per-employee fraction or an employee actual work-hour 

fraction. In the per-employee fraction method, the business would compare the number 

of EZ, EC, or RC resident employees in a taxable year to the total number of employees 

during the same taxable year. Employees include persons employed for at least 90 days 

and who work at least 15 hours per week. The employee actual work-hour fraction seeks 

to accommodate businesses with full- and part-time workers and compares actual hours 

worked by EZ, EC, or RC residents to total employee hours worked in a taxable year. 

A business must apply the same method consistently over the period of the tax incentive 

once a method is selected. The same methods of determining whether the 35-percent test 

is met may apply for purposes of the other EZ incentives and the incentives that require 

a Renewal Community Business, but the Internal Revenue Service (IRS) has not formally 

extended the rules. 

Are there any waivers for businesses that 

meet requirements in all other areas but the 

“35-percent rule” for EZ, EC, or RC employees? 

The 35-percent EZ, EC, or RC employee requirement is statutory 

and cannot be waived. For purposes of tax-exempt financing, the 

Enterprise Zone Business is permitted to average yearly percentages over a rolling, 

consecutive 5-year period. There are no tax regulations on whether the averaging 

provision applies to any of the other EZ incentives or the RC incentives. 

117

Appendix A 

Do employees contracted through a temporary 

agency meet the definition of employee for purposes of the Enterprise Zone Business or Renewal 

Community Business tests? Do employees who 

are also relatives meet the definition of employee 

for this purpose? 

The tax laws do not directly address these issues with respect to the Enterprise Zone 

Business or Renewal Community Business definition. If the business treats the individuals as employees for other Federal tax purposes, the business presumably could treat 

them as employees for this purpose. 

How does a business know it qualifies as 

an Enterprise Zone Business or Renewal 

Community Business? 

There is no formal application or certification process for being an 

Enterprise Zone Business or Renewal Community Business. A business 

must analyze the requirements in light of its own operations and use the same standards 

it applies for taking any position on its Federal tax return. This requires a legal determination, so a business should consult a tax attorney or its tax preparer. The business 

should retain documents that establish that it is an Enterprise Zone Business or Renewal 

Community Business, such as statements that an employee is an EZ, EC, or RC resident, 

in case of an audit by the IRS. 

Can real estate developers qualify as RC or EZ 

businesses? 

Yes, provided the property owned by the real estate developer is not in 

the business of holding residential rental property and at least 50 percent of the gross rental income from the lessees is from EZ or RC businesses. Note that property is residential rental property only if at least 80 percent of the 

gross rental income from the property is from dwelling units. 

118

About the Empowerment Zone/Enterprise Community 

Can a bank located in an EZ or RC, which has 

more than 35 percent of its employees residing 

in the EZ or RC and does more than 50 percent 

of its business in the EZ or RC meet the definition of an EZ or RC business? This question arises 

because the provision stating that less than 5 percent of the 

aggregate adjusted bases of the property of the business be 

attributable to “nonqualified financial property” is unclear. 

What type of business is this provision referring to? 

There is no explanation in the Congressional Committee Reports as to the types of businesses targeted by this provision. A bank could not qualify if more than 5 percent of the 

bank’s average aggregate unadjusted bases is attributable to nonqualified financial property. Nonqualified financial property includes debt and other similar property (other than 

accounts or notes receivable from sales or services). 

In what manner can a business with national 

or international locations qualify as an EZ or RC 

business if they have a plant or plants located 

in an EZ or RC? 

The qualifications for an EZ or RC business are measured with respect 

to a legal entity. Activities of legally separate (even if related) parties are not aggregated 

for purposes of determining whether an entity qualifies as an EZ or RC business. That 

means that a plant of a national company located in an EZ or RC can qualify as an EZ or 

RC business if it is set up as a separate legal entity (such as a subsidiary or partnership). 

119

About the Empowerment Zone/Enterprise Community 

May a business count family members as employees in determining if the business is considered 

an RC business? For example, if a business located in an RC has 10 employees, 4 of whom are 

family members who live in the RC, how many 

total employees need to live in the RC for the business to 

be considered an RC business? Would it be 35 percent of 

10 employees or 35 percent of 6 employees? 

Yes, employees who are also family members count for purposes of the 35-percent test. 

So, in the example, you would base the test on 10 employees. 

If the answer is a fraction, do you round up 

or down to determine the correct number 

of employees? 

You would not round at all. At least 35 percent of the employees must 

be residents of an RC. For any percentage less than 35 percent, the 

employer would fall below the 35-percent threshold and would fail to meet the test. 

An employer’s business address is located in an 

RC, but the business has multiple adjacent buildings connected by pedestrian walkways that are 

physically located outside the RC according to 

the demarcation lines of the census tract. If all 

the connected buildings have one central business address 

located in the RC, can all the buildings be considered to be 

inside the RC? 

Under the Internal Revenue Code provisions defining an RC business, if a business uses 

real property located both within and outside an RC, the amount of the real property 

located within the RC is substantial when compared to the amount of the real property 

located outside the RC, and the property located outside the RC is contiguous to the real 

property within the RC, the contiguous property is treated as being within the RC. However, 

this rule applies only for purposes of defining a RC business. For any other purpose, the 

taxpayer can get an answer by submitting a private letter ruling request to the IRS. 

120

Appendix B


Current Renewal 

Communities, 

Empowerment 

Zones, and 

Enterprise 

Communities as 

Designated by HUD 

and USDA 

HUD Designees 

Renewal Communities 

(RCs)—40 

Urban (U)—28 

Rural (R)—12 

Alabama 

Greene-Sumter (R) 

Mobile County (U) 

Southern Alabama (R) 

California 

Los Angeles (U)


Orange Cove (R)


Parlier (R)


San Diego (U)


San Francisco (U)


Georgia 

Atlanta (U) 

Illinois 

Chicago (U) 

Kentucky 

Eastern Kentucky (R) 

Louisiana 

Central Louisiana (R) 

New Orleans (U) 

Northern Louisiana (R) 

Ouachita Parish (U) 

Massachusetts 

Lawrence (U) 

Lowell (U) 

Michigan 

Detroit (U) 

Flint (U) 

Mississippi 

West Central Mississippi (R) 

New Jersey 

Camden (U) 

Newark (U) 

New York 

Buffalo-Lackawanna (U)


Jamestown (R)


Niagara Falls (U)


Rochester (U)


Schenectady (U)


North Dakota 

Turtle Mountain Band of 

Chippewa (R) 

Ohio 

Hamilton (U) 

Youngstown (U) 

Pennsylvania 

Philadelphia (U) 

South Carolina 

Charleston (U) 

Tennessee 

Chattanooga (U) 

Memphis (U) 

Texas 

Corpus Christi (U) 

El Paso County (R) 

Vermont 

Burlington (R) 

Washington 

Tacoma (U) 

Yakima (U) 

Wisconsin 

Milwaukee (U) 

Urban Empowerment 

Zones (EZs)—30 

Round I Urban EZs—5 

Illinois 

Chicago 

Maryland 

Baltimore 

Michigan 

Detroit 

New York 

New York 

Pennsylvania/New Jersey 

Philadelphia/Camden 

Supplemental Round I 

EZs—2 

California 

Los Angeles 

Ohio 

Cleveland 

Round II Urban EZs—15 

California 

Santa Ana 

Connecticut 

New Haven 

Florida 

Miami-Dade County 

Indiana 

Gary-Hammond-East Chicago 

Massachusetts 

Boston 

Minnesota 

Minneapolis 

Missouri/Illinois 

St. Louis/East St. Louis 

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Appendix B 

New Jersey 

Cumberland County 

Ohio 

Cincinnati 

Columbus 

South Carolina 

Columbia-Sumter 

Tennessee 

Knoxville 

Texas 

El Paso 

Virginia 

Norfolk-Portsmouth 

West Virginia/Ohio 

Huntington/Ironton 

Round III Urban EZs—8 

Arizona 

Tucson 

Arkansas 

Pulaski County 

California 

Fresno 

Florida 

Jacksonville 

New York 

Syracuse 

Yonkers 

Oklahoma 

Oklahoma City 

Texas 

San Antonio 

Enterprise Zones—1 

District of Columbia 

Washington 

Urban Enterprise 

Communities (ECs)—49 

Round I Urban ECs—45 

Alabama 

Birmingham 

Arizona 

Phoenix 

Arkansas 

Pulaski County 

Colorado 

Denver 

Connecticut 

Bridgeport 

New Haven 

Delaware 

Wilmington 

District of Columbia 

Washington 

Florida 

Miami 

Tampa 

Georgia 

Albany 

Illinois 

East St. Louis 

Springfield 

Indiana 

Indianapolis 

Iowa 

Des Moines 

Kentucky 

Louisville 

Massachusetts 

Springfield 

Michigan 

Muskegon 

Minnesota 

Minneapolis 

St. Paul 

Mississippi 

Jackson 

Missouri 

St. Louis 

Nebraska 

Omaha 

Nevada 

Las Vegas 

New Hampshire 

Manchester 

New Mexico 

Albuquerque 

New York 

Newburgh-Kingston 

North Carolina 

Charlotte 

Ohio 

Akron 

Cleveland 

Columbus 

Oklahoma 

Oklahoma City 

Oregon 

Portland 

Pennsylvania 

Harrisburg 

Pittsburgh 

Rhode Island 

Providence 

Tennessee 

Nashville 

Texas 

Dallas


El Paso


San Antonio


Waco


Utah 

Ogden 

Virginia 

Norfolk 

Washington 

Seattle 

West Virginia 

Huntington 

Round I Urban Enhanced 

ECs—4 

California 

Oakland 

Massachusetts 

Boston 

Missouri/Kansas 

Kansas City 

Texas 

Houston 

122

About the Empowerment Zone/Enterprise Community


USDA Designees 

Round I Rural EZs—3 

Kentucky 

Kentucky Highlands 

Mississippi 

Mid-Delta 

Texas 

Rio Grande Valley 

Round II Rural EZs—5 

California 

Desert Communities 

Georgia 

Southwest Georgia United 

Illinois 

Southernmost Illinois Delta 

North Dakota 

Griggs-Steele 

South Dakota 

Oglala Sioux Tribe 

Round III Rural EZs—2 

Maine 

Aroostook County 

Texas 

FUTURO 

Round I Rural ECs—28 

Alabama 

Chambers County 

Arizona 

Arizona Border Region 

Arkansas 

East Arkansas 

Mississippi County 

California 

Imperial County 

Watsonville 

Florida 

Jackson County 

Georgia 

Central Savannah River Area 

Crisp-Dooly 

Louisiana 

Northeast Louisiana Delta 

Michigan 

Lake County 

Mississippi 

North Delta Mississippi 

Missouri 

East Prairie 

New Mexico 

La Jicarita 

North Carolina 

Halifax-Edgecombe-Wilson 

Empowerment Alliance 

Robeson County 

Ohio 

Greater Portsmouth 

Oklahoma 

Southeast Oklahoma 

Oregon 

Josephine County 

Pennsylvania 

Lock Haven 

South Carolina 

Williamsburg-Lake City 

South Dakota 

Beadle and Spink 

Tennessee 

Fayette-Haywood Counties 

Scott-McCreary Area 

Virginia 

Accomack-Northampton 

Washington 

Lower Yakima County 

West Virginia 

Central Appalachia 

McDowell County 

Round II Rural ECs—20 

Alaska 

Metlakatla Indian 

Community 

Arizona 

Four Corners 

California 

Huron-Tule 

Florida 

Empowerment Alliance of 

Southwest Florida 

Hawaii 

Molokai 

Indiana 

Austin 

Kansas 

Wichita County 

Kentucky 

Bowling Green 

Maine 

Empower Lewiston 

Michigan 

Clare County 

Montana 

Fort Peck Assiniboine and 

Sioux Tribe 

New Mexico 

Deming 

Oklahoma 

Tri-County Indian Nations 

Pennsylvania 

Fayette 

South Carolina 

Allendale County ALIVE 

Tennessee 

Clinch-Powell 

Texas 

FUTURO 

Washington 

Five Star 

West Virginia 

Upper Kanawha Valley 

Wisconsin 

Northwoods NiiJii 

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