Empowerment Zone Employment Credit

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8747]

RIN 1545-AU30

Empowerment Zone Employment Credit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to the

period employers may use in computing the empowerment zone employment

credit under section 1396 of the Internal Revenue Code. The regulations

reflect and implement certain changes made by the Omnibus Budget

Reconciliation Act of 1993 (OBRA '93). They affect employers of

employees who live and work in an empowerment zone designated under the

statute. The regulations provide employers with the guidance necessary

to claim the credit.

DATES: These regulations are effective December 30, 1997. For dates of

applicability, see Sec. 1.1396-1(c) of these regulations.

FOR FURTHER INFORMATION CONTACT: Robert G. Wheeler, (202) 622-6060 (not

a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On December 16, 1996, a notice of proposed rulemaking [REG-209834-

96] containing proposed regulations relating to the period employers

may use in computing the empowerment zone employment credit under

section 1396 of the Internal Revenue Code was published in the Federal

Register (61 FR 66000).

No written comments responding to this notice were received. No one

requested an opportunity to speak at a public hearing. Therefore, no

public hearing was held. The regulations proposed by REG-209834-96 are

adopted with minor clarifications by this Treasury decision.

Explanation of Provisions

This document contains amendments to the Income Tax Regulations (26

CFR part 1) relating to the empowerment zone employment credit under

section 1396. Section 1396 was added to the Internal Revenue Code by

the Omnibus Budget Reconciliation Act of 1993 (OBRA '93). Section 1397D

of the Code authorizes the Secretary of the Treasury to prescribe

regulations that may be

[[Page 67727]]

necessary or appropriate to carry out the purposes of section 1396.

Section 1396 provides employers with a credit for certain wages

(qualified zone wages) paid or incurred by an employer for services

performed by a qualified zone employee. The amount of the empowerment

zone employment credit under section 1396 is equal to a specified

percentage of the qualified zone wages paid or incurred by the employer

during the calendar year that ends with or within the taxable year of

the employer. Questions have arisen about the definition of a

``qualified zone employee'' in section 1396(d). In particular,

questions have been raised about the appropriate period under section

1396(d)(1)(A) during which substantially all of the services performed

by an employee for his or her employer must be performed within an

empowerment zone in a trade or business of the employer.

Under the regulations, an employer may use either each pay period

of the calendar year or the entire calendar year as the relevant period

in determining whether a particular employee performed substantially

all of his or her services within an empowerment zone (the ``location-

of-services'' requirement). For each taxable year the employer must use

the same method for all its employees, but the employer may change

methods from one taxable year to the next. The description of the pay

period method has been revised slightly to clarify that the relevant

pay periods are those for the calendar year with respect to which the

credit is being claimed (i.e., the calendar year ending with or within

the employer's taxable year).

Special Analyses

It has been determined that this Treasury Decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It also has been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)

does not apply to these regulations, and because the regulation does

not impose a collection of information on small entities, the

Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.

Pursuant to section 7805(f) of the Internal Revenue Code, the notice of

proposed rulemaking preceding these regulations was submitted to the

Chief Counsel for Advocacy of the Small Business Administration for

comment on its impact on small business.

Drafting Information: The principal author of these regulations is

Robert G. Wheeler, Office of Associate Chief Counsel, Employee Benefits

and Exempt Organizations. However, other personnel from the IRS and

Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding

an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.1396-1 also issued under 26 U.S.C. 1397D.

Par. 2. A new undesignated center heading and Sec. 1.1396-1 are

added to read as follows:

Empowerment Zone Employment Credit

Sec. 1.1396-1 Qualified zone employees.

(a) In general. A qualified zone employee of an employer is an

employee who satisfies the location-of-services requirement and the

abode requirement with respect to the same empowerment zone and is not

otherwise excluded by section 1396(d).

(1) Location-of-services requirement. The location-of-services

requirement is satisfied if substantially all of the services performed

by the employee for the employer are performed in the empowerment zone

in a trade or business of the employer.

(2) Abode requirement. The abode requirement is satisfied if the

employee's principal place of abode while performing those services is

in the empowerment zone.

(b) Period for applying location-of-services requirement. In

applying the location-of-services requirement, an employer may use

either the pay period method described in paragraph (b)(1) of this

section or the calendar year method described in paragraph (b)(2) of

this section. For each taxable year of an employer, the employer must

either use the pay period method with respect to all of its employees

or use the calendar year method with respect to all of its employees.

The employer may change the method applied to all of its employees from

one taxable year to the next.

(1) Pay period method--(i) Relevant period. Under the pay period

method, the relevant period for applying the location-of-services

requirement is each pay period in which an employee provides services

to the employer during the calendar year with respect to which the

credit is being claimed (i.e., the calendar year that ends with or

within the relevant taxable year). If an employer has one pay period

for certain employees and a different pay period for other employees

(e.g., a weekly pay period for hourly wage employees and a bi-weekly

pay period for salaried employees), the pay period actually applicable

to a particular employee is the relevant pay period for that employee

under this method.

(ii) Application of method. Under this method, an employee does not

satisfy the location-of-services requirement during a pay period unless

substantially all of the services performed by the employee for the

employer during that pay period are performed within the empowerment

zone in a trade or business of the employer.

(2) Calendar year method--(i) Relevant period. Under the calendar

year method, the relevant period for an employee is the entire calendar

year with respect to which the credit is being claimed. However, for

any employee who is employed by the employer for less than the entire

calendar year, the relevant period is the portion of that calendar year

during which the employee is employed by the employer.

(ii) Application of method. Under this method, an employee does not

satisfy the location-of-services requirement during any part of a

calendar year unless substantially all of the services performed by the

employee for the employer during that calendar year (or, if the

employee is employed by the employer for less than the entire calendar

year, the portion of that calendar year during which the employee is

employed by the employer) are performed within the empowerment zone in

a trade or business of the employer.

(3) Examples. This paragraph (b) may be illustrated by the

following examples. In each example, the following assumptions apply.

The employees satisfy the abode requirement at all relevant times and

all services performed by the employees for their employer are

performed in a trade or business of the employer. The employees are not

precluded from being qualified zone employees by section 1396(d)(2)

(certain employees ineligible). No portion of the employees' wages is

precluded from being qualified zone wages by section 1396(c)(2) (only

first $15,000 of wages taken into account) or section 1396(c)(3)

(coordination with targeted jobs credit and work opportunity credit).

The examples are as follows:

[[Page 67728]]

Example 1. (i) Employer X has a weekly pay period for all its

employees. Employee A works for X throughout 1997. During each of

the first 20 weekly pay periods in 1997, substantially all of A's

work for X is performed within the empowerment zone in which A

resides. A also works in the zone at various times during the rest

of the year, but there is no other pay period in which substantially

all of A's work for X is performed within the empowerment zone.

Employer X uses the pay period method.

(ii) For each of the first 20 pay periods of 1997, A is a

qualified zone employee, all of A's wages from X are qualified zone

wages, and X may claim the empowerment zone employment credit with

respect to those wages. X cannot claim the credit with respect to

any of A's wages for the rest of 1997.

Example 2. (i) Employer Y has a weekly pay period for its

factory workers and a bi-weekly pay period for its office workers.

Employee B works for Y in various factories and Employee C works for

Y in various offices. Employer Y uses the pay period method.

(ii) Y must use B's weekly pay periods to determine the periods

(if any) in which B is a qualified zone employee. Y may claim the

empowerment zone employment credit with respect to B's wages only

for the weekly pay periods for which B is a qualified zone employee,

because those are B's only wages that are qualified zone wages. Y

must use C's bi-weekly pay periods to determine the periods (if any)

in which C is a qualified zone employee. Y may claim the credit with

respect to C's wages only for the bi-weekly pay periods for which C

is a qualified zone employee, because those are C's only wages that

are qualified zone wages.

Example 3. (i) Employees D and E work for Employer Z throughout

1997. Although some of D's work for Z in 1997 is performed outside

the empowerment zone in which D resides, substantially all of it is

performed within that empowerment zone. E's work for Z is performed

within the empowerment zone in which E resides for several weeks of

1997 but outside the zone for the rest of the year so that, viewed

on an annual basis, E's work is not substantially all performed

within the empowerment zone. Employer Z uses the calendar year

method.

(ii) D is a qualified zone employee for the entire year, all of

D's 1997 wages from Z are qualified zone wages, and Z may claim the

empowerment zone employment credit with respect to all of those

wages, including the portion attributable to work outside the zone.

Under the calendar year method, E is not a qualified zone employee

for any part of 1997, none of E's 1997 wages are qualified zone

wages, and Z cannot claim any empowerment zone employment credit

with respect to E's wages for 1997. Z cannot use the calendar year

method for D and the pay period method for E because Z must use the

same method for all employees. For 1998, however, Z can switch to

the pay period method for E if Z also switches to the pay period

method for D and all of Z's other employees.

(c) Effective date. This section applies with respect to wages paid

or incurred on or after December 21, 1994.

Dated: December 11, 1997.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

Approved:

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

[FR Doc. 97-33645 Filed 12-29-97; 8:45 am]

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