Form 8844: Empowerment Zone Employment Credit
Empowerment Zone Employment Credit is a tax incentive offered by the Internal Revenue Service (IRS) to businesses operating in designated Empowerment Zones (EZs). These zones are typically low-income urban or rural communities where the government aims to stimulate economic growth. Businesses located in these zones can claim a credit against their federal income tax liability for wages paid to qualified employees.
What is Form 8844?
Form 8844 is an official Internal Revenue Service (IRS) document used by businesses to claim the Empowerment Zone Employment Credit. This credit reduces a company's tax liability for wages paid to qualified employees working within designated Empowerment Zones (EZs).
Who can use Form 8844?
Partnerships and S corporations: These business entities must file Form 8844 to claim the credit.
C corporations and individuals: They generally don't need to file Form 8844 if their only source of the credit is from a partnership, S corporation, estate, trust, or cooperative. Instead, they can report the credit directly on Form 3800, General Business Credit.
Who CAN NOT Use Form 8844?
C Corporations: Traditional corporations that pay income tax separately from their shareholders. They report the credit directly on Form 3800, General Business Credit.
Individuals: Individual taxpayers cannot directly claim the EZEC on their personal tax returns.
Key Points about the Empowerment Zone Employment Credit
Credit Amount: 20% of the first $15,000 of annual qualified zone wages paid to a qualified zone employee.
Empowerment Zone Designation: The IRS designates specific areas as EZs. You can find a list of designated zones on the IRS website https://www.irs.gov/forms-pubs/about-form-8844. The designation is currently extended until December 31, 2025.
Qualified Zone Employee: An employee who lives and works within a designated EZ for more than half of the wages earned.
Qualified Zone Wages: Wages paid for services performed by a qualified zone employee within the designated EZ.
How to File Form 8844?
Step 1: Gather all necessary documentation, including wage records and employee residency information.
Step 2: Download the latest version of Form 8844 and its instructions attached below.
Step 3: Carefully complete the form following the instructions.
Step 4: Attach the completed form to your tax return.
How do I know if my business is located in an Empowerment Zone?
You can find a list of designated Empowerment Zones on the IRS website or by contacting your local economic development agency.
Are there any limitations on how I can use the credit?
Yes, the credit cannot reduce your tax liability to less than zero. Any unused credit may be carried forward to future tax years, subject to certain limitations.
Can I claim the credit if I'm a sole proprietor or a C corporation?
Generally, no. Sole proprietors and C corporations report the credit directly on Form 3800 if their only source for the credit is from a partnership, S corporation, estate, trust, or cooperative.
How long are empowerment zones designated?
Thanks to recent legislation, most empowerment zones have an extended designation period until December 31, 2025.
What documentation do I need to support my claim?
You'll likely need proof of residency for qualified zone employees and verification of your business location within the empowerment zone.
How does the credit affect my wage deductions?
The amount of the credit claimed on Form 8844 reduces your deduction for salaries and wages and certain educational and training expenses.