Title 26 — Internal Revenue CodeRelease 119-73
§1397C Enterprise zone business defined
Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 1— - NORMAL TAXES AND SURTAXES › Subchapter Subchapter U— - Designation and Treatment of Empowerment Zones, Enterprise Communities, and Rural Development Investment Areas › Part PART III— - ADDITIONAL INCENTIVES FOR EMPOWERMENT ZONES › Subpart Subpart D— - General Provisions › § 1397C
Summary
Defines what counts as an enterprise zone business for tax purposes. An enterprise zone business must be either a qualified business entity (a corporation or partnership) or a qualified proprietorship (a sole owner). To qualify, the business must mainly do active business inside an empowerment zone. At least 50% of its gross income must come from that active business. A large share of its physical property, its intangible assets, and the services its employees perform must be used in the zone. At least 35% of its employees must live in the zone. Less than 5% of its average asset base can be collectibles (unless held mainly for sale) and less than 5% can be nonqualified financial property. Nonqualified financial property includes debt, stock, partnership interests, options, futures, warrants, annuities, and similar items, but not reasonable working capital in cash or short-term debt (18 months or less) or certain debt items under section 1221(a)(4). Rental rules, exclusions for holding intangibles for sale, certain facilities, and some farming businesses are handled by special tests. If a business uses property both inside and outside the zone, and the zone property is substantial and contiguous to the outside property, special rules apply.
Full Legal Text
Title 26, §1397C
Internal Revenue Code — Source: USLM XML via OLRC
(a)For purposes of this part, the term “enterprise zone business” means—
(1)any qualified business entity, and
(2)any qualified proprietorship.
(b)For purposes of this section, the term “qualified business entity” means, with respect to any taxable year, any corporation or partnership if for such year—
(1)every trade or business of such entity is the active conduct of a qualified business within an empowerment zone,
(2)at least 50 percent of the total gross income of such entity is derived from the active conduct of such business,
(3)a substantial portion of the use of the tangible property of such entity (whether owned or leased) is within an empowerment zone,
(4)a substantial portion of the intangible property of such entity is used in the active conduct of any such business,
(5)a substantial portion of the services performed for such entity by its employees are performed in an empowerment zone,
(6)at least 35 percent of its employees are residents of an empowerment zone,
(7)less than 5 percent of the average of the aggregate unadjusted bases of the property of such entity is attributable to collectibles (as defined in section 408(m)(2)) other than collectibles that are held primarily for sale to customers in the ordinary course of such business, and
(8)less than 5 percent of the average of the aggregate unadjusted bases of the property of such entity is attributable to nonqualified financial property.
(c)For purposes of this section, the term “qualified proprietorship” means, with respect to any taxable year, any qualified business carried on by an individual as a proprietorship if for such year—
(1)at least 50 percent of the total gross income of such individual from such business is derived from the active conduct of such business in an empowerment zone,
(2)a substantial portion of the use of the tangible property of such individual in such business (whether owned or leased) is within an empowerment zone,
(3)a substantial portion of the intangible property of such business is used in the active conduct of such business,
(4)a substantial portion of the services performed for such individual in such business by employees of such business are performed in an empowerment zone,
(5)at least 35 percent of such employees are residents of an empowerment zone,
(6)less than 5 percent of the average of the aggregate unadjusted bases of the property of such individual which is used in such business is attributable to collectibles (as defined in section 408(m)(2)) other than collectibles that are held primarily for sale to customers in the ordinary course of such business, and
(7)less than 5 percent of the average of the aggregate unadjusted bases of the property of such individual which is used in such business is attributable to nonqualified financial property.
(d)For purposes of this section—
(1)Except as otherwise provided in this subsection, the term “qualified business” means any trade or business.
(2)The rental to others of real property located in an empowerment zone shall be treated as a qualified business if and only if—
(A)the property is not residential rental property (as defined in section 168(e)(2)), and
(B)at least 50 percent of the gross rental income from the real property is from enterprise zone businesses.
(3)The rental to others of tangible personal property shall be treated as a qualified business if and only if at least 50 percent of the rental of such property is by enterprise zone businesses or by residents of an empowerment zone.
(4)The term “qualified business” shall not include any trade or business consisting predominantly of the development or holding of intangibles for sale or license.
(5)The term “qualified business” shall not include—
(A)any trade or business consisting of the operation of any facility described in section 144(c)(6)(B), and
(B)any trade or business the principal activity of which is farming (within the meaning of subparagraph (A) or (B) of section 2032A(e)(5)), but only if, as of the close of the taxable year, the sum of—
(i)the aggregate unadjusted bases (or, if greater, the fair market value) of the assets owned by the taxpayer which are used in such a trade or business, and
(ii)the aggregate value of assets leased by the taxpayer which are used in such a trade or business,
(e)For purposes of this section, the term “nonqualified financial property” means debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, annuities, and other similar property specified in regulations; except that such term shall not include—
(1)reasonable amounts of working capital held in cash, cash equivalents, or debt instruments with a term of 18 months or less, or
(2)debt instruments described in section 1221(a)(4).
(f)For purposes of this section, if—
(1)a business entity or proprietorship uses real property located within an empowerment zone,
(2)the business entity or proprietorship also uses real property located outside the empowerment zone,
(3)the amount of real property described in paragraph (1) is substantial compared to the amount of real property described in paragraph (2), and
(4)the real property described in paragraph (2) is contiguous to part or all of the real property described in paragraph (1),
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Prior Provisions
A prior section 1397C was renumbered section 1397D of this title.
Amendments
2018—Subsec. (d)(5)(B). Pub. L. 115–141 substituted “subparagraph (A) or (B)” for “subparagraphs (A) or (B)” in introductory provisions. 2000—Pub. L. 106–554 renumbered section 1397B of this title as this section. 1999—Subsec. (e)(2). Pub. L. 106–170 substituted “section 1221(a)(4)” for “section 1221(4)”. 1997—Subsec. (b)(2). Pub. L. 105–34, § 956(a)(1), substituted “50 percent” for “80 percent”. Subsec. (b)(3). Pub. L. 105–34, § 956(a)(2), substituted “a substantial portion” for “substantially all”. Subsec. (b)(4). Pub. L. 105–34, § 956(a)(2), (3), substituted “a substantial portion” for “substantially all” and struck out “, and exclusively related to,” after “entity is used in”. Subsec. (b)(5). Pub. L. 105–34, § 956(a)(2), substituted “a substantial portion” for “substantially all”. Subsec. (c)(1). Pub. L. 105–34, § 956(a)(1), substituted “50 percent” for “80 percent”. Subsec. (c)(2). Pub. L. 105–34, § 956(a)(2), substituted “a substantial portion” for “substantially all”. Subsec. (c)(3). Pub. L. 105–34, § 956(a)(2), (3), substituted “a substantial portion” for “substantially all” and struck out “, and exclusively related to,” after “business is used in”. Subsec. (c)(4). Pub. L. 105–34, § 956(a)(2), substituted “a substantial portion” for “substantially all”. Subsec. (d)(2). Pub. L. 105–34, § 956(a)(4), inserted concluding provisions. Subsec. (d)(3). Pub. L. 105–34, § 956(a)(5), substituted “at least 50 percent” for “substantially all”. Subsec. (f). Pub. L. 105–34, § 956(a)(6), added subsec. (f). 1996—Subsec. (d)(5)(B). Pub. L. 104–188 struck out “preceding” before “taxable year” in introductory provisions.
Statutory Notes and Related Subsidiaries
Effective Date
of 1999 AmendmentAmendment by Pub. L. 106–170 applicable to any instrument held, acquired, or entered into, any transaction entered into, and supplies held or acquired on or after Dec. 17, 1999, see section 532(d) of Pub. L. 106–170, set out as a note under section 170 of this title.
Effective Date
of 1997 Amendment Pub. L. 105–34, title IX, § 956(b), Aug. 5, 1997, 111 Stat. 891, provided that: “(1) In general.—The
Amendments
made by this section [amending this section] shall apply to taxable years beginning on or after the date of the enactment of this Act [Aug. 5, 1997]. “(2) Special rule for enterprise zone facility bonds.—For purposes of section 1394(b) of the Internal Revenue Code of 1986, the
Amendments
made by this section shall apply to obligations issued after the date of the enactment of this Act.”
Effective Date
of 1996 AmendmentAmendment by Pub. L. 104–188 effective as if included in the provision of the Revenue Reconciliation Act of 1993, Pub. L. 103–66, §§ 13001–13444, to which such amendment relates, see section 1703(o) of Pub. L. 104–188, set out as a note under section 39 of this title.
Reference
Citations & Metadata
Citation
26 U.S.C. § 1397C
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73