Title 26 — Internal Revenue CodeRelease 119-73
§1396 Empowerment Zone Employment Credit
Title 26 › Subtitle Subtitle A— Income Taxes › Chapter 1— NORMAL TAXES AND SURTAXES › Subchapter U— Designation and Treatment of Empowerment Zones, Enterprise Communities, and Rural Development Investment Areas › Part III— ADDITIONAL INCENTIVES FOR EMPOWERMENT ZONES › Subpart A— Empowerment Zone Employment Credit › § 1396
Summary
Employers in designated empowerment zones — distressed areas picked for economic revitalization — can claim a tax credit equal to 20 percent of qualified zone wages paid during the year. Only the first $15,000 of wages per employee per calendar year counts toward the credit, and that $15,000 cap is reduced by any wages already used for the work opportunity credit under section 51. To be a qualified zone employee, the worker must perform substantially all of their services for the employer inside the zone and also live in the zone. Certain workers do not count: individuals related to the employer, 5-percent owners, anyone employed less than 90 days (with exceptions when the worker became disabled or was fired for misconduct), workers at certain excluded facilities, and most employees of farming businesses.
Full Legal Text
Title 26, §1396
Internal Revenue Code — Source: USLM XML via OLRC
(a)For purposes of section 38, the amount of the empowerment zone employment credit determined under this section with respect to any employer for any taxable year is the applicable percentage of the qualified zone wages paid or incurred during the calendar year which ends with or within such taxable year.
(b)For purposes of this section, the applicable percentage is 20 percent.
(c)(1)For purposes of this section, the term “qualified zone wages” means any wages paid or incurred by an employer for services performed by an employee while such employee is a qualified zone employee.
(2)With respect to each qualified zone employee, the amount of qualified zone wages which may be taken into account for a calendar year shall not exceed $15,000.
(3)(A)The term “qualified zone wages” shall not include wages taken into account in determining the credit under section 51.
(B)The $15,000 amount in paragraph (2) shall be reduced for any calendar year by the amount of wages paid or incurred during such year which are taken into account in determining the credit under section 51.
(d)For purposes of this section—
(1)Except as otherwise provided in this subsection, the term “qualified zone employee” means, with respect to any period, any employee of an employer if—
(A)substantially all of the services performed during such period by such employee for such employer are performed within an empowerment zone in a trade or business of the employer, and
(B)the principal place of abode of such employee while performing such services is within such empowerment zone.
(2)The term “qualified zone employee” shall not include—
(A)any individual described in subparagraph (A), (B), or (C) of section 51(i)(1),
(B)any 5-percent owner (as defined in section 416(i)(1)(B)),
(C)any individual employed by the employer for less than 90 days,
(D)any individual employed by the employer at any facility described in section 144(c)(6)(B), and
(E)any individual employed by the employer in a 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 employer which are used in such a trade or business, and
(ii)the aggregate value of assets leased by the employer which are used in such a trade or business (as determined under regulations prescribed by the Secretary),
(3)(A)Paragraph (2)(C) shall not apply to—
(i)a termination of employment of an individual who before the close of the period referred to in paragraph (2)(C) becomes disabled to perform the services of such employment unless such disability is removed before the close of such period and the taxpayer fails to offer reemployment to such individual, or
(ii)a termination of employment of an individual if it is determined under the applicable State unemployment compensation law that the termination was due to the misconduct of such individual.
(B)For purposes of paragraph (2)(C), the employment relationship between the taxpayer and an employee shall not be treated as terminated—
(i)by a transaction to which section 381(a) applies if the employee continues to be employed by the acquiring corporation, or
(ii)by reason of a mere change in the form of conducting the trade or business of the taxpayer if the employee continues to be employed in such trade or business and the taxpayer retains a substantial interest in such trade or business.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
References in Text
The Taxpayer Relief Act of 1997, referred to in subsec. (b)(2), is Pub. L. 105–34, Aug. 5, 1997, 111 Stat. 788. For complete classification of this Act to the Code, see Tables.
Prior Provisions
A prior section 1396, added Pub. L. 95–600, title VI, § 601(a), Nov. 6, 1978, 92 Stat. 2895; amended Pub. L. 96–595, § 3(a)(6), (9), (10), Dec. 24, 1980, 94 Stat. 3465, related to minimum distributions by an electing general stock ownership corporation, prior to repeal by Pub. L. 99–514, title XIII, § 1303(a), Oct. 22, 1986, 100 Stat. 2658.
Amendments
2000—Subsec. (b). Pub. L. 106–554, § 1(a)(7) [title I, § 113(a)], amended subsec. (b) generally, substituting provisions establishing an applicable percentage of 20 percent for provisions setting out tables for determining the applicable percentage. Subsec. (e). Pub. L. 106–554, § 1(a)(7) [title I, § 113(b)], struck out heading and text of subsec. (e). Text read as follows: “This section shall be applied without regard to any empowerment zone designated under section 1391(g).” 1997—Subsec. (b). Pub. L. 105–34 substituted “For purposes of this section— “(1) In general.—Except as provided in paragraph (2), the term ‘applicable percentage’ means the percentage determined in accordance with the following table:” for “For purposes of this section, the term ‘applicable percentage’ means the percentage determined in accordance with the following table:” and added par. (2). Subsec. (e). Pub. L. 105–34, § 952(b), added subsec. (e). 1996—Subsec. (c)(3). Pub. L. 104–188 substituted “work opportunity credit” for “targeted jobs credit” in heading.
Statutory Notes and Related Subsidiaries
Effective Date
of 2000 Amendment Pub. L. 106–554, § 1(a)(7) [title I, § 113(d)], Dec. 21, 2000, 114 Stat. 2763, 2763A–601, provided that: “The
Amendments
made by this section [amending this section and section 1400 of this title] shall apply to wages paid or incurred after December 31, 2001.”
Effective Date
of 1997 AmendmentAmendment by section 951(b) of Pub. L. 105–34 effective Aug. 5, 1997, except that designations of new empowerment zones made pursuant to
Amendments
by section 951 of Pub. L. 105–34 to be made during 180-day period beginning Aug. 5, 1997, and no designation pursuant to such
Amendments
to take effect before Jan. 1, 2000, see section 951(c) of Pub. L. 105–34, set out as a note under section 1391 of this title.
Effective Date
of 1996 AmendmentAmendment by Pub. L. 104–188 applicable to individuals who begin work for the employer after Sept. 30, 1996, see section 1201(g) of Pub. L. 104–188, set out as a note under section 38 of this title.
Reference
Citations & Metadata
Citation
26 U.S.C. § 1396
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73