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Title 26 — Internal Revenue CodeRelease 119-73not60

§1397C Enterprise Zone Business Defined

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 D— General Provisions › § 1397C

Last updated Apr 5, 2026|Official source

Summary

Defines which businesses count as an enterprise zone business for tax purposes. Two kinds qualify: a qualified business entity (a corporation or partnership) and a qualified proprietorship (a sole owner). For a corporation or partnership to qualify in a year, all its businesses must be active in an empowerment zone, at least 50% of its gross income must come from those zone businesses, a significant share of its physical and intangible property and of employee work must be used or done in the zone, at least 35% of its workers must live in the zone, and less than 5% of its average asset base can be collectibles (unless held for sale) or “nonqualified financial property.” The rules for a sole proprietor are the same but apply to the individual’s business income, property, and employees. A “qualified business” is usually any trade or business, but rental real estate counts only if it is not residential and at least 50% of rental income comes from enterprise zone businesses; renting tangible personal property counts only if at least 50% of the rentals go to zone businesses or zone residents. Businesses that mainly develop or hold intangibles to sell or license, certain listed facilities, and some farming activities are excluded. “Nonqualified financial property” means things like debt, stock, partnership interests, options, futures, forward contracts, warrants, notional principal contracts, annuities, and similar items, except reasonable working capital held as cash or short-term debt (18 months or less) and certain debt instruments described in section 1221(a)(4).

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 5, 2026

Release point: 119-73not60