[Federal Register Volume 62, Number 249 (Tuesday, December 30, 1997)]
[Rules and Regulations]
[Pages 67726-67728]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33645]
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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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