Employee Expense Credit
What is the Employee Expense Credit?
I own a business in the zone, what must I do to receive
the credit?
What is a qualified increased employment expenditure?
How are base period wages determined?
What is a qualified employee?
What is a qualified state tax liability?
What is a pass through entity?
Must I be in business for a certain period of time
before I can take the credit?
How can I determine if my business is in an enterprise
zone?
How can I determine if my employees live in the
enterprise zone?
My credit is greater than my qualified state tax
liability for the tax year, what may I do with my unused
credit?
What if the enterprise zone terminates?
What forms must I fill out?
Where can I obtain the forms?
Zone employers may earn tax credits
for employing zone residents. Credit is applied against
the taxpayer’s qualified state tax liability based on
wages paid to employees who live in the zone and work at
least 50 percent of the time in the zone on a job
related at least 90 percent of the time to the zone
facility. The annual employment expense tax credit is
the lesser of $1,500 multiplied by the number of
qualified employees or 10 percent of the increase in
wages paid to qualified employees in the tax year.
Example: If a taxpayer has 10
employees who each make $30,000 to equal $300,000 in
qualified wages and has base period wages of $280,000,
the taxpayer would be allowed to take the lesser of
$1,500 multiplied by the number of qualified employees
($15,000) or 10% of the increase in wages paid to
qualified employees ($2,000). The taxpayer would have a
credit of $2,000.
If the scenario remained the same
except the taxpayer had a base period wage of zero, the
taxpayer would have a credit of $15,000. This is the
lesser of $15,000 ($1500 x 10 employees) and $20,000
(10% of the increase in wages).
Businesses must register with the
Indiana Economic Development Corporation and their local
urban enterprise association by filing (postmarked) Form
EZB-R by June 1st of each year and paying a
participation fee. Businesses will need to complete
Form IT-20 and attach Indiana Schedule EZ, Part 2.
Qualified employees must be issued a Form IT-40QEC.
Qualified increased employment
expenditures means the following:
1)
For a taxpayer’s taxable year other than
the taxpayer’s taxable year in which the enterprise zone
is established, the amount by which qualified wages paid
or payable by the taxpayer during the taxable year to
qualified employees exceeds the taxpayer’s base period
wages.
Example: Base Period Wages = $20,000
Qualified Wages = $25,000
$25,000 - $20,000 = $5,000 (Qualified
Increase Employment Expenditure)
2)
For the taxpayer’s taxable year in which
the enterprise zone is established, the amount by which
qualified wages paid or payable by the taxpayer during
all of the full calendar months in the taxpayer’s
taxable year that succeed the date on which the
enterprise zone was established exceed the taxpayer’s
monthly base period wages multiplied by that same number
of full calendar months.
Example
1: Most enterprise zones are established on the first
day of January. If the enterprise zone is established
January 1, 1993 and the taxable year ends December 31,
1993, the qualified increase employment expenditure
would equal the amount by which the qualified wages paid
from January 1, 1992 through December 31, 1992 exceed
the taxpayer’s monthly base period wages multiplied by
the same number of calendar months, in this case twelve
months. If the base period wage is $24,000, the monthly
base period wage would be $2,000.
If we use
the qualified wage of $30,000 for the twelve month
period between January 1, 1993 and December 31, 1993 and
the monthly base period wage of $2,000, the qualified
increase employment expenditure for the year in which
the enterprise zone is established would be $6,000
($30,000 - $24,000 = $6,000).
Example
2: There are some enterprise zones that were not
established on January 1st. If the
enterprise zone is established February 1, 1993 and the
taxable year ends December 31, 1993, the qualified
increase employment expenditure would equal the amount
by which the qualified wages paid from February 1, 1992
through January 31, 1993 exceed the taxpayer’s monthly
base period wages multiplied by eleven months. (Monthly
base period wages = base period wages/12) If the base
period wage is $24,000, the monthly base period wage
would be $2,000.
If we use
the qualified wage of $30,000 for the eleven month
period between February 1, 1993 and December 31, 1993
and the monthly base period wage of $2,000, the
qualified increase employment expenditure for the year
in which the enterprise zone is established would be
$8,000 ($30,000 - $22,000 = $8,000).*
*This
example is for the Lafayette Enterprise Zone only.
1)
In the case of a taxpayer other than a
pass through entity, wages paid or payable by a taxpayer
to its employees during the year that ends on the last
day of the month that immediately precedes the month in
which an enterprise zone is established, to the extent
that the wages would have been qualified wages if the
enterprise zone had been in effect for that year. If
the taxpayer did not engage in an active trade or
business during that year in the area that is later
designated as an enterprise zone, then the base period
wages equal zero (0). If the taxpayer engages in an
active trade or business during only part of that year
in an area that is later designated as an enterprise
zone, then the department shall determine the amount of
base period wages.
Example:
If the enterprise zone was established February 1, 1993,
base period wages are determined by the qualified wages
paid to employees during the previous 12 months
(February 1, 1992 – January 31, 1993).
2)
In the case of a taxpayer that is a pass
through entity, base period wages equal zero (0).
A qualified employee means an
individual who is employed by a taxpayer, a pass through
entity, an employer exempt from adjusted gross income
tax (IC 6-3-1 through IC 6-3-7) under IC 6-3-2-2.8(3),
IC 6-3-2-2.8(4), or IC 6-3-2-2.8(5), a nonprofit entity,
the state, a political subdivision of the state, or the
United State Government and who:
1)
has a principal place of residence in the
enterprise zone;
2)
performs services for the taxpayer, the
employer, the nonprofit entity, the state, the political
subdivision, or the United State government, 90% of
which are directly related to:
A)
the conduct of the taxpayer’s or
employer’s trade or business; or
B)
the activities of the nonprofit entity,
the state, the political subdivision, or the United
State government;
that is
located in the enterprise zone; and
3)
performs at least 50% of the employee’s
service for the taxpayer or employer during the taxable
year in the enterprise zone.
A qualified state tax liability is
each taxpayer’s total income or financial institution
tax liability incurred under:
1)
IC 6-3-1 through IC 6-3-7 (state adjusted
gross income tax) with respect to enterprise zone
adjusted gross income;
2)
IC 27-1-18-2 (insurance premiums tax) with
respect to enterprise zone insurance premiums; and
3)
IC 6-5.5 (financial institutions tax)
as computed after the application
of the credits that, under IC 6-3.1-1-2, are to be
applied before this credit.
A pass through
entity may be a:
1)
corporation that is
exempt from adjusted gross income tax under IC
6-3-3-3.8;
2)
trust;
3)
limited liability
company; or
4)
limited liability
partnership.
Businesses must have been operating
in the zone during the year that the enterprise zone was
established, or in the added areas in the years the zone
was expanded, be a new business or, under certain
conditions relocate to the zone to qualify for zone
benefits.
Contact your local urban enterprise
association. You may obtain contact information for your
local urban enterprise association by visiting the
Association of Indiana Enterprise Zones at
www.aiez.org and clicking on membership directory.
Contact your local urban enterprise
association. You may obtain contact information for your
local urban enterprise association by visiting the
Association of Indiana Enterprise Zones at
www.aiez.org and clicking on membership directory.
The amount of the credit for a
taxable year may not exceed the taxpayer’s qualified
state tax liability for the taxable year and a taxpayer
is not entitled to a refund of any unused credit. The
excess may be carried back three (3) preceding taxable
years or carried over to ten (10) succeeding taxable
years. A credit earned by a taxpayer in a particular
taxable year must be applied against the taxpayer’s
qualified state tax liability for that taxable year
before any credit carryover or carryback is applied
against that liability.
If an enterprise zone terminates in
a taxable year that succeeds the last taxable year in
which a taxpayer is entitled to use the credit carryover
that results from excess credit, then the taxpayer may
use the credit carryover that results from any taxable
year up to an including the taxable year in which the
enterprise zone terminates.
Enterprise Zone Business Registration Form (EZB-R)
Enterprise Zone Qualified Employee Deduction Certificate
(IT-40QEC)
Indiana Schedule EZ
Taxpayers should contact their
local urban enterprise association to obtain an
electronic or hard copy of the appropriate forms.
Employee Wage Deduction
What is the Employee Wage Deduction?
What is a qualified employee?
What is a pass through entity?
How long must an employee be a resident of the zone to
receive the deduction?
How can I determine if I live or work in an enterprise
zone?
How do I claim the deduction?
How do I calculate my applicable wages for deduction?
How much tax can I save?
Do I need to work for a certain type of employer?
Must my employer be in business for a certain period of
time before I can take the deduction?
What if the enterprise zone terminates?
Must I register with the state or local urban enterprise
association in order to receive the credit?
A qualified employee living and
working in a designated enterprise zone may be entitled
to deduct from state adjusted gross income one-half
(1/2) of the enterprise zone income earned for services
or $7,500, whichever is less.
A qualified employee means an
individual who is employed by a taxpayer, a pass through
entity, an employer exempt from adjusted gross income
tax (IC 6-3-1 through IC 6-3-7) under IC 6-3-2-2.8(3),
IC 6-3-2-2.8(4), or IC 6-3-2-2.8(5), a nonprofit entity,
the state, a political subdivision of the state, or the
United State Government and who:
1)
has a principal place of residence in the
enterprise zone;
2)
performs services for the taxpayer, the
employer, the nonprofit entity, the state, the political
subdivision, or the United State government, 90% of
which are directly related to:
A)
the conduct of the taxpayer’s or
employer’s trade or business; or
B)
the activities of the nonprofit entity,
the state, the political subdivision, or the United
State government;
that is
located in the enterprise zone; and
3)
performs at least 50% of the employee’s
service for the taxpayer or employer during the taxable
year in the enterprise zone.
A pass through entity may be a:
1)
corporation that is exempt from adjusted
gross income tax under IC 6-3-3-3.8;
2)
trust;
3)
limited liability company; or
4)
limited liability partnership.
There is no length of residence
requirement. An individual qualifies for the deduction
the first day that the individual lives and works in the
enterprise zone.
Contact your local urban enterprise
association. You may obtain contact information for
your local urban enterprise association by visiting the
Association of Indiana Enterprise Zones at
www.aiez.org and clicking on membership directory.
Qualified employees may claim the
deduction by sending
Form IT-40QEC (completed by employer) with their
Indiana State tax return and entering the amount claimed
as “other” in deductions.
Wages earned while living and
working within the enterprise zone may be considered
enterprise zone income (applicable wages). Once
enterprise zone income has been determined, this amount
is divided in half. Qualified employees may deduct from
their state adjusted gross income one-half (1/2) of
their enterprise zone income (applicable wages) or
$7,500, whichever is less.
Example 1: You move into a
residence located within the enterprise zone on January
1, 2005 while working for a business outside of the
enterprise zone. On August 1, 2005, you take a job
within the enterprise zone. Although you live within
the zone, only those wages earned after August 1, 2005,
while living and working in the enterprise zone, are
applicable for the deduction. If you made $35,000 in
2005 with $14,000 earned after August 1, 2005, you would
take a deduction of $7,000 ($14,000/2 = $7,000).
Example 2: The same scenario, but
you earned $16,000 after August 1, 2005. Although half
of $16,000 is $8,000, your deduction may not exceed
$7,500. Therefore, you would only be able to take a
deduction of $7,500.
Currently, Indiana personal income
tax rate is 3.4%. The value of the deduction is the tax
rate multiplied by the qualified wages deducted.
Example: If the zone resident
employee qualifies for the maximum deduction and the
personal income tax rate is 3.4%, then tax savings to
the zone resident is $255 ($7,500 X .034 = $255).
A qualified employee must work for
a taxpayer, a pass through entity, an employer exempt
from adjusted gross income tax (IC 6-3-1 through IC
6-3-7) under IC 6-3-2-2.8(3), IC 6-3-2-2.8(4), or IC
6-3-2-2.8(5), a nonprofit entity, the state, a political
subdivision of the state, or the United States
government.
No. There is no length of
operation requirement.
No qualified employee is entitled
to a deduction for a taxable year that begins after the
termination of the enterprise zone in which that
individual resides.
No. Employees are not required to
register or pay fees with the state or local urban
enterprise associations to receive a tax deduction. |
