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Employee Expense Credit/Employee Wage Deduction

Frequently Asked Questions

 

 

Zone Technical Assistance
LUEA staff provides assistance to participating zone business in issues such as zone taxes and filings, grant applications such as brownfield assessment and property information to name a few. Contact LUEA for details.


 

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?

What is the Employee Expense Credit?

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).  

I own a business in an enterprise zone, what must I do to receive the credit?

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.

What is a qualified increased employment expenditure?

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. 

How are base period wages determined?

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).

What is a qualified employee?

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.

What is a qualified state tax liability?

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.

What is a pass through entity?

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.

Must I be in business for a certain period of time before I can take the credit?

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.

How can I determine if my business is in an 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.

How can I determine if my employees live 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.

My credit is greater than my qualified state tax liability for the tax year, what may I do with my unused credit?

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.

What if the enterprise zone terminates?

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.

What forms must I fill out? 

Enterprise Zone Business Registration Form (EZB-R)

Enterprise Zone Qualified Employee Deduction Certificate (IT-40QEC)

Indiana Schedule EZ

Where can I obtain the forms?

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? 

Employee Wage Deduction

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. 

What is a qualified employee?

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.

What is a pass through entity?

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.

How long must an employee be a resident of the zone to receive the deduction?

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.

How can I determine if I live or work in an 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.

How do I claim the deduction?

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.

How do I calculate my applicable wages for deduction?

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.

How much tax can I save?

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).

Do I need to work for a certain type of employer?

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.

Must my employer be in business for a certain period of time before I can take the deduction?

No.  There is no length of operation requirement.

What if the enterprise zone terminates?

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.

Must I register with the state or local urban enterprise association in order to receive the deduction?

No. Employees are not required to register or pay fees with the state or local urban enterprise associations to receive a tax deduction.

     

 

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Lafayette Urban Enterprise Association
Greater Lafayette Commerce | P.O. Box 348 | 337 Columbia Street | Lafayette, IN 47902-0348
phone: 765.742.4044 | fax: 765.742.6276 | e-mail: info@luea.org

 

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