Indiana Schedule EZ 123 is used by taxpayers doing business in an Indiana enterprise zone or airport development zone to calculate the Employment Expense Tax Credit and, when necessary, determine the amount of enterprise zone income tied to that credit. The schedule is designed for businesses that may have income both inside and outside the zone, non-business income that must be allocated, and credit amounts that may need to be limited by actual state tax liability. It combines three parts into one form: one part for apportioning business income to the zone, another for allocating non-business and non-unitary income, and a final section for computing the credit itself and tracking any unused credit carryover. Depending on the entity type, some sections may be required and others may be skipped, but the form as a whole helps determine how much of the employment-based credit can actually be used on an Indiana return. It can apply to individuals, corporations, nonprofits, financial institutions, S corporations, partnerships, and fiduciaries, although pass-through entities have some special rules. If you operate in more than one enterprise zone and the base years differ, you generally need a separate schedule for each zone.
How to Complete Indiana Schedule EZ 123
Heading Information
At the top of the form, enter the tax year ending month and year. Then fill in the taxpayer’s name and Federal Employer Identification Number in the spaces provided. You must also enter the location name of the enterprise zone or airport development zone connected to the credit. Next, check the box that matches the type of Indiana return the employer will file, such as the individual return, corporate return, nonprofit return, financial institution return, S corporation return, partnership return, or fiduciary return. Make sure the entity type selected matches the return where the credit will ultimately be claimed.
Part 1A: Determining Enterprise Zone Adjusted Gross Income
Part 1A is used to determine the percentage of business income attributable to the enterprise zone when the taxpayer has business activity both within and outside the zone. If the taxpayer is exempt from Indiana’s allocation and apportionment rules because all relevant business activity is treated as zone activity, then all income may be attributed to the zone and this calculation may not be needed. Otherwise, complete the receipts factor carefully.
Line 1a(1) asks for sales delivered or shipped to the enterprise zone from within the zone. Enter the amount in Column A.
Line 1a(2) asks for sales delivered or shipped to the enterprise zone from outside the zone. Enter the amount in Column A.
Line 1b(1) is for sales shipped from the zone to the United States government. Enter that amount in Column A.
Line 1b(2) is for certain sales shipped from the zone to locations outside a zone where the only activity consists of order solicitation, for tax years beginning before January 1, 2016. Enter the applicable amount in Column A if this rule applies.
Line 1c is for interest income and other receipts from extending credit that are attributed to the zone.
Line 1d is for other gross business receipts not already included above.
On Line 2, add the Column A amounts from lines 1a through 1d. Then enter all receipts from everywhere in Column B.
On Line 3, divide total receipts in Column A by total receipts in Column B and enter the percentage within the zone. Use a percentage rounded to two decimal places. This percentage is the apportionment figure carried into Part 2.
Part 1B: Allocated Non-Business And Non-Unitary Income
Part 1B is used when the taxpayer has non-business income or non-unitary partnership income that must be allocated between zone and everywhere amounts. This section uses Column A for sources within the zone and Column B for sources everywhere.
Line 1 is for dividends other than dividends from a DISC or FSC. Enter the allocable zone amount in Column A and the total amount from everywhere in Column B.
Line 2 is for interest income other than U.S. government interest. Enter the zone amount in Column A and the total amount in Column B.
Line 3 is for net capital gains or losses. Enter the amount attributable to the zone in Column A and the total amount in Column B.
Line 4 is for rents and royalties from tangible personal property. Enter the amount attributable to the zone in Column A and the total amount in Column B.
Line 5 is for patents, copyrights, and royalties from intangible property. Enter the amount attributable to the zone in Column A and the total amount in Column B.
Line 6 is for other non-business income. Enter the zone amount in Column A and the total amount in Column B. If this line includes unusual items, a separate explanation should be prepared and attached with the return.
Line 7 is for distributive share income from non-unitary partnerships and tiered partnerships. Enter the portion attributable to the zone in Column A and the total reported amount in Column B.
Line 8 is for related expenses connected with non-business income. Enter the applicable expense amount in both columns as appropriate.
Line 9 is the net non-business and non-unitary partnership or tiered income or loss. Add lines 1 through 7 and subtract line 8 for each column separately. The result in Column A represents zone non-business income, while the result in Column B represents total non-business income from all sources.
Certification Section
The certification section below the enterprise zone income sections must be completed by any taxpayer using Part 1 or Part 2. The signer certifies that the schedule has been examined and is true, correct, and complete. The signer also certifies that Indiana business activities were not substantially reduced for the purpose of relocating the business into an enterprise zone. Enter the signature, title, and date in the spaces provided. This section should be signed by someone authorized to sign the return.
Part 2: Enterprise Zone Employment Expense Tax Credit Calculation
Part 2 computes the actual employment expense credit and determines how much of it can be used in the current year.
On the description line for Line 1, enter the base period year. The base year depends on the specific enterprise zone, and pass-through entities generally use 1999.
Line 1a is for base period qualified wages. Enter the amount of base period wages paid. Pass-through entities enter zero on line 1a.
Line 1b is for current tax year qualified wages. Enter wages paid during the current year to qualified employees. For pass-through entities, include only wages paid during the current year to employees who otherwise qualify and were first employed after December 31, 1998.
Line 2 is the qualified increase. Subtract line 1a from line 1b.
Line 3 is 10% of the increase in wages. Multiply line 2 by 0.10.
Line 4 is based on the number of qualified employees. Multiply the number of qualified employees by $1,500. For pass-through entities, count only those qualified employees first employed after December 31, 1998.
Line 5 is the current year employment expense credit. Enter the lesser of line 3 or line 4.
Line 6 is current year federal adjusted gross income after Indiana modifications. Enter the taxpayer’s Indiana taxable income figure as instructed for the applicable return type. Taxpayers subject to insurance premium tax or financial institutions tax skip ahead to line 15. Pass-through entities with no tax liability also generally enter zero and continue to line 15.
Line 7 is non-business income from all sources. Enter the amount from Part 1B, line 9, Column B.
Line 8 is net taxable business income. Subtract line 7 from line 6.
Line 9 is the apportionment percentage from Part 1A, line 3 for the taxable year.
Line 10 is enterprise zone business income. Multiply line 8 by line 9.
Line 11 is non-business enterprise zone income. Enter the amount from Part 1B, line 9, Column A.
Line 12 is the enterprise zone net operating loss deduction. Enter the allowable zone portion of any net operating loss deduction used in the current year.
Line 13 is total enterprise zone adjusted gross income. Add line 10 and line 11, then subtract line 12.
Line 14 is enterprise zone adjusted gross income tax. Multiply line 13 by the appropriate tax rate for the taxpayer’s type and year.
Line 15 is qualified state tax liability. Enter the amount from line 14, or the applicable net financial institutions tax or insurance premium tax attributed to the zone. A pass-through entity with no tax liability enters zero.
Line 16 is the credit allowed this year. Enter the lesser of line 5, plus any applied carryover credit, or line 15. If line 15 is greater than line 5, available carryover from earlier years may be added, but only up to the remaining qualified state tax liability.
Line 17 is unused credit carryover. If line 5 exceeds line 15, enter the excess here and also report it in Part 3.
The amount on line 16 is the amount that is carried to the appropriate credit line on the annual Indiana return. If a pass-through entity has no tax liability, the pro rata share of the credit from line 5 is generally reported to the owners on the applicable owner statements.
Part 3: Employment Expense Tax Credit Carryover
Part 3 is used when the current year credit exceeds qualified state tax liability and some amount must be carried back or forward. It also serves as the running record of remaining credit.
In the Credit Carryback section, enter each applicable prior period ending date for the third preceding tax year, second preceding tax year, and first preceding tax year. For each year, enter the qualified tax liability applied and the remaining excess credit after that application.
In the Credit Carryforward section, do the same for the first following tax year through the tenth following tax year, listing the period ending, qualified tax liability applied, and remaining excess credit.
In the Year of Credit field, enter the year the excess credit originally arose.
In the Amount of Excess Credit from Part 2 field, enter the unused credit amount from Part 2.
In the Location Name of Enterprise Zone(s) field, enter the name of the relevant zone connected to the carryover.
A separate carryover schedule should generally be maintained for each credit year if multiple years of unused credit are involved. The credit is not refundable, so unused amounts may only be applied through the carryback and carryforward rules, subject to the qualified state tax liability limitation.
Key Rules To Remember
Only qualified employees count for the employment expense calculation, and the definition is strict. The employee generally must live in the zone, perform at least 90% of services directly related to the business conducted in the zone, and perform at least 50% of services for the taxpayer in the zone. Pass-through entities have additional restrictions on which employees may be counted. Government agencies and nonprofit organizations without unrelated tax liability generally are not eligible for this credit. Also, if you use either Part 1 or Part 2, do not forget the signature section, because the schedule includes a certification that must be completed.