At the end of 2015, President Obama signed into law the Omnibus Spending Bill H.R. 2029 and the PATH Act (Protecting Americans from Tax Hikes Act of 2015), which gave businesses a significant opportunity to benefit from a variety of major federal tax incentives to implement various hiring, training, and investing practices.
The Work Opportunity Tax Credit (WOTC) is designed to encourage employers to hire and retain individuals from various target groups, including veterans of war, welfare recipients, and the newly added “long-term unemployed” category, among others. Extended for five years through 2019, this program enables businesses to qualify for a tax credit of up to $9,600 per eligible employee for the first year of employment.
The Federal Empowerment Zone Employment Credit provides businesses with an incentive to hire employees who live and work around “empowerment zones”—designated distressed urban and rural areas that face serious employment problems. Through the end of 2016, businesses may be eligible for an employment credit of up to $3,000 per eligible employee hired in an empowerment zone.
The Employer Wage Credit for Employees Who Are Active Duty Members of the Uniformed Services expands PATH Act tax credit qualification—namely, a tax credit of 20 percent of differential wages paid to each qualified employee who has been called to active duty, up to a maximum of a $4,000 credit per qualified employee—to any sized business that employ members of the uniformed services. The PATH Act also makes this particular tax credit permanent.
The Indian Employment Credit offers employers a credit based on the first $20,000 of qualified wages and health benefits they pay to eligible employees who are enrolled members of an Indian tribe (or whose spouse is an enrolled member of an Indian tribe), who live on or near an Indian reservation and work on the reservation. This credit is extended through the end of 2016, and businesses can receive up to $4,000 per eligible employee to whom they have paid wages and health benefits.
The extension of these various tax credits and incentives are welcome news for businesses, says said Jeanne Madden, vice president, tax credits for ADP, a provider of human resources, benefits, payroll, and compliance services. But they also add further complexity to an already complicated tax credit landscape in which businesses might miss out on opportunities or run afoul of failing to abide by new and changing rules.
Case in point: the WOTC. Madden notes that there is a pretty big compliance baked into that, since it got a five-year renewal, yes, but it also got a notice from the Internal Revenue Service that provides employers relief for anybody who was hired starting on Jan. 1, 2015, through May 31, 2016. This provides employers relief from typical filing requirements to screen applicants prior to offering them a job.
This particular provision is big, Madden says. It’s unprecedented for the IRS to go back and then go forward on a particular requirement, but now we are in a place where there is a 17-month window in which employers are relieved of that requirement. What it means is that if a business did not previously participate in the WOTC, now it can by screening for eligible employees all the way back to the beginning of 2015. That window is about to close, however, as time is swiftly running out. After that, the old rules—which state that employers looking to take advantage of the WOTC must screen employees for eligibility before making a job offer to them and once hired, submit paperwork to that effect within 28 days of the start date—come back into force. If you’re a compliance officer and want to something with the WOTC, Madden says, it is important to understand this distinction right now.
More broadly, Madden notes that there are hundreds of state and federal tax incentive programs, and that WOTC is just a particularly large one. Within the context of these programs in general, chief compliance officers need to be aware of how each program has separate requirements, and those requirements often vary widely from one another. The key thing is to stay on top of the requirements associated with tax credits to prevent a situation where improper compliance might jeopardize that credit (either by failing to qualify or by running afoul of clawback provisions). As with most tax programming, compliance is easier said than done.
Something else to consider is that many employers do not realize, especially when they get into areas involving negotiated incentives, is that there may be benefits accidentally left on the table. Imagine, for example, a company applying for an economic development incentive that hinges in hiring a certain number of people from a certain area. Normally, that tax credit might apply against state tax liability, but some jurisdictions, Madden says, may be open for negotiation with employers to apply that credit against withholding tax because the business is not expecting any state tax liability for the next five years. That is the kind of situation where a good chief compliance officer, chief financial officer, and tax manager can put their heads together, put their ears to the ground, and talk to people who understand the fine points of the program. In this example, Madden says, the company may have tax credits to take advantage of, but only if they knew enough to actually take those credits. There might be an opportunity to negotiate with the county or state to use those credits against payroll withholding and get an immediate benefit.
The devil is in the details, but when it comes to tax credit programs, it’s nothing but details.
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