| The work opportunity tax credit (WOTC) has been in existence for years; however, the Small Business and Work Opportunity Tax Act of 2007, P.L. 110-28 (SBWOTA), expanded the definition of some of the target groups, creating tax incentives that will affect more clients than originally expected. SBWOTA expanded the definition of qualified veteran to include certain disabled veterans and broadened the definition of a targeted group of high-risk youths, now referred to as designated community residents (DCRs). The changes are effective for employees hired after May 25, 2007, and the WOTC will now sunset after Aug. 31, 2011. SBWOTA also permits individuals and corporations to claim the WOTC against the alternative minimum tax for tax years beginning after Dec. 31, 2006. A qualified veteran now includes a person entitled to compensation for a service-connected disability who is hired not more than one year after a discharge or release from active duty in the U.S. armed forces or whose aggregate periods of unemployment during the one-year period ending on the hiring date equal or exceed six months. A DCR is defined as someone who is at least 18 years of age, but not yet 40, on the hiring date and who has qualified wages for services performed while his or her principal place of abode is within an empowerment zone, enterprise community, renewal community, or rural renewal county. RURAL RENEWAL COUNTIES
The rural renewal county is a new qualifying area added to the WOTC. It is defined as any county outside a metropolitan statistical area that had a net population loss during the periods 1990–1994 and 1995–1999. This definition includes 408 counties, covering 32 states and approximately 13% of all U.S. counties. The instructions to Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit , list all the rural renewal counties. Employees must be certified by a designated local agency as being members of a targeted group for their employer to claim the WOTC. Employers must make a written request to their state work force agency for certification within 28 days of the hire. To apply for WOTC certification, employers must complete Form 8850. On receipt, the state WOTC coordinator for the work force agency must certify the job applicant as a member of the targeted group. Once this step is complete, the employee must meet the minimum number-of-hours-worked requirement (400 hours for maximum credit and 120–399 hours for partial credit). MAXIMUM CREDIT DEFINED
TThe maximum credit is 40% of an employee’s qualified first-year wages, limited to $2,400 per employee; the partial credit rate is 25%, limited to $1,500 per employee. Employers can claim the credit by filing Form 5884, Work Opportunity Credit , with their annual income tax returns. Clients should be educated now so they do not miss out on the credit for future eligible hires. Employees hired after May 25, 2007, are eligible; but because employees need to be certified, employers must know the rules from the beginning of the hiring process to qualify.
For a detailed discussion of the issues in this area, see “The WOTC Expanded,” by Heather Leggiero, CPA, J.D., in the November 2007 issue of The Tax Adviser. —Alistair M. Nevius, editor-in-chief
The Tax Adviser |
