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 |