Work Opportunity Tax Credit and On-Boarding

The U.S. Department of Labor (DOL) and U.S. Department of Treasury, through the Internal Revenue Service (IRS), jointly administer the implementation of the WOTC program. DOL, through the Employment and Training Administration (ETA), provides grant funding and policy guidance to the State Workforce Development Agencies, also called State Workforce Agencies (SWA) to administer the certification process, while IRS administers all tax-related provisions and requirements. WOTC target groups include:

• Qualified IV-A recipients;
• Qualified veterans;
• Qualified ex-felons;
• Designated community residents;
• Vocational rehabilitation referrals;
• Recipients of SNAP benefits (food stamps);
• Supplemental Security Income (SSI) recipients;
• Long-term family assistance recipients; and
• Qualified Long-term unemployment recipients.

In funding for Fiscal Year (FY) 2017, SWAs received $18,485,000 to support the administration of WOTC, which includes the certification process and reporting data on a quarterly basis.

Those areas are particularly attractive considering these statistics:

• Among veterans, the unemployment rate was 4.1% in February 2016.
• Empowerment Zones (explained below) have at least a 20% unemployment rate.
• About 45.2 million Americans received nutrition aid from SNAP in December 2015.
• The unemployment rate among 16 to 19-year-olds was 15.5% in February 2016.

Pre-screening and Certification

In order to qualify for the tax credits, an employer must obtain certification that an individual is a member of the targeted group before the employer may claim the credit. An eligible employer must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their respective state workforce agency within 28 days after the eligible worker begins work. Employers should contact their individual state workforce agency with any specific processing questions for Forms 8850. (See the On Boarding Workflow, below)

Limitations on the Credits

The credit is limited to the amount of the business income tax liability or social security tax owed. For most target groups, you can receive the following tax credit:

• For employees who work at least 120 hours in a year, 25% of the employee's first-year wages, up to the maximum credit.
• For employees who work at least 400 hours in a year, 40% of the employee's first-year wages, up to the maximum credit.

The tax credit is different for Qualified Long-term Temporary Assistance for Needy Families (TANF) Recipients:

• For the first year, 40% of the first-year wages, up to the maximum credit, for employees who work at least 400 hours in a year.
• For the second year, 50% of the second-year wages, up to the maximum credit, for employees who work at least 400 hours, in a year.

The maximum credit you can get ranges from $1,200 to $9,600, depending on the employee.

A taxable business may apply the credit against its business income tax liability, and the normal carry-back and carry-forward rules apply. See the instructions for Form 3800, General Business Credit, for more details. For qualified tax-exempt organizations, the credit is limited to the amount of employer social security tax owed on wages paid to all employees for the period the credit is claimed.

Claiming the Credit

Qualified tax-exempt organizations will claim the credit on Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans, as a credit against the employer's share of Social Security tax. The credit will not affect the employer's Social Security tax liability reported on the organization's employment tax return.

Taxable Employers

After the required certification is secured, taxable employers claim the tax credit as a general business credit on Form 3800 against their income tax by filing the following:

• Form 5884 (with instructions);
• Form 3800 (with instructions); and
• Your business's related income tax return and instructions (e., Forms 1040, 1041, 1120, etc.).

Tax-Exempt Employers

Qualified tax-exempt organizations described in IRC Section 501(c) and exempt from taxation under IRC Section 501(a), may claim the credit for qualified veterans who begin work on or after Dec. 31, 2014, and before Jan. 1, 2020. After the required certification (Form 8850) is secured, tax-exempt employers claim the credit against the employer social security tax by separately filing Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans.

File Form 5884-C after filing the related employment tax return for the period that the credit is claimed. The IRS recommends that qualified tax-exempt employers do not reduce their required deposits in anticipation of any credit. The credit will not affect the employer's Social Security tax liability reported on the organization's employment tax return.

Company Benefits

Participating in credit programs like the WOTC program can minimize a company's tax liability and offset the high capital costs associated with new, expanding, or relocated business sites. These credits can also enhance cash flow to a business and can be used to offset the need for cutbacks and allow funding for other special projects. These credit programs can further allow the HR and tax departments to become revenue generating areas.

Employee Benefits

Employees can benefit from employment-based credits in several ways. For some individuals, gaining employment through the assistance of tax credit programs, like the WOTC, removes the need for assistance from government aid programs like the Temporary Assistance for Needy Families (TANF) or Supplemental Nutrition Assistance Program (SNAP). Because employment-based tax credits can help offset some of the costs of doing business, the credits can be used to fund special projects that benefit employees or perhaps even provide raises for many employees. Participating in federal and/or state employment-based tax credit programs can provide a win-win outcome for both employers and employees. Not only can your business benefit from reduced income tax liability thereby freeing income to spend on other projects, but your employees can benefit from gainful employment and/or special benefits funded by the tax savings generated from the participation of employment-based tax credit programs.

Opportunity Zones

The IRS has released regulations outlining the details of the new Opportunity Zone Program, which was created as part of the 2017 tax reform legislation. This new tax incentive program is intended to promote investments in certain economically distressed communities. Through the program, investors are able to inject capital into low-income communities and promote long-term economic growth through a variety of investment vehicles and, possibly, receive significant tax benefits.

What Is the Program?

Investors wishing to utilize the newly-enacted opportunity zone program must invest their gain from sales to unrelated parties into a Qualified Opportunity Zone Fund (QO Fund), which may be structured as a corporation or partnerships. In order to meet the criteria of a QO Fund, 90% of the assets held by the vehicle on the last day of the fund's taxable year (and the last day of the first six-month period of the fund's taxable year) must be qualified opportunity zone property (QOZ Property) within a QO Zone and the QO Fund must have acquired the property after Dec. 31, 2017.

QO Zones are population census tracts that are low-income communities and are specifically designated as QO Zones. For a census tract to be designated as a QO Zone, a low-income community must be identified and nominated by the Governor of the state (or territory) in which the community is located.

The QO Fund must invest capital in QO Zone Property, which can be QO Zone stock, QO Zone partnership interests, or qualified opportunity zone business property.

What Are the Tax Benefits?

Capital gain deferral or, possibly, exclusion from gross income. Capital gain is deferred and, ultimately, may be permanently excluded from gross income if certain requirements are met. Under the new law, any gain from the sale or exchange of property by a taxpayer to an unrelated person that is invested in a QO Fund, as defined below, within 180 days of the sale of that property is excluded from gross income until the earlier of the date the investment in the QO Fund is sold or Dec. 31, 2026. Moreover, for investments held for at least 10 years, the taxpayer will recognize no capital gain income on the appreciation of the asset from the time of the initial investment in the QO Zone through the sale of the investment.

Basis Boosts

The taxpayer's basis in the QO Fund initially is zero, but will be increased by 10% of the deferred gain if the investment is held for five years, and increased by an additional 5% if the investment is held for seven years. Therefore, if a gain on the sale of property is reinvested in a QO Fund within the required timeframe, taxpayers may be able to decrease the taxable portion of the originally deferred gain by 15% (an overall basis step-up of 15%).

For additional information about WOTC and eligible target groups, see, http://bit.ly/2HsLEar.

These programs are available for employers who wish to take advantage of the philosophical orientation to bring private capital into subject matter areas that have not been on the front burner since the 1970s and real estate opportunities in distressed areas for the underprivileged.

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Lawrence L. Bell, JD, LTM, CLU, ChFC, CFP®, AEP, a member of this newsletter's Board of Editors, has served as Tax Bar liaison to the IRS for 10 years. He has received patents in actuarial product fields dealing with COLI, GASB, FASB, IASB and OPEB solutions. To learn more, visit www.mycpo.net.