Back in December, President Obama signed two bills into law that extended an array of business tax credits and incentives that had previously expired. By signing the “Consolidated Appropriations Act of 2016” and the “Protecting Americans from Tax Hikes Act of 2015” (PATH Act), the President gave businesses across the country the opportunity to claim credits that relate to various hiring, training and investing practices they might already follow.
Capturing tax credits and incentives is an important contributor to an employer’s bottom line that can reduce a company’s overall tax rate and free capital for strategic business initiatives. Of the more than 50 tax benefits extended into 2016, a handful are particularly noteworthy in their potential relevance to a large number of U.S. businesses.
For example, one key credit extended into this year is the Work Opportunity Tax Credit (WOTC). This credit, which has been a boon to businesses in years past, is available to employers that hire and retain workers from certain target groups like veterans of war, welfare and food-stamp recipients and others. The extension of WOTC also now includes a new category of worker: the long-term unemployed who have been out of work for at least 27 consecutive weeks and have received unemployment compensation at a federal or state level for a period of time during their unemployment. Through the WOTC program, businesses can claim a tax credit of up to $9,600 per eligible employee for their first year of employment.
While recent legislation extended WOTC for five years, allowing businesses to claim this credit from 2015 through 2019, the IRS provided guidance and transition relief on March 7 that addresses how employers can claim this credit for members of the targeted groups hired between January 1, 2015 and May 31, 2016. Employers that hired workers during this time period who qualify for one of the WOTC categories – other than the long-term unemployed category, which went into effect January 1, 2016 – can claim this credit as long as they file Form 8850 with the IRS before the June 29, 2016 deadline. Employers who hire from the long-term employed target group after January 1, 2016 (but before May 31, 2016) can also take advantage of this transition relief.
Other opportunities businesses now have to claim tax credits based on specific hiring practices include the Indian Employment Credit and the Employer Wage Credit for Employees Who Are Active Duty Members of the Uniformed Services. The Indian Employment Credit, extended through December 31, 2016, is available to employers that have hired individuals who are enrolled members (or whose spouse is an enrolled member) of an Indian tribe, live on or near an Indian reservation and work on the reservation. This credit provides up to $4,000 to employers per eligible employee.
Similarly, the Wage Credit for Active Duty Members offers a credit of up to $4,000 per eligible employee who has been called to active duty. Extended indefinitely, this credit is now available to businesses of all sizes, rather than just those that employ fewer than 50 workers.
Another credit extended as a result of the legislation President Obama signed late last year includes the Federal Empowerment Zone Employment Credit. This credit offers incentives to businesses that hire employees who live and work in certain empowerment zones throughout the United States. Through December 31, 2016, businesses can claim up to $3,000 per qualified employee who resides in designated urban and rural areas like Baltimore and Detroit, among others. A full list of empowerment zones is available here.
All of these extended tax credits and incentives focus on encouraging employers to continue hiring and, ultimately, contribute to the country’s overall economic well-being. In addition, many of these programs offer incentives to encourage businesses to diversify their workforce.
Faced with a diverse and often complicated tax credits landscape, many businesses struggle to keep pace with ongoing legislative changes that affect the credits and incentives for which they are eligible from year to year. Given the important role tax credits play in the modern business model, employers would greatly benefit from investing in the latest technologies and advanced analytics to accompany their reporting processes and should consider enlisting a trusted service provider to help them track ongoing legislative updates and identify new tax credit opportunities.