Work Opportunity Tax Credit Update

The Work Opportunity Tax Credit (WOTC), a federal credit available to employers for hiring individuals from certain target groups, expired at the end of 2014. The 2015 Protecting Americans from Tax Hikes (PATH) Act extended the WOTC for four years to December 31, 2019 and targets an additional demographic: long-term unemployment recipients.

Previously, the WOTC didn’t apply to employees from the targeted groups hired after December 31, 2014. The December 2015 PATH Act retroactively reinstated the credit to January 1, 2015. Normally, certifications of employer qualification are to be received before hiring. As was the case with the 2014 retroactive reinstatement, we expect transition relief will be available for 2015 so employers will be able to obtain 2015 WOTC certifications for a limited period for hirings that occurred before the PATH Act was enacted.

How the WOTC Works

The tax credit employers can claim depends upon the target group of the individual hired, the wages paid to that individual in the first year of employment and the number of hours that individual worked. There is also a maximum tax credit that can be earned. For most target groups, the credit is available as follows:

• If the individual works at least 120 hours, the employer may claim a tax credit equal to 25% of the individual’s first year wages, up to the maximum tax credit.
• If the individual works at least 400 hours, the employer may claim a tax credit equal to 40% of the individual’s first year wages, up to the maximum tax credit.

Who Qualifies for the WOTC

Here is a list of targeted groups along with the maximum credit. Qualifications apply, so please contact your Miller Cooper representative for details.

• Veterans – ranges from $2,400 – $9,000
• Temporary Assistance to Needy Families (“TANF”) Recipients – ranges from $2,400 – $9,000
• SNAP (food stamp) Recipients – $2,400
• Vocational Rehabilitation Referrals – $2,400
• Ex-felons – $2,400
• Supplemental Security Income Recipients – $2,400
• Designated Community Residents (living in Empowerment Zones or Rural Renewal Counties) – $2,400
• Summer Youth Employees (living in Empowerment Zones) – $1,200
• Long-term Unemployment Recipients (post 2015 hires) – $2,400

Maximum Wages

Maximum wages are generally $6,000. Exceptions are as follows:

• TANF Recipients: Year 1 and Year 2 = $10,000
• Summer Youth Employees: $3,000
• Veterans:

• $12,000, if satisfies the compensation-for-disability requirement;
• $14,000, if satisfies the unemployed-for-six months-in-the-last-year requirement; and
• $24,000, if satisfies the compensation-for-disability requirement and the unemployed-for-six-months-requirement.

How to Claim the Credit

You must ask for, and be issued, a certification for each employee for the state employment security agency (SESA). The certification proves that the employee is a member of the targeted group. You must either:

• Receive the certification by the day the individual begins work; or
• Complete Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, on or before the day you offer the individual a job and receive the certification before you claim the credit.

For details on the WOTC or updates on transition deadlines, please contact us.

Important Tax Developments

The following is a summary of important tax developments that have occurred in the past three months that may affect you, your family, your investments and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

New tax legislation. While in the past, Congress has been chastised by some for being gridlocked, there was a flurry of new laws containing tax provisions in the last quarter of the year:

• The Protecting Americans from Tax Hikes Act retroactively extended 50 or so taxpayer-favorable tax “extenders”-temporary tax provisions. These provisions are routinely extended by Congress on a one- or two-year basis and had been expired since the end of 2014. It made permanent more than a dozen of the extenders (including the enhanced child tax credit, American opportunity tax credit and earned income tax credit; parity for exclusion from income for employer-provided mass transit and parking benefits; the deduction of state and local general sales taxes; the research credit; and 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements and qualified retail improvements). It also contained a delay in the Affordable Care Act’s 2.3% excise tax on medical devices and provisions on Real Estate Investment Trusts, IRS administration, the Tax Court and numerous other rules.
• The Consolidated Appropriations Act included a delay of the Affordable Care Act’s 40% excise tax on high cost employer-sponsored health coverage (i.e., the so-called “Cadillac” tax) and a one-year suspension of the annual fee on health insurance providers; in addition to the extension and phaseout of credits for wind facilities, the election to treat qualified facilities as energy property, the solar energy credit, and qualified solar electric and water heating property credits. It also contained a provision that gives independent oil refiners a favorable way of accounting for transportation costs in calculating their domestic production activities deduction.
• The Fixing America’s Surface Transportation Act requires the Secretary of State to deny a passport (or renewal of a passport) to a seriously tax delinquent taxpayer (i.e., generally, a taxpayer with any outstanding debt for federal taxes in excess of $50,000). It also requires the IRS to enter into qualified tax collection contracts with private debt collectors for the collection of inactive tax receivables and repealed a recently enacted provision that provided for a longer automatic extension of the due date for filing Form 5500.
• The Bipartisan Budget Act of 2015 eliminated the TEFRA unified partnership audit rules and the electing large partnership rules, and replaced them with streamlined partnership audit rules. The new rules are effective for returns filed for partnership tax years beginning after Dec. 31, 2017, but taxpayers can elect to apply them earlier.
• The Protecting Affordable Coverage for Employees Act revised the non-tax definition of small and large employers for purposes of the Affordable Care Act. This, however, also modified a benefits-related tax rule permitting certain qualified health plans to be offered through cafeteria plans.

De minimis expensing safe harbor under capitalization regulations is increased. As we reported in our January/February issue an alternative to the general capitalization rule, regulations permit businesses to elect to expense their outlays for “de minimis” business expenses. The election is allowed where the amount paid for the property doesn’t exceed $5,000 per invoice (or per item as substantiated by the invoice) if the taxpayer has an applicable financial statement (AFS), but a $500 limit applies where the taxpayer does not have an AFS. In new guidance, the IRS has increased, from $500 to $2,500, the de minimis safe harbor limit for taxpayers that don’t have an AFS. The increase applies for costs incurred during tax years beginning on or after January 1, 2016, but use of the new limit won’t be challenged by the IRS in tax years prior to 2016.

Deduction safe harbor for remodeling costs of retail and restaurant businesses. Taxpayers are generally allowed to deduct all the ordinary and necessary expenses paid or incurred in carrying on any trade or business, including repair and maintenance costs, but must generally capitalize amounts paid to acquire, produce or improve property. Determining how these rules apply to the various components of a remodeling project can be a complex and difficult undertaking. In new guidance, the IRS has provided a safe harbor method that taxpayers engaged in the trade or business of operating a retail establishment or a restaurant may use to determine whether costs paid or incurred to refresh or remodel a qualified building are deductible or must be capitalized. Under the safe harbor, a qualified taxpayer treats 75% of its qualified costs paid as deductible and 25% as expenses that must be capitalized.