The WOTC Expanded

Editor: Kevin F. Reilly, J.D., CPA

The work opportunity tax credit (WOTC) has been in existence for years; however, the Small Business and Work Oppor-tunity 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 thought. 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).

These changes are effective for employees hired after May 25, 2007, SBWOTA’s enactment date, and the WOTC now sunsets after August 31, 2011. SBWOTA also permits individuals and corporate taxpayers to claim the WOTC against the alternative minimum tax for tax years beginning after December 31, 2006.

Under Sec. 51(d)(3)(A)(ii), a qualified veteran includes a person entitled to compensation for a service-connected disability and (1) having a hiring date that is not more than one year after having been discharged or re-leased from active duty in the U.S. armed forces or (2) having aggregate periods of unemployment during the one-year period ending on the hiring date that equal or exceed six months. Under Sec. 51(d)(5), a DCR is someone who (1) is at least 18 years of age, but not yet age 40, on the hiring date and (2) 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. 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 in order for their employer to take the WOTC. Employers must make a written request to their state workforce agency for certification within 28 days of the hire (Sec. 51(d)(13)). (See www.servicelocator.org/OWSLinks.asp for a listing of agencies by state.) To apply for WOTC certification, employers must complete Form 8850. On receipt, the state WOTC coordinator for the workforce agency must certify the job applicant as a member of the targeted group. Once this step is complete, the employee has to meet the minimum number-of-hours-worked requirement (400 hours for maximum credit and 120–399 for partial credit).

The maximum credit is 40% of an employee’s qualified first-year wages, limited to $2,400 per employee (Sec. 51(a)); the partial credit rate is 25%, limited to $1,500 per employee (Sec. 51(i)(3)). Employers elect to take the credit by filing Form 5884, Work Opportunity Credit, with their annual income tax returns. Clients should be educated now about this new tax incentive. 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.