Unclaimed deductions, penalty abatements and tax credits are just a few of the advantages busy taxpayers unknowingly miss out on before the end of the year. A few CPAs and accountants are taking the bull by the horns and going directly to the industry sectors that would most likely benefit. While not itemizing deductions may be the biggest, overlooked tax advantage, especially for the state tax deduction, there are also several unclaimed penalty abatements and tax credits.
Tax credits have a more powerful impact because they are dollar for dollar. Unfortunately, taxpayers may not know how much more valuable tax credits can be. If a taxpayer is paying an effective 25 percent tax rate, a tax credit is worth four times as much.
A tax credit you may want to see if your clients qualify for is the Work Opportunity Tax Credit (WOTC). The WOTC is administered by the Department of Labor for private, for-profit employers that hire individuals from specific targeted groups who may have disadvantages finding employment. Eligible employers can receive a Federal tax credit, ranging from $1,200 to $9,600 for each qualified employee hired.
Your state employment commission receives applications for the WOTC on Form 8850, Pre-Screening Notice and Certification Request for Work Opportunity Tax Credit, for the WOTC to determine whether the employer is eligible for the credit. In addition to filing Form 8850, the employer must complete and submit the following Employment and Training Administration (ETA) applicable forms to their state WOTC coordinator:
- ETA Form 9062, Conditional Certification Form: This form is to be submitted if the job applicant received this form from a participating agency, such as Jobs Corps, for example.
- ETA Form 9061, Individual Characteristics Form: This form is to be submitted if the job applicant did not receive a conditional certification.
Your clients’ employers who receive a WOTC certification will use Form 3800, General Business Credit, with their Federal return to claim the credit. The WOTC is limited to the amount of the business income tax liability or Social Security tax owed. A taxable business may apply the credit against its business income tax liability. The normal carry-back and carry-forward rules apply.
The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) retroactively allows eligible employers to claim the WOTC for all targeted group employee categories that were in effect prior to the enactment of the PATH Act, if the individual began work for the employer after Dec. 31, 2014, and before Jan. 1, 2020. For the same period, tax-exempt employers are included for the WOTC for qualified veterans. The PATH Act also added qualified long-term unemployment recipients hired on, or after, Jan. 1, 2016, to eligible employees for WOTC.
Notice 2016-22, WOTC Guidance and Transition Relief, provides 28 days to submit Form 8850 to the appropriate Designated Local Agencies (DLA). Notice 2016-40, WOTC Additional Transition Relief, extends this transition relief by three months. If an employer has employees hired on, or after, Jan. 1, 2015 (Jan. 1, 2016, in the case of qualified long-term unemployment recipients), and on, or before, Aug. 31, 2016, the employer is considered to have satisfied the 28-day deadline if it submits Form 8850 to the DLA no later than Sept. 28, 2016.
Clients who hire employees who fit in one of these categories may qualify for the WOTC: disabled or unemployed veteran, food stamp recipient, long-term unemployed, vocational rehabilitation referral, ex-felon, Supplemental Security Income recipient, designated community resident, short-term Temporary Assistance for Needy Families (TANF), long-term TANF (up to $9,000 over two years) and summer youth if the youth are located in designated empowerment zones.
It is no wonder why employers, who are busy creating jobs, overlook this tax credit; there are many hoops to jump through! However, the credits can be substantial, which is why a few CPA and accounting firms are reaching out to industries that hire employees in these categories.