Tag: Tax Credits
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Hiring new employees can be a difficult undertaking for businesses, especially amid the economic fallout caused by the ongoing coronavirus pandemic. However, the Work Opportunity Tax Credit is an often-overlooked tax break for employers that presents greater saving opportunities than ever before. This tax credit was originally part of a group of temporary tax incentives that Congress typically extends each year. However, the Consolidated Appropriations Act (CAA) in 2020 extended the credit through 2025. Therefore, to make the most of the Work Opportunity Tax Credit and secure significant tax savings, employers need to be able to identify those candidates who fall within the targeted groups and promptly take the steps needed to obtain certification. Work Opportunity Tax Credit Basics The Work Opportunity Tax Credit is designed to encourage employers to hire workers from certain target groups that historically have experienced trouble finding a job. The amount of the credit is based on wages paid to the eligible employee, and the maximum allowed per employee can go up to $9,600, depending on the target group and the qualified wages paid to the new employee. New hires must work at least 120 hours before employers can claim the Work Opportunity Tax Credit and the credit is generally equal to 25% of the first-year wages paid to a certified individual until they surpass 400 hours, at which time the credit increases to 40% of their first-year wages. No cap applies to the number of new hires who can qualify, nor to the amount of credit that can be claimed or generated. In order to treat a new hire as a member of a targeted group, an employer must: Obtain certification from the state workforce agency that the individual is a member of a target group on or before the first day of work, or Complete Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Tax Credit, on or before the day employment is offered and submit the notice to the state workforce agency to request certification within 28 days after the individual starts work. To be eligible for the Work Opportunity Tax Credit, a new employee has to be certified as a member of one of the following target groups: Qualified IV-A Recipient, Qualified Veteran, Ex-Felon, Designated Community Resident (DCR), Vocational Rehabilitation Referral, Summer Youth Employee, Supplemental Nutrition Assistance Program (SNAP) Recipient, Supplemental Security Income (SSI) Recipient, Long-Term Family Assistance Recipient, or Long-Term Unemployment. There are exclusions that apply to the list of the Work Opportunity Tax Credit target groups. Employers who rehire a former employee, a family member or dependent, or someone who will be a majority owner in the business may not be able to claim the tax credit for that individual even if the individual is otherwise a member of a target group. Claiming the Work Opportunity Tax Credit To claim the Work Opportunity Tax Credit, most for-profit employers use Form 5884 to calculate their allowable credit. On the other hand, tax-exempt employers are generally not eligible for the WOTC. However, they can claim the credit by using Form 5884-C when hiring qualified veterans. The Work Opportunity Tax Credit is allowed against the Old Age, Survivors, and Disability Insurance program often referred to as the Social Security tax owed by tax-exempt employers. The credit is calculated in the same way it would be if employers were not tax-exempt, with a few modifications: 26% instead of 40% for qualifying first-year wages, and 16% instead of 25% for a qualified veteran who has completed at least 120 hours but less than 400 hours of service for an employer. Realizing Work Opportunity Tax Credit Benefits Claiming the Work Opportunity Tax Credit can save companies a significant amount of taxes, especially if their business is expanding and likely to attract some or many of the targeted employee groups the credit is designed to help. Furthermore, the Work Opportunity Tax Credit is intended to provide incentives for employers to hire certain candidates who find it difficult to get jobs. As a result, companies can benefit the community by providing economic opportunities and enhancing their organization’s reputation by helping individuals who need support. The Work Opportunity Tax Credit management process can be streamlined for both applicants and employers by automating the process to allow businesses to efficiently capture tax credit opportunities. As a result, employers can remove the burden of tracking and filing for the Work Opportunity Tax Credit and meet the necessary deadlines. Furthermore, they can realize the benefits without increasing staff to handle the tax credit paperwork and filings while a team of experts can help them identify any additional federal, state, or local benefits that are not being utilized.
Developing new products or services or improving the existing ones can be one of the most effective ways to grow a business. Furthermore, having a research and development strategy can lead to innovation and increased productivity and improve a business's competitive advantage. The Research and Development (R&D) tax credit consistently ranks as one of the most valuable credits leveraged by companies to reap big savings when filing their taxes. At the same time, the credit is severely underutilized due to common misconceptions and lack of information. Therefore, it would be beneficial to employers to understand how the R&D tax credit works and how to use it to maximize tax savings, but also what documentation is necessary for this process, including IRS form 6765. Calculating the R&D Tax Credit While it is commonly believed that only large corporations can claim the R&D tax credit, businesses of any size and across a variety of industries can be eligible. To qualify they need to have engaged in what the Internal Revenue Service (IRS) defines as qualified research expenses (QREs). If a company qualifies for the R&D tax credit, there are standard ways to calculate it, including the regular research credit (RRC) method and the alternative simplified credit (ASC) method. Under the RRC method, the R&D tax credit is worth 20% of the company’s QREs over a base amount, which is a product of a fixed-base percentage and the average annual gross receipts from the past four years. Under the ASC method, the R&D tax credit is worth 14% of the company’s QREs over 50% of its average QREs from the past three years. If there are no QREs from previous years, the credit is worth 6% of the current year’s QREs. Documents Needed For Claiming the R&D Tax Credit Proper documentation is essential for successfully obtaining the benefits of the R&D tax credit, while also avoiding the potential for an audit. Therefore, when claiming the R&D tax credit, businesses should prepare the following: Form 6765, Credit for Increasing Research Activities; A list of R&D activities that qualify for the credit, in accordance with the four-part test; Additional information for QREs, including wage reports, supplies and other research expenses and receipts; Time-tracking information and/or an allocation of employee time for employees whose W-2 taxable wages are being claimed as part of the credit; and Contracts and other subsidiary information in case any elements of the R&D process were outsourced. IRS Form 6765 IRS Form 6765 is used for two key purposes: Calculating and claiming R&D tax credits; and Communicating preference in the application of eligible tax credits. All businesses, regardless of their structure, must file IRS Form 6765 if they want to claim the R&D tax credit. To document their qualified R&D expenses, they complete the four basic sections of the form: Sections A and B - When it comes to choosing the method to use when calculating R&D tax credits, businesses can use either the standard method and fill out Section A, or the alternative simplified credit method and complete Section B. However, the alternative simplified credit applies to both the current tax year and all subsequent years and if businesses elect this method, they cannot revoke the current tax year’s alternative simplified credit selection. To revoke it for a subsequent tax year, it is necessary to complete Section A related to the regular tax credit and attach it to Form 6765. Also, at the end of IRS Form 6765’s Sections A and B, there is an option of electing to take a reduced credit that might simplify the preparation of a business’ state tax returns. Section C - Once R&D credit for the current year is quantified, Section C identifies additional forms and schedules where businesses need to report this figure in accordance with their business structure. Section D - The final part of IRS Form 6765 is only required for qualified small businesses (QSBs) making a payroll tax election. The amount they nominate in this section should be replicated on Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. IRS Form 6765 should be filed with a company’s income tax return no later than the extended due date of that year’s tax return. Adding Value to Businesses with the R&D Tax Credit The primary purpose of the R&D tax credit is to boost economic activity by encouraging companies to innovate and invest in new technologies, products and services, but claiming it is not an easy process. In addition to meeting the tax credit qualification requirements, it must be properly and accurately documented and understanding the IRS Form 6765 is one of the important elements in this process. However, outsourcing the R&D tax credit management makes the entire process of claiming tax credits simple and streamlined. Such an approach provides businesses with experience, technology, resources and ongoing audit support while relieving the burden of monitoring changes in applicable legislation and compliance requirements.
Finding skilled workers has always been a challenge for employers. While this has been a long-standing problem for several industries, it has been worsened by the pandemic because many of those who lost jobs in 2020 have not returned to work or have moved on to other vocations. Completing the eligibility requirements for the Work Opportunity Tax Credit (WOTC) is one of the ways companies can widen their hiring pools while potentially qualifying for a valuable tax break. In addition to this, the latest WOTC extension means that businesses can continue to take advantage of this tax-saving opportunity while hiring workers who have experienced long periods of unemployment and members of other target groups. Work Opportunity Tax Credit History Since it was established, WOTC has expired a number of times before being retroactively reauthorized. In addition to extending the duration of the credit, reauthorization legislation has changed the eligible populations and maximum credit levels while in other instances, WOTC eligible populations and credit levels were changed without extending the duration of authorization. The WOTC was created by the Small Business Job Protection Act of 1996 (P.L. 104-188) to allow for-profit employers to claim a tax credit against their federal income tax liabilities for hiring members of seven specifically designated groups from October 1, 1996, through September 30, 1997. The Taxpayer Relief Act of 1997 (P.L. 105-34) revised WOTC by shortening the minimum employment requirement to 120 hours, creating a two-tier subsidy based on the length of retention, and extending the credit through June 30, 1998. This Act also created the Welfare to Work (WtW) tax credit, which was later incorporated into the long-term family assistance recipients credit under WOTC. VOW to Hire Heroes Act (P.L. 112-56) expanded the qualified veterans' group covered by WOTC and changed the amount of first-year wages that can be claimed for the credit. It made the WOTC refundable for certain tax-exempt employers and also extended the expiration date of WOTC for veterans to December 31, 2012. However, this law did not include the WOTC extension for non-veterans. The Protecting Americans from Tax Hikes Act of 2015 (P.L. 114-113) expanded the WOTC to include long-term unemployment recipients and extended the WOTC for all eligible groups through December 31, 2019. H.R. 1865, Further Consolidated Appropriations Act (CAA), 2020 signed on December 20, 2019, included numerous extensions of tax incentives, and a one-year WOTC extension was among them. Latest WOTC extension As part of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, included in the Consolidated Appropriations Act, 2021, the WOTC program received a five-year extension through December 31, 2025. To be eligible, employers must hire workers prior to 2026, obtain certification affirming the individual’s status as a member of a target group, and submit the completed IRS Form 8850 to the appropriate State Workforce Agency within 28 days after the individual begins employment. In addition to this, the IRS announced the extension of the deadline for certification requests for members of the designated community resident and qualified summer youth employee target groups. This was necessary because, in addition to the WOTC extension, the CAA generally extended the period for which Empowerment Zone designations are in effect through 2025. As a result, employers needed more time to comply with certification requirements. WOTC Requirements There are several requirements that employers must meet in order to qualify for the WOTC. For instance, employees must work at least 120 hours in the first year of employment to receive the tax credit. Also, employees who are related to the employer or who previously worked for the employer are not eligible. Employers of all sizes are eligible to claim the WOTC. This includes both taxable and certain tax-exempt employers located in the United States and in some U.S. territories. Employers can earn a tax credit of up to $9,600 per employee, depending on the target group of the new employee and the number of hours worked in the first year. However, the rules and credit amounts differ for specific employees. The maximum credit available for the first year’s wages is $2,400 for each employee or $4,000 for a recipient of long-term family assistance. For some veterans, the limits are $4,800, $5,600, or $9,600, and for summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15. The maximum WOTC credit available for summer youth workers is $1,200 per employee. Encouraging Employment of High-Risk Workers Certain groups of people in the United States experience higher rates of persistent unemployment or job turnover. These categories include people with disabilities, veterans, long-term social welfare program recipients, or former criminal offenders, traditionally thought to be riskier hires compared with other types of applicants. The longer someone stays out of work, the harder it is to reenter, but employers can use WOTC as a proven tool for promoting the employment of underprivileged individuals. Moreover, the WOTC extension provides them with more opportunities to capture thousands in credits. While the administrative burdens involved in WOTC management can be challenging, automated WOTC solutions significantly improve both accuracy and efficiency of the program. Integrating applicant screening and work opportunity tax credit certification questions into one automated application process increases compliance, enhances the applicant experience, and simplifies the application for credit certification.