A number of tax credits benefiting individuals and small business are set to expire when the clock strikes midnight at the end of the year, and it’s up to Congress to determine whether to renew them.
Like many events on Capitol Hill, we won’t know until the last minute which credits will be extended, and it’s never wise to gamble on the renewal of an expiring tax credit or deduction.
The federal Work Opportunity Tax Credit (WOTC), which can be worth thousands of dollars for a small business, is set to expire at the end of the year. WOTC promotes the hiring of individuals who qualify as members of target groups, mainly veterans. If you are planning to increase your staff, you should consider doing it this year to take advantage of this lucrative tax credit.
This credit was set to expire at the end of 2012, but Congress renewed it for another year. At present, the deadline for hiring a qualified veteran is Dec. 31, 2013.
There are five key facts you should know about the WOTC:
1. According to the IRS, a qualified veteran is defined as:
- Has served on active duty (not including training) in the U.S. Armed Forces for more than 180 days or have been discharged or released from active duty for a service-connected disability, and
- Not have a period of active duty (not including training) of more than 90 days that ended during the 60-day period ending on the hiring date.
In addition to the above, the veteran is considered qualified for purposes of the credit if he or she is certified as:
- A member of a family receiving assistance under the Supplemental Nutrition Assistance Program (SNAP) (food stamps) for at least a three-month period ending during the 12-month period ending on the hiring date.
- Unemployed for a period or periods totaling at least four weeks (whether or not consecutive) but less than six months in the one-year period ending on the hiring date.
- Unemployed for a period or periods totaling at least six months (whether or not consecutive) in the one-year period ending on the hiring date.
- Entitled to compensation for a service-connected disability and hired not more than one year after being discharged or released from active duty in the U.S. Armed Forces.
- Entitled to compensation for a service-connected disability and unemployed for a period or periods totaling at least six months (whether or not consecutive) in the one-year period ending on the hiring date.
2. Maximum Credit: If you operate a taxable business, the tax credit limit is $9,600 per worker. The limit for tax-exempt employers is $6,240.
3. Credit Factors: There is a formula to determine the amount of the credit you may receive. You do not automatically receive the amounts indicated above. The formula includes the following variables: length of time the veteran was unemployed, the number of hours worked and the amount of wages paid during the first year of employment. Use IRS Form 5884 to determine the amount of the credit you can take.
4. Disabled Veterans: If you hire a veteran with a service-related disability, you may be eligible for the maximum credit.
5. State Certification: Complete Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to pre-screen and to make a written request to your State Workforce Agency to certify an individual as a member of a targeted group for purposes of qualifying for the WOTC. This form is not filed with the Internal Revenue Service; it is filed with the appropriate State Workforce Agency.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all 50 states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, Calif., and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Her new e-book Taxpertise for the Creative Mind Murder, Mayem, Romance, Comedy and Tax Tips for Artists of all Kinds is available at all major booksellers. Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.