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The tax laws have been used historically to encourage certain activities that the government deems desirable, but that people might not otherwise undertake on their own because the economic rewards are perceived as insufficient. This group of tax credits is a good example of that type of policy.
Work Opportunity Tax Credit
The work opportunity credit is designed to provide an incentive to hire persons from certain disadvantaged groups that have a particularly high unemployment rate. A list of those groups is reproduced, below. In general, employers may claim a credit equal to 40 percent of the first $6,000 of qualified wages paid during an employee's first year of employment, or a maximum credit of $2,400 per qualifying employee. The employee must work at least 400 hours, or the credit is reduced by 75 percent. If an employee performs less than 120 hours of service, no credit is available.
The credit is claimed on Form 5884, Work Opportunity Credit.Any business expense deduction for such wages must be reduced by the amount of the credit, as reflected on Form 5884. The credit currently applies to the wages of employees hired before January 1, 2012.
The credit applies to the wages paid to new employees who fit in one of the following groups:
Under special provisions, an employer's credit for hiring an eligible summer youth employee is only 40 percent of the first $3,000 of wages earned during the 90-day period. If the summer youth employee continues working for the employer after the 90-day period, the employer can get an additional credit until the employee earns $6,000 for the year if the employee qualifies as a member of another targeted group (e.g. part of a family receiving food stamps for six months).
WOTC Expanded for Veterans. The Work Opportunity Tax Credit (WOTC) for all the groups listed above is only available for workers hired before the end of 2011 The Returning Heroes Tax Credit and the Wounded Warriors Tax Credit is available through 2012 to employers that hire unemployed veterans.
From November 21, 2011 through the end of 2012, employers can claim a Returning Heroes tax credit as follows:
Employers that hire veterans with service-connected disabilities who have been looking for employment for more than six months may be eligible for a Wounded Warriors Tax Credit of up to $9,600 per employee. The credit is available for veterans hired after the after November 21, 2011 through the end of 2012.
In addition, employers may be eligible for a WOTC credit of up to $2,400 if they hire a veteran who is a member of a family that received general assistance or food stamps for at least a three-month period during the 12-month period before the hiring date.
Disabled Access Credit
Under the Americans with Disabilities Act of 1990 (ADA), businesses that are open to the public ("public accommodations," in legal language) must accommodate or help persons with disabilities seeking to use their services. They must also remove physical barriers to the disabled, if removal is "readily achievable" (the regulations say that moving tables in a restaurant is "readily achievable," but widening a doorway is not). What's more, any renovations or new construction must include provisions for accessibility by the disabled, in accordance with certain very technical specifications.
Small businesses that are faced with making changes to obey the ADA have been given a "carrot," in the form of a tax credit, to encourage them to comply with the law. For any year, the tax laws allow you to claim a credit for 50 percent of your eligible access expenditures that exceed $250 but don't exceed $10,250. So, you can't claim more than $5,000 in any one year. The "eligible access expenditures" include not only expenses for removal of physical barriers (in renovations, but not new construction), but also expenses for deaf interpreters; readers for the blind; equipment or devices to make services available to the deaf, blind, or other disabled persons; or similar expenses.
The Disabled Access Credit is claimed on Form 8826, Disabled Access Credit, and is part of the general business credit. In addition to the dollar limit mentioned above, the total of all your general business credits can't reduce your current year's tax bill below the larger of (a) your tentative minimum tax or (b) 25 percent of the part of your regular tax bill that exceeds $25,000.
Empowerment Zone and Renewable Community Employment Credit
The Empowerment Zone tax benefits are available through 2011. This tax credit is available only to small businesses - that is, those having: (1) gross receipts of $1 million or less, or (2) having no more than 30 full-time employees during the preceding year.
If your business is located in a federal "empowerment zone," and you hire workers who also live and work within the zone, you can get a tax credit for 20 percent of the first $15,000 of wages paid to each of your workers (i.e., $3,000 maximum credit per employee each year). The workers can be full-time or part-time, so long as substantially all of their work is done within the zone and as part of your trade or business. You can't count wages paid to employees who worked for less than 90 days (unless the worker became disabled or was fired for misconduct); employees who are closely related to you; employees who own 5 percent or more of the business; or employees at golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetrack or gambling facilities, or liquor stores.
Where are these zones? Parts of the following areas are empowerment zones and renewal zones. You can find out if your business or an employee’s residence is located within an empowerment zone by using the HUD's RC/EZ/EC Address Locator, or by calling 1-800-998-9999.
The empowerment zone employment tax credit is claimed on Form 8844, Empowerment Zone Employment Credit, and is not part of the general business credit.
Indian Employment Credit
If your business is located on an Indian reservation, and you have employees who live on or near the reservation, you may be eligible for a special tax credit. You can claim a credit for 20 percent of your wages or health insurance costs for the year (up to $20,000 per employee) that exceed the total of comparable costs you had in 1993. However, the employee must be an enrolled member, or the spouse of an enrolled member, of an Indian tribe.
It expires at the end of 2011, but for 2011, the credit is claimed on Form 8845, Indian Employment Credit.
New Markets Credit
This tax credit for qualified equity investments made after December 31, 2000, to acquire stock in a community development entity (CDE). The credit includes any capital or equity investment in, or loan to, any qualified active low-income community business or qualified community development entity.
A CDE is any domestic corporation or partnership whose primary mission is serving or providing investment capital for low-income communities or low-income persons, that maintains accountability to residents of low-income communities through representation on governing or advisory boards of the CDE, and is certified by the Treasury Department as an eligible CDE. Examples of CDEs include community development banks, venture funds, and new investment companies.
The credit is worth over 30 percent of the amount invested (in present value terms). An investor is allowed a five percent credit for the year in which the equity interest is purchased from the CDE and for the first two anniversary dates after the purchase from the CDE. The investor is also entitled to a six percent credit on each anniversary date thereafter for the following four years. The credit is recaptured if the entity fails to continue to be a CDE or the interest is redeemed within seven years. The maximum annual amount of qualifying equity investments is capped at $3.5 billion for 2010 and 2011. Unused credits can be carried over through December 31, 2016.
The credit is claimed on Form 8874, New Markets Credit.
Low-Income Housing Credit
A tax credit is available for low-income housing that's constructed, rehabilitated, or acquired after 1986. The credit amounts to 70 percent of the qualified basis of non-federally subsidized units, or 30 percent of the qualified basis of units financed with tax-exempt bonds or other federal subsidies, but it must be claimed over a period of 10 years. The property must continue to meet the "low-income" requirements for at least 15 years to avoid recapture of tax benefits. If you purchase qualified property on which the credit is being claimed, before the 10 year period is up, you may be able to "step into the shoes" of the seller and claim the remainder of the credit.
The credit is claimed on Form 8586, Low-Income Housing Credit,.