Credits Benefiting Disadvantaged Groups

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 wages used in computing the credit, as reported on line 2 of Form 5884. The credit currently applies to the wages of employees hired before January 1, 2015.

The credit applies to the wages paid to new employees who fit in one of the following groups:

• families receiving cash welfare benefits for at least 9 months during the 18-month period before the hiring date
• designated-community resident vocational rehabilitation referrals certified to have a physical or mental disability
• qualified summer youth employees aged 16 or 17 on the hiring date who live in an empowerment zone or enterprise community, perform services during a 90-day period between May 1 and September 15, and who have not previously worked for the employer
• ex-felons hired not more than one year after the later of their conviction or release from prison, who are members of low-income families
• individuals who are in families that have been receiving food stamps for six months
• Supplemental Security Income (SSI) beneficiaries
• long-term family assistance recipients

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 Returning Heroes Tax Credit and the Wounded Warriors Tax Credit is also available through 2014 to employers that hire unemployed veterans.

From November 21, 2011 through the end of 2014, employers can claim a Returning Heroes tax credit as follows:

• up to $2,400 for hiring veterans who are unemployed for more than four weeks, but less than six months; or
• up to $5,600 for hiring veterans who have been looking for a job for more than six months.

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 2014.

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.

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.

Save Money If you anticipate that your disabled accommodation expenses will exceed $10,250, try to stage the project over more than one year in order to take maximum advantage of the tax credit.

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 2014. 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 and Renewal Community 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 2014 and is claimed on Form 8845, Indian Employment Credit.

New Markets Credit

The new markets tax credit (NMTC), which is part of the general business credit, is intended to spur investment in low-income or economically disadvantaged areas. A taxpayer who holds a qualified equity investment on a credit allowance date during a tax year is entitled to the new markets tax credit. The allowance date is the date on which the investment is initially made, and the first six anniversary dates thereafter. The amount of the tax credit for the first three allowance dates is five percent of the amount paid for the qualified equity investment in the qualified community development entity (CDE) as of the original issue date. The tax credit increases to 6 percent for each of the four remaining allowance dates. Thus, the total allowable credit (taken either by the original purchaser or a subsequent holder), claimed over seven annual allowance dates, is 39 percent of the qualified investment. The amount paid at original issue includes the amounts paid directly to, or on behalf of the CDE, such as underwriter's fees.

Unused credits can be carried over through December 31, 2019.

The credit is claimed on Form 8874, New Markets Credit.

Low-Income Housing Credit

The low-income housing credit may be claimed for qualified buildings and expenses of rehabilitating existing structures. The credit is an applicable percentage of the building’s qualified basis, determined for the month the building is placed in service. The basis is reduced by the amount of federal grants received, and the applicable percentage is higher for new buildings that are not subsidized by the federal government. The taxpayer may elect a 20/50 requirement, under which 20 percent of the units are rent-restricted and have tenants with incomes of not more than 50 percent of area median income, or a 40/60 requirement, computed in same manner. The unit must satisfy requirements during 15-year compliance period starting with year building is placed in service.

The credit is claimed on Form 8586, Low-Income Housing Credit.

Warning If you're interested in investing in low-income housing to take advantage of the tax credit, you will definitely need the assistance of an attorney who is well-versed in this very complicated subject.

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