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Work opportunity tax credit "extender" has limited window for opportunity.

Part of the various tax incentives signed into law in August 1996 included special extenders for provisions that had expired earlier when Congress could not come to an agreement. The Small Business Job Protection Act of 1996 (SBJPA) included a provision for the reinstatement of the Targeted Jobs Tax Credit under Sec. 51 as the Work Opportunity Tax Credit, which Congress believes win have a meaningful impact on the economy, as well as provide incentives to hire the disadvantaged.

In its basic form, the Work Opportunity Tax Credit allows a credit against Federal taxes equal to a percentage of qualified wages paid to employees from one or more of seven targeted groups starting after Sept. 30, 1995 and before Oct. 1, 1997.

The credit does not reinstate the Targeted Jobs Tax Credit to when the previous credit eligibility ended (Dec. 31, 1997 for employment), nor does it extend to employees hired after Oct. 1, 1997 Committee reports indicate that this is intentional, to give Congress an opportunity to see if the new tax credit has proven effective.

Amount of Credit

The credit allowed for each employee is 35% of qualified first-year wages, up to a maximum of $6,000 in wages. For qualified summer-youth employees, the maximum wage base is $3,000. The credit is treated as a general business credit and is subject to the annual tax liability limitations for other business credits.

Qualified Employees

Employees who quality for the Work Opportunity Tax Credit come from seven targeted groups. 1. Qualified IV-A recipients: Generally, individuals under each states welfare programs for assistance for families with dependent children (AFDC). The family must have received the assistance for at least nine months (all or part of which ends on the hiring date of the employee). Each member of the family is treated as receiving the assistance. 2. Qualified veterans: Veterans also must be part of a family receiving benefits under the IV-A program for 12 months or food stamps for three months. In addition, only those veterans who served on active duty for at least 180 days or have been discharged for a service-connected disability qualify. However, if the active duty occurs within 60 days of the hiring, the veteran does not qualify. 3. Qualified ex-felons: Persons convicted of a Federal or state felony and hired within one year after conviction, or release from prison. The ex-felon cannot be holding a high- or moderate-paying job when the prospective employer attempts to hire him, the ex-felon's family must earn below 70% of the Bureau of Labor Statics lower-living standard during a predetermined period. 4. High-risk youths: Anybody between the ages of 18 and 24 on the hiring date who lives in an empowerment zone or enterprise community. The "high-risk youth" must continue to live there during the employment. 5. Vocational rehabilitation referrals: Individuals certified as having (1) a physical or mental disability that is a substantial handicap to employment or (2) been referred to the employer while receiving, or after completing, vocational rehabilitation under an individualized written rehabilitation plan. Designated local employment agencies will provide the certification from the vocational rehabilitation agency. 6. Qualified summer youth employees: Individuals who perform services for the employer during any 90-day period between May 1 and September 15, who are 16 or 17 years old on the hiring date, not previously employed by the same employer, and living in an empowerment zone or enterprise community. For qualified summer youth employees, only the first $3,000 of wages qualify. 7. Qualified food stamp recipients: This is limited to individuals 18 to 24 years old who are members of a family receiving assistance under a food stamp program for the six-month period ending on the hiring date. Each member of the family is an eligible recipient.

Employers should take extreme caution during the employment process, as all of these qualifiers have very specific transition rules.

Who Designates the Employee?

Key to qualifying for the credit is obtaining certification prior to employing the individual. The employer can do this in one of two ways: 1. The employer can obtain a written certification from the designated local agency that the employee is a member of the target group. This certification must be obtained by the day the qualified employee begins work for the employer. 2. The employer can complete a prescreening notice by the day the employee begins work and submit the notice to the designated agency within die first 21 calendar days of the employees employment. The form of the prescreening notice is prescribed by the IRS and can be obtained from the local designated

Both the employee and employer sign the notice under penalties of perjury. If the designated agency incorrectly approves certification and subsequently revokes the certification, the employer will receive credit for wages paid up to the day of revocation, but not subsequent. If the agency turns down anyone for certification, the agency must provide written reasons why the certification was turned down.

Key Considerations for the Work

Opportunity Tax Credit

Due to the unique manner in which the credit has been established, several issues are significant * If an employer can use the credit and its competition cannot (because of net operating losses and other tax liability limitation issues), qualifying summer youth employees and other qualified employees can be recruited without the employer having to pay higher wages. Even if competitors do vie for the same potential employees, the "winning" employer may pay higher wage costs, but less on a net basis considering the impact of the credit. * The average employee (at minimum wage) will reach the $6,000 wage cap in about seven to eight months. At that point, the employer has "capped out" the credit for that employee. If the employee's work is good and he is making a contribution to the business, he may be hired on merit instead of Federal tax subsidies.


It is extremely difficult to find issue with offering opportunities for those considered to be disadvantaged to improve their working skills. The Work Opportunity Tax Credit attempts to provide those avenues for employers by funding the program through Federal tax savings to employers. One critical issue is whether employers will invest the time and effort necessary to find, attract, recruit, qualify and train new employees whom the employer did not hire before.

The second critical issue is the intention of the employer to retain the employee once the credit limit has been reached or is removed. It is interesting to note that this program essentially moves assistance dollars from the family to the business. Like any type of assistance program, once the recipient becomes accustomed to receiving the money/tax credit, it is difficult to stop.

The third critical issue is the responsiveness of the credit to the perceived problem. Naturally, the employer, even when limiting the search to qualified credit employees, will seek the best employees from this group. Do these employee candidates need the Work Opportunity Tax Credit to succeed or will they succeed anyway because of their own initiative?

The 1996 Work Opportunity Tax Credit program is certainly a popular program for Congress. Its effectiveness in stimulating the economy by creating real opportunity remains to be seen.
COPYRIGHT 1996 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1996, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Author:Lemaster, Herb
Publication:The Tax Adviser
Date:Dec 1, 1996
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