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2015 Form Instructions Revised for ‘Windfall’ Business Tax Credits

Feb 3rd 2016
Senior Analyst Thomson Reuters Checkpoint
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The Protecting Americans from Tax Hikes (PATH) Act of 2015 contains a fair number of “windfall” business tax breaks for 2015 (i.e., tax breaks available on the 2015 return even though they were off the books when the events triggering the breaks occurred). Three of these breaks are highlighted in recently updated 2015 form instructions: the work opportunity tax credit (WOTC), the credit for differential wage payments, and the empowerment zone employment credit.

Work Opportunity Tax Credit
The WOTC, under Internal Revenue Code Section 51, allows employers that hire members of certain targeted groups (such as qualifying veterans) to get a credit against income tax equal to a percentage of first-year wages (and second-year wages, as well, for some eligible hires). The credit depends on which targeted group the eligible hire belongs in. Targeted groups include:

  • Qualified IV-A recipients (qualified recipients of aid to families with dependent children or successor program)
  • Qualified veterans
  • Qualified ex-felons
  • Designated community residents
  • Vocational rehabilitation referrals
  • Qualified summer youth employees
  • Qualified supplemental nutrition assistance benefits recipients
  • Qualified Supplemental Security Income recipients
  • Long-term family assistance recipients (i.e., members of a family who receive or received assistance under a IV-A program for a minimum period of time)

The WOTC was to have expired for eligible employees who began work after 2014. In more precise terms, under prior law, wages for purposes of the WOTC didn't include any amount paid or incurred to veterans or nonveterans who began work after Dec. 31, 2014. However, as the revised instructions for Form 5884, Work Opportunity Credit, for 2015 point out, the PATH Act extended the WOTC retroactively so that it applies to eligible hires who began work after Dec. 31, 2014, and before Jan. 1, 2020. (The PATH Act also extended the WOTC to employers that hire qualified long-term unemployed individuals but only for eligible individuals who began work for an employer after Dec. 31, 2015.)

In general, under the WOTC rules, an individual isn't treated as a member of a targeted group unless:

  1. On or before the day the individual begins work, the employer obtains certification from the state employment security agency (SESA) that the individual is a member of a targeted group; or
  2. The employer completes a prescreening notice on or before the day the individual is offered employment and submits such notice to the SESA to request certification not later than 28 days after the individual begins work.

Timing problem for eligible new hires during 2015. The revised instructions for Form 5884 acknowledge that the WOTC certification rules pose a problem for 2015, as employers hired eligible workers before they knew they would qualify for the WOTC for the year (i.e., before they obtained the proper certification for them). Because the credit expired at the end of 2014 and was retroactively extended on Dec. 18, 2015, the instructions say businesses may be allowed more time to submit Form 8850, Prescreening Notice and Certification Request for the Work Opportunity Credit, for an individual who began work while the credit was expired or for a reasonable time after it was extended. The instructions say the IRS will update Form 5884 as this and any other additional information becomes available.

If the past is any guide, employers should have until the end of April 2016 to submit Form 8850 for eligible workers hired during 2015. Late in 2014, the Tax Increase Prevention Act of 2014 extended the WOTC retroactively for 2014 for members of targeted groups. Following that legislation, the IRS recognized that employers needed additional time to comply with the requirements of Code Section 51(d)(13)(A). Accordingly, Notice 2015-13, 2015-10 IRB, provided that a taxable employer that hired a member of a targeted group, or a qualified tax-exempt organization that hired a qualified veteran described in Code Section 51(d)(3), on or after Jan. 1, 2014, and before Jan. 1, 2015, was treated as having satisfied the requirements of Code Section 51(d)(13)(A)(ii) if it submitted the completed Form 8850 to request certification to the appropriate SESA not later than April 30, 2015.

Credit for Differential Wage Payments
Eligible small business employers that pay differential wages – payments to employees for periods that they are called to active duty with the US uniformed services (for more than 30 days) that represent all or part of the wages they would have otherwise received from the employer – can claim a credit. This differential wage payment credit is equal to 20 percent of up to $20,000 of differential pay made to an employee during the tax year.

Uniformed services means the Armed Forces, the Army National Guard, and the Air National Guard when engaged in active duty for training, inactive duty training, or full-time National Guard duty; the commissioned corps of the Public Health Service; and any other category of persons designated by the president in time of war or national emergency.

An eligible small business employer is one that:

  1. Employed on average less than 50 employees on business days during the tax year.
  2. Under a written plan, provides eligible differential wage payments to each of its qualified employees.

A qualified employee is one who has been an employee for the 91-day period immediately preceding the period for which any differential wage payment is made.

The credit was to have ended for differential wages paid after Dec. 31, 2014, but the PATH Act retroactively and permanently extended the credit. The revised instructions for Form 8932, Credit for Employer Differential Wage Payments, for 2015 reflect the retroactive extension of the credit and also point out the PATH Act liberalization providing that for tax years beginning after Dec. 31, 2015, the differential wage credit applies to employers of any size (i.e., the less-than-50-employee average no longer applies).

The revised instructions also point out that the credit for employer differential wage payments is part of the general business credit, and the amount of any research credit or orphan drug credit otherwise allowable for compensation paid to any employee is reduced by the credit for differential wage payments figured for that employee.

Empowerment Zone Employment Credit
Employers may claim an empowerment zone employment credit for any tax year equal to 20 percent of the qualified zone wages paid or incurred during the calendar year that ended with or within that tax year. The amount of qualified zone wages (qualified wages paid to an employee who was a resident of certain designated distressed urban and rural areas, and who performed substantially all employment services within the zone in the employer's trade or business) that are taken into account for each employee can't exceed $15,000 for a calendar year. Thus, the credit can't exceed $3,000 per qualified employee. Qualified zone wages don't include wages taken into account for the WOTC, and the $15,000 maximum amount above is reduced by the amount of wages taken into account for the WOTC. The credit also reduces an employer's wage deduction for the year.

The designation period for an empowerment zone was to have ended on Dec. 31, 2014, but under the PATH Act, as noted by the instructions for Form 8844, Empowerment Zone Employment Credit, for 2015, the designation period was retroactively reinstated and extended through 2016. As a result, businesses that paid or incurred qualified employment zone wages during calendar-year 2015 are retroactively entitled to claim an empowerment zone employment credit. The instructions point out that the credit must be figured using only the wages that were paid or incurred in the calendar year that ended with or within the employer's tax year. For example, if the employer's tax year began on April 1, 2015, and ended on March 31, 2016, it must figure wages based on the calendar year that began on Jan. 1, 2015, and ended on Dec. 31, 2015. Wages paid after the end of the calendar year may be used only to figure the credit claimed on the following year's tax return.

The instructions to Form 8844 list a total of 40 urban and rural areas, parts of which are designated as empowerment zones. A taxpayer can find out if his or her business or an employee's residence is located within an urban or rural empowerment zone by using the EZ/RC Address Locator.

The extension of the empowerment zone designation period through 2016 also means that the following other empowerment zone tax breaks were extended through 2016:

  • Increased Code Section 179 expensing on qualifying equipment.
  • Tax-exempt bond financing.
  • Deferral of capital-gains tax on the sale of qualified assets sold and replaced.
  • Partial exclusion of capital-gains tax on certain sales of qualified small business stock.

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