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Zero in on target work groups

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in Small Business Tax

If your small business is booming, you may be look­ing to expand your workforce.

Strategy: Hire workers from certain disadvantaged “target” groups. Then, you can qualify for the Work Opportunity Tax Credit (WOTC), which can provide thousands of dollars in tax savings for your company.

The WOTC, which had expired at the end of 2014, was recently reinstated retroactive to 2015 by the Protecting Americans from Tax Hikes (PATH) Act, and extended through 2019 (see box on page 2). The PATH Act also adds another targeted group of workers eligible for the credit.

Here’s the whole story: The WOTC is based on the number of hours worked and wages earned in the first year of employment. If the employee works at least 120 hours, the credit is generally equal to 25% of the first-year wages up to $6,000, for a maximum credit of $1,500. However, if the employee works at least 400 hours, the credit is boosted to 40% of first-year wages up to $6,000, for a maximum credit of $2,400.

Prior to the PATH Act, the target groups for the WOTC included the following:

Military veterans

Temporary Assistance for Needy Family (TANF) Recipients

SNAP (Food Stamp) Recipients

Designated Community Residents (living in Em-powerment Zones or Rural Renewal Counties)

Vocational Rehabilitation Referral

Ex-felons

Supplemental Security Income (SSI) Recipients

Summer Youth Employees (Living in Empowerment Zones)

Special rules may apply to some of these groups. For instance, the credit available for the TANF group is available over a two-year period. And even bigger credits may be available for hiring military veterans. The maximum credit can reach as high as $9,600 for a disabled veteran.

Thanks to the PATH Act, the WOTC is now also available for hiring “long-term unemployment recipients.” The law defines long-term unemployment recipients as individuals unemployed for not less than 27 consecutive weeks who have received unemployment compensation under federal or state law. The WOTC can be claimed for qualified employees from this group who begin work after 2015.

An employer is required to obtain certification that an individual is a member of the targeted group before it can claim the WOTC by filing Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with the Department of Labor (DOL). The form must be filed within 28 days after the eligible worker begins work unless transitional rules apply (see box).

Best of all, there’s no overall dollar limit on the WOTC amount that can be claimed by an employer. For example, say you hire 10 full-time workers from three different target groups and each one is paid $30,000 for the year. This could entitle you to a $6,000 credit for each of the 10 workers for a total of $60,000.

Tip: The WOTC, which is claimed as part of the general business credit, reduces your business tax bill on a dollar-for-dollar basis.

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