Congress extends and expands the Work Opportunity Tax Credit to fight unemployment

Credits & Incentives talk with Deloitte

​“Credits & Incentives talk with Deloitte” is a monthly column by Kevin Potter of Deloitte Tax LLP, featured in the Journal of Multistate Taxation and Incentives, a Thomson Reuters publication. This edition discusses the extension of the Work Opportunity Tax Credit program, available to employers hiring individuals from certain target groups, as a tool to reduce the ranks of unemployed.

The Work Opportunity Tax Credit program

As of January 2016, 7.8 million people were considered unemployed in the United States which created an unemployment rate of 4.9 percent,1 numbers essentially unchanged from the prior month.2 The persistent unemployment was one reason that Congress took action in December 2015 to extend the Work Opportunity Tax Credit and certain other tax incentives.

The Work Opportunity Tax Credit (WOTC) Program was created by the Small Business Job Protection Act of 19963 to facilitate access to jobs for American workers. WOTC was intended to be broadly applicable to employers regardless of size, geography, or industry and was designed to streamline the eligibility process of prior tax credit programs.

Exhibit 1. Sept. 2013-Sept. 2014 WOTC certifications by occupational category

The WOTC federal income tax credit, ranging between $2,400 and $9,600 for each qualified newly hired employee, is available to employers for hiring individuals from certain target groups who have historically faced barriers to employment.

WOTC assists targeted individuals in their employment search process to become wage-earners on their way to economic independence. In 1997, P.L. 105-34 changed WOTC to a two-tiered credit based upon the number of hours an individual works.

Slightly different from other tax credit programs, responsibility for WOTC is shared between the Department of Treasury, through the Internal Revenue Service (IRS), and the Department of Labor, through the Employment and Training Administration (ETA). While this is a federal tax credit, certifications are issued by the State Workforce Agencies (SWAs). The WOTC falls under the general business credit and is, therefore, subject to the net tax liability limitation of Section 38 of the Internal Revenue Code (IRC) and the carryback and carryover rules of IRC Section 39.

Excerpts from the article

Protecting Americans from Tax Hikes Act of 2015 extends and expands WOTC

Since the initial enactment in 1996, WOTC has expired and been extended numerous times. On several occasions, WOTC has been expired for months at a time awaiting reauthorization by Congress. Most recently in 2015, WOTC and certain other tax incentives remained expired for much of the tax year. However, on December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015 (PATH),4 which includes the following modifications:

  • A five-year extension of the WOTC
  • A new target group added to the WOTC
  • A two-year extension to the Empowerment Zone (EZ) hiring incentives
  • A two-year extension to the Indian Employment Tax Credit (IETC)

These law changes were made retroactively effective to December 31, 2014, unless specified otherwise in the discussion that follows.

PATH Section 142 extends the WOTC from December 31, 2014, through December 31, 2019.5 Section 142 also modified the WOTC to make it available to businesses that hire "qualified long-term unemployment recipients" who begin work for an employer after December 31, 2015.6

The term "qualified long-term unemployment recipient" is defined as "any individual who is certified by the designated local agency as being in a period of unemployment which (A) is not less than 27 consecutive weeks, and (B) includes a period in which the individual was receiving unemployment compensation under State or Federal law."7

The addition of the "qualified long-term unemployment recipient" target group is an effort to address those individuals who have been unemployed for over 27 consecutive weeks, a number that currently stands at 2.1 million based on the latest labor statistics.8 This long-term unemployed target group has continued to grow in relative amounts with individuals in this target group accounting for 26.9 percent of the unemployed in January 2016 versus 12.7 percent in 2000.9

After the passage of PATH, 14 WOTC target groups now exist; download the full article for a complete list.

In addition to extending and expanding the WOTC, PATH also extended several other federal hiring incentives. PATH Section 171 extends from December 31, 2014, to December 31, 2016, the period for which an EZ designation shall be in effect for certain economically depressed census tracts.11 The EZ hiring credit program provides an annual federal income tax credit of up to $3,000 per EZ resident hired.12

In addition, PATH Section 161 extends through December 31, 2016, the federal income tax credit for the hiring of qualified persons that work and live on or near an Indian reservation.13 The program provides an annual tax credit of up to $4,000 based on wages and health insurance costs paid to qualified employees.14

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