On November 21, the President signed into law H.R. 674, the “3% Withholding Repeal and Job Creation Act” (the Act). As this article explains, the President’s signature sets the effective date for a number of Act provisions with an effective date geared to the Nov. 21, 2011, date of enactment.
Enhanced Work Opportunity Tax Credit (WOTC) for Hiring Qualified Veterans
The Act gave a one-year lease on life to the work opportunity tax credit (WOTC), but only with respect to qualified veterans who begin work for the employer before Jan 1, 2013. (Code Sec. 51(c)(4), as amended by Act Sec. 261(d)) The Act also made these important WOTC changes for hiring qualified veterans.
Broadened categories of qualified veterans. Under the Act, effective for individuals who begin work for the employer after Nov. 21, 2011, a qualified veteran is a veteran who is certified by the designated local agency as falling within one of the following four categories (Code Sec. 51(d)(3)(A), as amended by Act Sec. 261(b)):
The individual is a member of a family receiving assistance under a food stamp program under the Food Stamp Act of ’77 for at least three months, all or part of which is during the 12-month period ending on the hiring date. (Code Sec. 51(d)(3)(A)(i))
The individual is entitled to compensation for a service-connected disability, and either:
- has a hiring date that isn’t more than one year after having been discharged or released from active duty in the U.S. Armed Forces, or (Code Sec. 51(d)(3)(A)(ii)(I))
- has aggregate periods of unemployment during the 1-year period ending on the hiring date that equal or exceed six months. (Code Sec. 51(d)(3)(A)(ii)(II))
The individual has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed four weeks (but less than six months). (Code Sec. 51(d)(3)(A)(iii))
The individual has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed six months. (Code Sec. 51(d)(3)(A)(iv))
My observation: The Act adds the third and fourth categories of qualified veterans but leaves the first two categories unchanged.
Larger WOTC for hiring certain qualified veterans. Under the Act, effective for individuals who begin work for the employer after Nov. 21, 2011, the maximum amount of qualifying first-year wages against which the WOTC may be claimed is:
- $12,000 for an individual who is a qualified veteran under Code Sec. 51(d)(3)(A)(ii)(I) , i.e., is entitled to compensation for a service-connected disability and has a hiring date that isn’t more than one year after having been discharged or released from active duty in the U.S. Armed Forces.
- $24,000 for an individual who is a qualified veteran under Code Sec. 51(d)(3)(A)(ii)(II), i.e., is entitled to compensation for a service-connected disability and has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed six months.
- $14,000 for an individual who is a qualified veteran under Code Sec. 51(d)(3)(A)(iv), i.e., has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed six months. (Code Sec. 51(b)(3), as amended by Act Sec. 261(a))
My observation: The maximum WOTC for hiring qualified disabled veterans in Category A is $4,800 (.4 × $12,000 maximum qualifying first-year wages).
My observation: The maximum WOTC for hiring qualified veterans in this category is unchanged from pre-Act law.
My observation: The maximum WOTC for hiring qualified disabled veterans in Category B is $9,600 (.4 × $24,000 maximum qualifying first-year wages).
My observation: The maximum WOTC for hiring qualified veterans in Category C—i.e., longer-term unemployed veterans—is $5,600 (.4 × $14,000 maximum qualifying first-year wages).
Fast-tracked qualification process for qualified veterans. Under the Act, effective for individuals who begin work for the employer after Nov. 21, 2011:
- A veteran will be treated as certified by the designated local agency as having aggregate periods of unemployment meeting the requirements of Code Sec. 51(d)(3)(A)(ii)(II) or Code Sec. 51(d)(3)(A)(iv) (see above), if he or she is certified by the local agency as being in receipt of unemployment compensation under State or Federal law for not less than six months during the 1-year period ending on the hiring date. (Code Sec. 51(d)(13)(D)(i)(I), as amended by Act Sec. 261(c))
- A veteran will be treated as certified by the designated local agency as having aggregate periods of unemployment meeting the requirements of Code Sec. 51(d)(3)(A)(iii) (see above), if he or she is certified by the local agency as being in receipt of unemployment compensation under State or Federal law for not less than four weeks (but less than six months) during the 1-year period ending on the hiring date. (Code Sec. 51(d)(13)(D)(i)(II), as amended by Act Sec. 261(c))
- Additionally, IRS at its discretion may provide alternative methods for certification of a veteran who is a qualified veteran because of unemployment (i.e., is described in Code Sec. 51(d)(3)(A)(ii)(II), Code Sec. 51(d)(3)(A)(iii), or Code Sec. 51(d)(3)(A)(iv)). (Code Sec. 51(d)(13)(D)(ii), as amended by Act Sec. 261(c))
Tax-exempt employers get a payroll-tax credit for hiring qualified veterans. Under the Act, effective for individuals who begin work for the employer after Nov. 21, 2011, a tax-exempt employer (one described in Code Sec. 501(c) and exempt from tax under Code Sec. 501(a)) may, subject to the limits described below, claim a credit for the WOTC it could claim for hiring qualified veterans if it were not tax-exempt. The credit is allowed against the OASDI (Social Security) tax that the exempt employer would otherwise have to pay on the wages of all its employees during the “applicable employment period” (with respect to any qualified veteran, the one-year period beginning with the day he or she goes to work for the tax-exempt organization). (Code Sec. 52(c)(2) and Code Sec. 3111(e), as amended by Act Sec. 261(e))
The credit for hiring qualified veterans, which can’t exceed the OASDI tax otherwise payable for employment of all the tax-exempt’s employees during the “applicable employment period,” is calculated as it would be under Code Sec. 51, but with the following modifications:
- The general credit percentage of qualifying first-year wages is 26% (instead of 40%).
- The credit percentage of qualifying wages is 16.25% (instead of 25%) for a qualified veteran who has completed at least 120, but less than 400, hours of service for the employer.
- The tax-exempt employer may only take into account wages paid to a qualified veteran for services in furtherance of the activities related to the purposes or function constituting the basis of the organization’s exemption under Code Sec. 501. (Code Sec. 3111(e)(2) and Code Sec. 3111(e)(3), as amended by Act Sec. 261(e)(2))
Steve Eubanks, EA, MBA
steve.eubanks@strategictaxgroup.com
www.strategictaxgroup.coom
Source: Federal Tax Updates on Checkpoint News 11/22/2011
