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Text File | 1996-10-11 | 14KB | 322 lines

@108 CHAP 8

        ┌───────────────────────────────────────────────┐
        │ TARGETED JOBS TAX CREDIT FOR HIRING EMPLOYEES │
        │  (NOW KNOWN AS THE "WORK OPPORTUNITY CREDIT"  │
        └───────────────────────────────────────────────┘

If you hire members of certain economically disadvantaged
groups, the federal government will pay you a subsidy of up
to $2,100 per employee in the form of "Work Opportunity
Tax Credits" (formerly known as "Targeted Jobs Tax Credits")
against your income tax liability.  Unfortunately, most
small business employers seem to be unaware of this
substantial tax subsidy or else mistakenly assume that
it applies only if you hire ex-felons or the like.

Part of the reason so many employers failed to take advantage
of this tax giveaway in the past was on account of a Catch-22
in the way the program worked, before its recent revision in
1996:  To qualify for the old targeted jobs credit for hiring
a disadvantaged category person, he or she had to be certified
as such by a designated state employment security agency and
the certification was required to be received by the employer
(or requested in writing) at least one day before the employee
began work.

At the same time, state and federal anti-discrimination
laws make it very difficult for you as an employer to ask
prospective job applicants if they belong to any of the
disadvantaged groups that are eligible for the tax credits,
since to do so could be considered a discriminatory hiring
practice....

Accordingly, many employers simple didn't bother to try to
obtain the old targeted jobs credit.

The new work opportunity credit, which will expire on May
31, 1997, provides a better mechanism for determining if
an employee is a member of a targeted group.  The new rule
is as follows:

  . An agency certification must be received on or before
    a worker commences employment, or,

  . On or before an offer of employment is made to an
    individual, the employer must complete a "pre-screening
    notice" (on the new Form 8850, Work Opportunity Credit
    Pre-Screening Notice and Certification Request), which
    obtains necessary information from the job applicant,
    on the basis of which the employer believes the person
    is an eligible member of a targeted group.  The employer
    then has 21 days after the person begins work in which
    to submit the Form 8850, signed by both employer and
    employee, to the state employment security agency,
    requesting the certification that is needed to obtain
    the work opportunity jobs credit for federal income
    tax purposes.

The targeted group individuals for whom you can claim the
jobs tax credit when you hire them are as follows has also
been slightly revised under the new work opportunity
credit provisions enacted in 1996:

    . QUALIFIED IV-A RECIPIENTS.  Indviduals certified by
      the designated local agency as being a member of a
      family receiving assistance under a program approved
      under part A of Title IV of the Social Security Act.

    . QUALIFIED VETERANS.  Includes certain veterans who
      are members of a family receiving food stamps or
      assistance under a IV-A plan.

    . QUALIFIED EX-FELONS.  This category includes certain
      recently convicted or released felons with low
      family incomes.

    . HIGH-RISK YOUTHS.  Youths age 18 or older but under
      25 who live in empowerment zones or enterprise
      communities.

    . VOCATIONAL REHABILITATION REFERRALS.  These are
      certain individuals with substantial physical or
      mental disabilities who have completed (or are
      currently enrolled in) vocational rehabilitation
      programs.

    . QUALIFIED SUMMER YOUTH EMPLOYEES.  Economically
      disadvantaged youths 16 or 17 years old who are
      hired to work between May 1 and September 15, who
      were not previously employed by you.

    . QUALIFIED FOOD STAMP RECIPIENTS.  Youths between
      age 18 and 25 who are members of families receiving
      food stamp assistance and who meet certain other
      requirements.

On the first $6,000 you pay an eligible target group
employee, you will earn tax credits of 35% of the wages
(formerly 40%, under the old targeted jobs credit), if the
employee works a minimum of 180 days or 400 hours for you.
(For "qualified summer youths" the minimum period
is only 20 days or 120 hours, but the credit is allowed
on only the first $3,000 of wages during the first 90 days.)
The credit is not allowed for wages paid to strikebreakers
or "scabs."  NOTE: One drawback of this tax credit is that
you must reduce the wages you can deduct dollar-for-dollar
for the jobs credits you claim.  That is, if you pay someone
$1,000 and claim a $350 targeted jobs tax credit, you can
only deduct $650 for wage expense on your tax return, not
the full $1,000.

@CODE: CA
California has its own jobs tax credit program, somewhat
similar to the federal jobs credit described above.  The
California Employment Development Dept. (EDD) is the state
agency that certifies individuals as eligible employees
under both the federal and state jobs tax credit laws.
There is some overlap with the federal targeted jobs credit
in the categories of eligible employees, but for the most
part the state requirements are different.

The state jobs credit for eligible and certified employees
is as follows:

    . For the first 12 months of employment, a tax credit
      equal to 10% of the first $3,000 of wages paid to the
      employee.

    . For the second year of employment, a tax credit of
      10% of the first $3,000 of wages for such period.

Thus, the maximum California jobs credit is $600 per
employee, earned over a 2-year period.  The state jobs
credit is NOT allowed as an offset against the California
alternative minimum tax or the corporation minimum franchise
tax.  Note that the California jobs credit expired on
December 31, 1993 (unless it is unless retroactively
extended).

California also provides certain special jobs tax credits
for hiring disadvantaged or unemployed persons in
"Enterprise Zones" and "High-Density Unemployment Areas"
that have been designated in certain parts of the state
that are economically depressed.

Employers in California may also claim a 50% credit (up to
$600 per dependent) under a plan providing child care for
employees.

        ┌───────────────────────────────────────────────┐
        │       CALIFORNIA INVESTMENT TAX CREDIT        │
        └───────────────────────────────────────────────┘

Effective January 1, 1994, California began to allow a 6%
investment tax credit (ITC) on certain purchases of equipment
and other tangible personal property purchased for use by a
"qualified person" where the property is placed in service
in California.  Such personal property must be used primarily
in any stage of the manufacturing, processing, refining,
fabricating, or recycling of property, beginning at the
point any raw materials are received by the "qualified
person" and introduced into the process, and ending at the
point at which the the manufacturing, etc. process has
altered the property to its completed form (including
packaging, if required).

(Effective September 11, 1994, if you pay sales tax or use
tax on the purchase of equipment that would qualify for the
investment tax credit, and if you are "pre-qualified" by the
Board of Equalization as a "new business," you may instead
elect to receive a refund of the sales or use tax, 6% in
1994, or 5% in 1995, in lieu of claiming the 6% investment
credit on your income or franchise tax return.  Businesses
that operate in Enterprise Zones or Program Areas may be
able to claim BOTH a sales tax and income tax credit!)

The credit also applies to tangible personal property that
is purchased for use by a qualified person, to be used in
California:

  . primarily in research and development;

  . primarily to maintain, repair, measure, or test the
    property described above; or

  . by a contractor purchasing the property either as an
    agent of a qualified person or for the contractor's own
    account and subsequent resale to a qualified person for
    use in the performance of a construction contract for
    a qualified person who will use the property as an
    integral part of the manufacturing, processing, refining,
    fabricating, or recycling process, or as a research or
    storage facility for use in connection with the
    manufacturing process.

NOTE:  Property that is leased by a "qualified person" to
another person DOES NOT qualify for the ITC for the lessor.

Under this law, a "qualified person" who can claim the
credit (or for whom it can be claimed by an agent) is any
person engaged in lines of business described in Codes 2000
to 3999 of the Standard Industrial Classification (SIC)
Manual published by the U.S. Office of Management and Budget,
1987 edition.  These particular SIC codes are under the
heading of "Manufacturing."

Note that, in addition to machinery and equipment, "tangible
personal property" (for purposes of the California ITC)
includes:

  . Equipment or devices (including computers and software)
    used or required to operate, control, regulate or
    maintain the machinery, plus repair and replacement
    parts with a useful life of one or more years;

  . Property used in pollution control that meets State
    Air Resources Board or Water Resources Control Board
    standards;

  . Certain special purpose buildings and foundations used
    as an integral part of the manufacturing, etc., process,
    but not including warehouses for completed products;

  . Fuel used or consumed in the manufacturing process; and

  . Property used in recycling.

However, tangible property does NOT (except as noted above)
include consumables with a useful life of less than a year,
inventory, equipment used in the extraction process, or
equipment used to store finished products that have completed
the manufacturing process.

While the new ITC could be EARNED in 1994, taxpayers could
not actually claim it on their tax returns until the 1995 tax
year (along with credits earned in 1995, if any).  Credits
that exceed your tax liability for any tax year can be
carried over for up to seven succeeding years (nine for
certain "small businesses").  A "small business" is one
that meets any one of 3 tests for the taxable year:

  . It has gross receipts of under $50 million;

  . It has net assets of under $50 million, OR

  . It has a total credit (ITC) of under $1 million.

This law provides that the ITC will remain in effect until
at least January 1, 2001 (or longer if manufacturing
employment does not grow to specified levels).

Note that, while claiming the credit as an offset against
sales tax is allowed only at the rate of 5% in 1995 and
later years, versus 6% if claimed as an income tax credit,
there may be advantages to claiming the sales tax credit
instead of an income tax credit:

  . The sales tax credit is available immediately, when you
    purchase equipment and give proper documentation of your
    eligibility for the credit to the seller; and

  . For many new businesses, it may be several years, if
    ever, before there is any income tax liability against
    which the income tax credit could be offset, unlike
    the sales tax credit, which can be used whether or
    not your business has any net taxable income.

(On the other hand, the "tax basis" of the asset must be
reduced for state tax depreciation purposes if the sales tax
credit is claimed, which is not the case for the income tax
credit.  Thus, there are numerous trade-offs to consider.)

NOTE:  S corporation shareholders get to claim the full 6%
income tax investment credit, and the S corporation itself
still gets to use 1/3 of the credit against its tax
liability, which is a fairly generous rule.

@CODE:OF
@CODE: HI

        ┌───────────────────────────────────────────────┐
        │        HAWAII TARGETED JOBS TAX CREDIT        │
        └───────────────────────────────────────────────┘

The Hawaii legislature has enacted a "targeted jobs tax
credit" equal to 20% of the first $6,000 of "qualified
first-year wages."  It applies only to wages paid to an
individual who is a vocational rehabilitation referral.

In addition, Hawaii law provides a capital goods excise
tax credit, which is essentially an investment credit of
4% of the cost of equipment placed in service by a business
in Hawaii, which amounts to a full credit for the 4%
General Excise Tax paid on the purchase.

This law is modeled after the federal investment credit
law that was in effect before 1986.
@CODE:OF
@CODE: PA

        ┌───────────────────────────────────────────────┐
        │     PENNYSLVANIA JOB CREATION TAX CREDITS     │
        └───────────────────────────────────────────────┘

The Commonwealth of Pennsylvania has adopted a job creation
tax credit, effective July 1, 1996, under which a company
that creates 25 or more new jobs in the Commonwealth may be
entitled to a tax credit of up to $1,000 per employee, if
proper application is made to the Department of Community
and Economic Development.  A "new job," for purposes of the
credit, is defined as a full time job for which the average
hourly wage rate (excluding benefits) is at least 150% of
the federal minimum wage.

Tax credits may be used against either the corporate income
tax, capital stock and franchise tax, or applied against
the personal income tax of sole proprietors or owners of
an S corporation or partnership, or against the gross
receipts tax or against certain taxes imposed on financial
institutions.
@CODE:OF