When crafts retailer Jo-Ann Stores notified Visalia, Calif., that the city was on their short list of locations for a major distribution center, the Tulare County Business Incentive Zone (BIZ) started its work to persuade the company to choose Visalia. They offered a comprehensive financial assistance package that included state income tax credits of $31,500 per employee hired over a five-year period. Jo-Ann Stores accepted. In return for the package, the company agreed to provide more than 120 jobs to low- and moderate-income individuals and within three years increase the number of jobs to 350. The result: Jo-Ann Stores now employs 125 people in a 630,000-square-foot distribution center in Visalia. For the city's efforts to attract the company, Visalia Mayor Don Landers accepted the "Success Story of the Year" award from the California Association of Enterprise Zones. Could your company be the next success story?
With the economic downturn since September 11 and the fall of some of the country's largest emp loyers, hiring tax-credit programs have taken on importance as a means to help curb the unemployment rate and provide fiscal relief to businesses.
Yet despite the value of hiring tax-credit programs, most companies don't pursue them. In many cases, an in-house corporate tax team, major auditor, or corporate real estate broker is either not aware of or underestimates the benefits of hiring tax credits. While companies pay close attention to other kinds of financing opportunities, they miss out on thousands--or millions--of dollars in lost savings each year when they don't pursue hiring tax credits. And when businesses know about the programs, unfortunately, they often falsely conclude they wouldn't qualify or the process for complying would be too difficult. Not so.
Here's a look at the types of hiring tax credits that are available and how you can participate in them with ease.
Hiring tax credits come in two forms: those that focus on persuading companies to open facilities in certain "incentive zones" and those that encourage a company to hire targeted groups of individuals or create jobs. First let's consider the incentive-zone programs.
More than 1,000 areas across the country have been in some way classified as enterprise zones by the federal or state governments to provide incentives for companies willing to invest in those designated zones. Federal incentive zones are called Empowerment Zones, while state ones are Enterprise Zones. Most states have one or both types. Each zone usually offers employers thousands of dollars in tax credits per eligible new hire. To qualify for the credit, new hires must generally work or live in the zone or both. The zones often offer businesses a range of other benefits also, all geared at sustainable community development, including tax-exempt facility bonds, Work Opportunity Tax Credits (WOTC), reductions of the capital gains tax liability, increased expensing deductions on depreciable property, and deduction of qualified brownfield cleanup costs.
One recent example of an incentive zone at the federal level comes as a result of September 11. To address the economic redevelopment challenges facing New York City, in March 2002 President Bush signed into law the Liberty Zone Employment Credit for Lower Manhattan. The intent: encourage businesses to remain, expand, and relocate to lower Manhattan by offsetting labor costs. The new provision will provide for a special yearly credit of $2,400 per employee through 2004 for businesses with fewer than 200 employees.
In addition, the Department of Housing and Urban Development (HUD) recently announced that 40 communities around the country will be designated Renewal Communities (RCs). RCs are urban and rural communities targeted for renewal and nominated by state and local governments. They are similar to the Empowerment and Enterprise Zones, and businesses in these areas can take advantage of wage credits worth up to $1,500 for every new or existing employee who lives and works in an RC.
HUD also designated seven new Empowerment Zones in addition to the more than two dozen across the country. Businesses in these areas are eligible for a federal hiring tax credit of up to $3,000 per qualified zone employee each year. Any employee who lives and works in the zone qualifies. More information about where the zones are located is available at http://www.hud.gov/ezec/locator.
State Enterprise Zones
The Tulare County BIZ mentioned earlier is an excellent example of the innovative incentive programs states are offering. Three entities created the program--the Tulare County Employment Center, the Tulare County Economic Development Corporation, and the Targeted Tax Area. The efforts of this joint partnership resulted in a complete tax incentive package to every eligible company in the Tulare County Business Incentive Zone. Any business in the Zone can take advantage of these incentives. Hiring credits are available for any workers who are residents of the Zone or who are economically disadvantaged, disabled, Native American, ex-offenders, or eligible recipients of general public assistance.
The program enables companies to receive state income tax credits of more than $31,500 per employee hired over a five-year period. The maximum hiring credit available is based on an hourly wage of $10.12 over five years. Since the Targeted Tax Area was put in place in November 1998, more than 1,800 employees at 64 companies have utilized the incentives.
NEW-HIRE AND JOB-CREATION TAX CREDITS
Beyond incentive-zone hiring credits, other types of new-hire and job-creation tax credits are available with less stringent qualifying criteria, such as only requiring the company to be located in the state instead of a specific community, or, in the case of federal credits, the company can be hiring anywhere in the country. New-hire credits are aimed at a company's new and replacement workers, while job-creation credits are targeted solely at new positions created within a company. For instance, if a company created and filled 50 new jobs in 2002, all 50 of these positions could qualify for a job-creation credit.
Hiring and job-creation tax credits exist in almost every state. When a state offers its own hiring tax-credit program, these credits can be claimed in addition to federal employment wage tax credits, doubling the benefit. Let's look at targeted hiring tax credits and job-creation tax credits.
Targeted Hiring Tax Credits
The federal government offers companies tax credits for hiring individuals from certain targeted groups, such as Native Americans, recipients of public assistance, at-risk youth, the disabled, and residents of Empowerment Zones. These credits include the Work Opportunity Tax Credit (WOTC) and Welfare-to-Work (W-t-W) Tax Credit. The maximum credit per employee is $2,400 for the WOTC and $8,500 per employee for the W-t-W credit. Generally, 5% to 15% of a company's ongoing new hires will meet the eligibility requirements for the WOTC or W-t-W credit.
Regarding the WOTC and W-t-W Tax Credit, in March 2002 Congress passed a two-year retroactive extension as part of the economic stimulus bill, enabling businesses to continue capturing these valuable credits.
Job-Creation Tax Credits
The federal government and many states offer current employers tax credits worth thousands of dollars for each new full-time job created in a calendar year. Companies are generally required to create a minimum number of jobs over a set period of time. The catch: Companies usually must apply for these credits before filling the new positions.
REAPING THE BENEFITS WITH EASE
So now that you know what's available, the next question is how you obtain the credits. If you want to administer a tax-credit opportunity internally, you can use a variety of software and Web-based technologies to capture hiring tax credits and process the forms. Generally, these capabilities are accessed through subcontracted relationships with tax-credit firms specializing in combining advanced technologies with government-compliance procedures. These firms can also seamlessly integrate the hiring tax-credit workflow into the company's human resources process.
To date, the federal government still requires physical signatures from new hires on the WOTC and W-t-W 8850 Form, so at this point the WOTC and W-t-W tax credit process can't be fully automated. But the IRS has launched a working group called the Simplified Tax and Wage Reporting System (STAWRS) to develop a fully electronic version of the 8850 Form. It's anticipated this process will be available to any business in the next year or two. State tax-credit programs have their own unique requirements and may work differently and be more streamlined.
HOW TO PARTICIPATE
Since there's overhead associated with the forms processing necessary to participate, most companies choose to outsource the program administration to specialized tax-credit firms mentioned earlier. Such firms can streamline the certification process for getting government approval for the tax credit and capture the greatest amount of credits. They can research and obtain a variety of state and federal tax credits for which a company might otherwise not have the time or willingness to apply. They also maintain contact with program directors so clients' needs can be presented most effectively to the state administrators. Outsourcing to tax-credit specialists offers companies peace of mind, cost savings, and end-to-end consolidation of the identification and processing tasks. So now are you ready to achieve financial success with hiring tax credits?
Information Is a Click Away
Here are a few organizations that can help you learn more about hiring tax credits:
Walton Management provides specialty tax-credit services for a variety of federal and state tax-credit programs. www.waltonmanagement.com
The Department of Housing and Urban Development provides extensive information about the Empowerment Zone program. www.hud.gov/ezec/locator
The Department of Labor's Training and Employment Administration offers information about welfare-to-work tax-credit opportunities. www.doleta.gov
Daniel A. Weiss is senior associate in the National Capital Area Office of Walton Management Services, a consulting firm with more than 20 years' experience administering state and federal corporate tax-credit programs. You can reach Daniel at firstname.lastname@example.org or (301) 657-4620.…