Two business tax credits, the Work Opportunity Tax Credit (WOTC) and the New Markets Tax Credit (NMTC), are among the tax provisions extended when the omnibus spending and tax extender legislation was passed by Congress and signed into law on December 18.
Work Opportunity Tax Credit Extended through 2019
The WOTC allows employers who hire members of certain targeted groups to receive a tax credit equal to a percentage of wages during the first year of employment of up to $6,000 per employee ($3,000 for qualified summer youth employees).
- If the individual works at least 120 hours, the employer may claim a tax credit equal to 25% of the individual's first year wages, up to the maximum tax credit.
- If the individual works at least 400 hours, the employer may claim a tax credit equal to 40% of the individual's first year wages, up to the maximum tax credit.
Where the employee is a long-term family assistance (LTFA) recipient, the employer may claim a credit for second-year wages, equal to 50% of qualified wages for that year. For LFTA recipients, the WOTC limitation is $10,000 per employee.
The WOTC applies for the hiring of qualifying veterans, with the maximum limitation generally at $6,000. However, the credit limitation can be as high as $12,000, $14,000, or $24,000, depending on factors such as whether the veteran has a service-connected disability, the period of his or her unemployment before being hired, and when that period of unemployment occurred relative to the WOTC-eligible hiring date.
The WOTC had expired at the end of 2014. The new law retroactively extends the WOTC for 2015 so that it applies to eligible veterans and individuals from target groups who begin work for the employer on or before December 31, 2019.
The new law also adds a new targeted group for WOTC eligibility beginning in 2016: qualified long-term unemployed individuals, defined as those who have had a period of unemployment which is greater than or equal to 27 consecutive weeks, and at some point during the period received unemployment compensation under state or federal law. The credit for such long-term unemployed individuals is 40% of the first $6,000 of wages.
New Markets Tax Credit Extended Through 2019
The NMTC was enacted in 2000 as Code Section 45D with the goal to incentivize investment in low-income and impoverished communities in the United States. Low-income communities are defined as:
- The poverty rate for such census tract is at least 20%
- The Median Family Income (MFI) of such census tract does not exceed 80% of:
- The statewide MFI, if the tract is not located within a metropolitan area, or
- The greater of statewide MFI or the metropolitan area MFI, if the tract is located within a metropolitan area
The NMTC allows a credit for making qualified equity investments (QEI) in community development entities (CDE), which invest in these low-income communities. The credit is:
- Five percent for the year in which the QEI is invested in the CDE and for the first two anniversary dates after the purchase (for a total credit of 15%), plus
- Six percent on each anniversary date thereafter for the following four years (for a total of 24%)
The credit totals to equal 39% of the qualifying investment and is claimed over seven years. Qualifying investments include any capital or equity investment in, or loan to, any qualified active low-income community business.
The NMTC had expired for tax years beginning in 2015. The new law retroactively extends the NMTC for 2015 through 2019. The extension reinstates the $3.5 million cap on qualifying equity investments and allows investments made in excess of the cap to be carried forward to be claimed as NMTC in tax years through 2024.