Construction Update

Opportunity Knocks As Congress Renews Tax Credit

Contractors sometimes overlook an important federal program called the Work Opportunity Tax Credit (WOTC), a straight dollar-for-dollar reduction in tax liability that can reduce your tax bill significantly.

The Work Opportunity Tax Credit originated eight years ago in a Congress marked by welfare reform. Like other legislation of that era, including the Welfare-to-Work program, it promotes job development and training for individuals in certain carefully targeted populations. The current Congress renewed the WOTC in September.

The idea of tax credits isn’t new. States have long offered companies incentives to invest in training, equipment, land or facilities in designated areas, and the Internal Revenue Code rewards a wide range of initiatives — from alternative fuel campaigns to building designs that accommodate disabled persons.

Tax Laws Reward or Penalize

The primary function of a tax system, of course, is to finance the government’s operations. But in so doing, many tax laws also aim to influence behavior — personal as well as business — by penalizing certain actions and rewarding others. (Questions about whether a particular behavior calls for a carrot or a stick have been debated since Colonial times.)

The Work Opportunity Tax Credit rewards action by employers. It encourages companies to hire certain job seekers (see sidebar) by offering the companies a reduction in federal tax liability. The credit is neither a deferral nor a deduction or exemption, but rather a straight-dollar savings. For a full-time hire it can reach as much as $2,400; lesser credits are available for summer hires.

Claiming a work opportunity credit imposes clerical obligations that can put some companies off — even if the paperwork is worth $2,400. In order to claim the credit, a firm must file forms with both a state workforce agency and the IRS.

Timely Filing Required

States are responsible for certifying that a new hire meets WOTC criteria. Because the state and federal forms are due within 21 days of the new employee’s start date, companies that would claim the credit must have procedures and questionnaires in place to capture relevant information at the beginning of the application process — not six months after the fact.

For a larger firm, the tax savings gained by claiming the WOTC might justify assigning personnel to manage the process. Consulting experts can provide training and guidance — to ensure, for example, that the information-gathering is indeed relevant and legal. Smaller firms may choose to contract out the entire project.

How will you know which of your applicants live in an Empowerment Zone, for example? It’s not always obvious: A fraternity house at a well-heeled private college might qualify while the mean streets of a nearby neighborhood might not. You can’t expect your applicants to know their status — not many people think of their home turf in terms of federal Empowerment Zone designations.

So are you ready to undertake a project to match job applicants to the boundaries of the various zones?

Whether to outsource this process or manage it in house, in fact, may be the biggest question a company faces with the Work Opportunity Tax Credit. Answering that question wisely requires a careful analysis of costs and potential benefits, which will vary greatly from firm to firm depending on its size, hiring practices and turnover rates.

Our firm can help you assess the value of the Work Opportunity Tax Credit for your business, and then help you decide how you can pursue it successfully.

For more information about our services to the construction industry, Contact:
Mark Lund, Parter-in-Charge of Construction Services at 713.297.6907.

The articles in this newsletter are general in nature and are not a substitute for accounting, legal, or other professional services. We assume no liability for the reader's reliance on this information. Before implementing any of the ideas contained in this publication, consult a professional advisor to determine whether they apply to your unique circumstances.