Credits Benefiting Disadvantaged Groups

The tax laws have been used historically to encourage certain activities that the government deems desirable, but that people might not otherwise undertake on their own because the economic rewards are perceived as insufficient. This group of tax credits is a good example of that type of policy.

Work Opportunity Tax Credit

The work opportunity credit is designed to provide an incentive to hire persons from certain disadvantaged groups that have a particularly high unemployment rate. A list of those groups is reproduced, below. In general, employers may claim a credit equal to 40 percent of the first $6,000 of qualified wages paid during an employee's first year of employment, or a maximum credit of $2,400 per qualifying employee. For qualified disabled veterans hired after May 25, 2007, the credit may be claimed for up to $12,000 of the first year wages. The employee must work at least 400 hours, or the credit is reduced by 75 percent. If an employee performs less than 120 hours of service, no credit is available.

The credit is claimed on Form 5884, Work Opportunity Credit.Any business expense deduction for such wages must be reduced by the amount of the credit, as reflected on Form 5884. The credit currently applies to the wages of employees hired before January 1, 2012.

The credit applies to the wages paid to new employees who fit in one of the following groups:

families receiving cash welfare benefits for at least 9 months during the 18-month period before the hiring date
veterans who are members of families receiving assistance or food stamps for at least a 3-month period during the 12-month period before the hiring date
veterans with service-related disabilities
vocational rehabilitation referrals certified to have a physical or mental disability
qualified summer youth employees aged 16 or 17 on the hiring date who live in an empowerment zone or enterprise community, perform services during a 90-day period between May 1 and September 15, and who have not previously worked for the employer
ex-felons hired not more than one year after the later of their conviction or release from prison, who are members of low-income families
individuals aged 18 to 24 who are in families that have been receiving food stamps for six months
Supplemental Security Income (SSI) beneficiaries
long-term family assistance recipients (formerly welfare-to-work individuals)
unemployed veterans who begin work in 2009 or 2010 only
disaffected youth who begin work in 2009 or 2010 only

Under special provisions, an employer's credit for hiring an eligible summer youth employee is only 40 percent of the first $3,000 of wages earned during the 90-day period. If the summer youth employee continues working for the employer after the 90-day period, the employer can get an additional credit until the employee earns $6,000 for the year if the employee qualifies as a member of another targeted group (e.g. part of a family receiving food stamps for six months).

Disabled Access Credit

Under the Americans with Disabilities Act of 1990 (ADA), businesses that are open to the public ("public accommodations," in legal language) must accommodate or help persons with disabilities seeking to use their services. They must also remove physical barriers to the disabled, if removal is "readily achievable" (the regulations say that moving tables in a restaurant is "readily achievable," but widening a doorway is not). What's more, any renovations or new construction must include provisions for accessibility by the disabled, in accordance with certain very technical specifications.

Small businesses that are faced with making changes to obey the ADA have been given a "carrot," in the form of a tax credit, to encourage them to comply with the law. For any year, the tax laws allow you to claim a credit for 50 percent of your eligible access expenditures that exceed $250 but don't exceed $10,250. So, you can't claim more than $5,000 in any one year. The "eligible access expenditures" include not only expenses for removal of physical barriers (in renovations, but not new construction), but also expenses for deaf interpreters; readers for the blind; equipment or devices to make services available to the deaf, blind, or other disabled persons; or similar expenses.

Save Money

If you anticipate that your disabled accommodation expenses will exceed $10,250, try to stage the project over more than one year in order to take maximum advantage of the tax credit.

The Disabled Access Credit is claimed on Form 8826, Disabled Access Credit, and is part of the general business credit. In addition to the dollar limit mentioned above, the total of all your general business credits can't reduce your current year's tax bill below the larger of (a) your tentative minimum tax or (b) 25 percent of the part of your regular tax bill that exceeds $25,000.

Empowerment Zone and Renewable Community Employment Credit

The Empowerment Zone tax benefits are available through 2011. This tax credit is available only to small businesses - that is, those having: (1) gross receipts of $1 million or less, or (2) having no more than 30 full-time employees during the preceding year.

If your business is located in a federal "empowerment zone," and you hire workers who also live and work within the zone, you can get a tax credit for 20 percent of the first $15,000 of wages paid to each of your workers (i.e., $3,000 maximum credit per employee each year). The workers can be full-time or part-time, so long as substantially all of their work is done within the zone and as part of your trade or business. You can't count wages paid to employees who worked for less than 90 days (unless the worker became disabled or was fired for misconduct); employees who are closely related to you; employees who own 5 percent or more of the business; or employees at golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetrack or gambling facilities, or liquor stores.

Where are these zones? Parts of the following areas are empowerment zones. You can find out if your business or an employee’s residence is located within an empowerment zone by using the HUD's RC/EZ/EC Address Locator, or by calling 1-800-998-9999.

Arkansas: Pulaski County
Arizona: Tucson
California: Fresno; Los Angeles; (city and county); Santa Ana; Desert Communities (part of Riverside County)
Connecticut: New Haven
District of Columbia
Florida: Jacksonville; Miami/Dade County
Georgia: Southwest Georgia United (part of Crisp County and all of Dooly County)
Illinois: Chicago; East St. Louis; Southernmost Illinois Delta (parts of Alexander and Johnson Counties and all of Pulaski County)
Indiana: Gary/Hammond/East Chicago
Kentucky: Kentucky Highlands (part of Wayne County and all of Clinton and Jackson Counties)
Maine: Aroostook County (parts)
Massachusetts: Boston
Maryland: Baltimore
Michigan: Detroit
Mississippi: Mid-Delta (parts of Bolivar, Holmes, Humphreys, Leflore, Sunflower, and Washington Counties)
Minnesota: Minneapolis
Missouri: St. Louis
New Jersey: Camden; Cumberland County
New York: New York; Syracuse; Yonkers
North Dakota: Griggs-Steele (part of Griggs County and all of Steele County)
Ohio: Cincinnati; Cleveland; Columbus; Ironton
Oklahoma: Oklahoma City
Pennsylvania: Philadelphia
South Carolina: Columbia/Sumter
South Dakota: Oglala Sioux Tribe (parts of Jackson and Bennett Counties and all of Shannon County)
Tennessee: Knoxville
Texas: El Paso; San Antonio; Middle Rio Grande FUTURO Communities (parts of Dimmit, Maverick, Uvalde, and Zavala Counties); Rio Grande Valley (parts of Cameron, Hidalgo, Starr, and Willacy Counties)
Virginia: Norfolk/Portsmouth
West Virginia: Huntington

The empowerment zone employment tax credit is claimed on Form 8844, Empowerment Zone Employment Credit, and is not part of the general business credit.

Indian Employment Credit

If your business is located on an Indian reservation, and you have employees who live on or near the reservation, you may be eligible for a special tax credit. You can claim a credit for 20 percent of your wages or health insurance costs for the year (up to $20,000 per employee) that exceed the total of comparable costs you had in 1993. However, the employee must be an enrolled member, or the spouse of an enrolled member, of an Indian tribe.

Until it expires at the end of 2011, the credit is claimed on Form 8845, Indian Employment Credit.

New Markets Credit

This tax credit for qualified equity investments made after December 31, 2000, to acquire stock in a community development entity (CDE). The credit includes any capital or equity investment in, or loan to, any qualified active low-income community business or qualified community development entity.

A CDE is any domestic corporation or partnership whose primary mission is serving or providing investment capital for low-income communities or low-income persons, that maintains accountability to residents of low-income communities through representation on governing or advisory boards of the CDE, and is certified by the Treasury Department as an eligible CDE. Examples of CDEs include community development banks, venture funds, and new investment companies.

The credit is worth over 30 percent of the amount invested (in present value terms). An investor is allowed a five percent credit for the year in which the equity interest is purchased from the CDE and for the first two anniversary dates after the purchase from the CDE. The investor is also entitled to a six percent credit on each anniversary date thereafter for the following four years. The credit is recaptured if the entity fails to continue to be a CDE or the interest is redeemed within seven years. The maximum annual amount of qualifying equity investments is capped at $3.5 billion for 2010 and 2011. Unused credits can be carried over through December 31, 2016.

The credit is claimed on Form 8874, New Markets Credit.

Low-Income Housing Credit

A tax credit is available for low-income housing that's constructed, rehabilitated, or acquired after 1986. The credit amounts to 70 percent of the qualified basis of non-federally subsidized units, or 30 percent of the qualified basis of units financed with tax-exempt bonds or other federal subsidies, but it must be claimed over a period of 10 years. The property must continue to meet the "low-income" requirements for at least 15 years to avoid recapture of tax benefits. If you purchase qualified property on which the credit is being claimed, before the 10 year period is up, you may be able to "step into the shoes" of the seller and claim the remainder of the credit.

The credit is claimed on Form 8586, Low-Income Housing Credit,.

Warning

If you're interested in investing in low-income housing to take advantage of the tax credit, you will definitely need the assistance of an attorney who is well-versed in this very complicated subject.

Making Work Pay Credit

If you have earned income for 2010, you may be eligible for the $400 Making Work Pay tax credit, scheduled to expire in 2010. This tax credit has meant more take-home pay for many workers, because the withholding tables were revised to take the credit into account.

The maximum credit is the lesser of either (1) $400 ($800 for married joint returns) or (2) 6.2 percent of your income (this credit is phased out for higher income taxpayers).

Some taxpayers may have had too little withheld from their wages during the year as a result of the revisions in the withholding tables for the credit. Those who risk reduced refunds or even tax due with their returns include married couples with two incomes, individuals with multiple jobs, dependents of other taxpayers, pensioners, Social Security recipients who also work, and workers without valid Social Security numbers.

The Making Work Pay tax credit is phased out for higher-income taxpayers. The credit is reduced by $2 for every $100 by which your income exceeds $75,000 for single taxpayers and $150,000 for couples filing a joint return. The credit phases out completely at $95,000 for single taxpayers and $190,000 for couples filing jointly.

A key feature of this tax credit is that it is refundable. Even if you don't owe any taxes, you can still take the credit and receive a tax refund. Use Schedule M to claim the credit on your Form 1040 or Form 1040A.

The Making Work Pay credit is eliminated after 2010. For 2011, it is replaced with an adjustment in the amount of payroll taxes paid. Fir 2011, the employees' portion of the Old Age, Survivors, and Disability tax (part of Social Security taxes) is reduced from 6.2 percent to 4.2 percent. The self-employment tax rate is also reduced 2 percent to 13.3 percent in 2011.