Veterans Day, which originally was fixed to commemorate the Armistice for World War I but later became a day to honor veterans of all wars, is November 11 (although the federal holiday is November 10).
In recognition of this date, it’s worth noting that businesses that hire certain disabled veterans can receive a federal income tax credit called the work opportunity tax credit (WOTC).
Here are 10 things to know about this credit:
1. Your employee must be a veteran.
For purposes of the tax credit, this is a person who served on active duty (not including training) in the Armed Forces of the United States for more than 180 days or has been discharged or released from active duty for a service-connected disability, and has been off active duty (not including training) for more than 90 days that ended during the 60-day period ending on the hiring date.
2. Your employee must be a qualified veteran.
This is a veteran who belongs to any of the following categories:
- Entitled to compensation for a service-connected disability and hired not more than one year after being discharged or released from active duty in the U.S. Armed Forces.
- Entitled to compensation for a service-connected disability and unemployed for a period totaling at least 6 months (whether or not consecutive) in the one-year period that ended on the date of hire. A member of a family receiving assistance under the Supplemental Nutrition Assistance Program (SNAP) (food stamps) for at least 3 months during the first year of employment.
- Unemployed for a period totaling at least 4 weeks (whether or not consecutive) but less than 6 months in the 1-year period prior to the date of hire.
- Unemployed for a period or periods totaling at least 6 months (whether or not consecutive) in the one-year period ending on the date of hire.
3. You must certify eligibility.
This is done by having your new employee sign Form 8850. You then submit it to the state workforce agency of the state in which your business is located (where the employee works) within 28 days after this worker begins employment with you. Your state may have electronic filing for this, so check. If you fail to do this, you can’t take the credit, even if the worker is a qualified veteran.
4. Figure the credit properly.
The credit rate is 40% of qualified first-year wages. The amount of wages taken into account is:
- $6,000 for a qualified veteran certified as being either (a) a member of a family receiving SNAP assistance (food stamps) for at least a 3-month period during the 15-month period ending on the hiring date, or (b) unemployed for a period or periods totaling at least 4 weeks (whether or not consecutive) but less than 6 months in the 1-year period ending on the hiring date.
- $12,000 for a qualified veteran certified as being entitled to compensation for a service-connected disability and hired not more than 1 year after being discharged or released from active duty in the U.S. Armed Forces.
- $14,000 for a qualified veteran certified as being unemployed for a period or periods totaling at least 6 months (whether or not consecutive) in the 1-year period ending on the hiring date.
- $24,000 for a qualified veteran certified as being entitled to compensation for a service-connected disability, and unemployed for a period or periods totaling at least 6 months (whether or not consecutive), in the 1-year period ending on the hiring date.
5. Complete Form 5884.
The business must complete this form and attach it to its annual tax return.
6. Reduce your deduction for wages.
The amount of wages that can be deducted are reduced dollar-for-dollar by the amount of an WOTC claimed.
7. Apply the general business credit limitation.
The WOTC is part of the general business credit, which operates to limit annual business credits to tax liability reduced by the greater of (a) the tentative minimum tax or (b) 25% of net regular tax liability that exceeds $25,000. However, excess credit amounts can be carried back one year and forward for up to 20 years, so this limitation won’t ultimately prevent you from benefiting from the WOTC.
8. Have your pass-thru entity file the paperwork.
For owners of S corporations, partnerships, and limited liability companies to claim their share of the WOTC, the entity must complete the paperwork (e.g., submit Form 8850 to the state workforce agency and attach a completed Form 5884 to the entity’s income tax return).
9. Note time limits for claiming the credit.
You can elect to claim or not to claim the WOTC any time within 3 years from the due date of your return on either your original return or an amended return (assuming you timely submitted Form 8850).
10. Watch for the expiration of the credit.
The credit is scheduled to expire in a couple of years; work must begin before January 1, 2020. Because of this scheduled expiration (which could change), if you’re thinking of expanding your staff, don’t miss out on this credit.
Conclusion
While the rate of unemployed veterans is low (3% in September 2017 compared with 4.3% in the prior year), that’s still a lot of veterans seeking work. Veterans can make excellent workers. Don’t overlook this labor pool when filling your job openings.
