Three Tax Credit Opportunities Extended: WOTC, Federal Empowerment Zone and Indian Employment Credits

The Consolidated Appropriations Act, 2021 (CAA 2021), signed into law on December 27, 2020, extended three federal tax credits that were set to expire on December 31, 2020:

• The Work Opportunity Tax Credit (WOTC) is extended through December 31, 2025 (however, the CAA 2021 does not include the COVID-19 unemployed target group proposed in the Senate HEALS Act during the summer of 2020);
• The Federal Empowerment Zone tax credit is also extended through December 31, 2025; and
• The Indian Employment Credit is extended through December 31, 2021.

 
WOTC

The WOTC provides for a general business credit of up to $9,600 to employers that hire and retain individuals from certain targeted groups that have faced barriers to employment. A targeted group for purposes of the WOTC includes a qualified IV-A recipient, qualified veteran, qualified ex-felon, designated community resident, vocational rehabilitation referral, qualified summer youth employee, qualified food stamp recipient, qualified SSI recipient, long-term family assistance recipient or long-term unemployment recipient. The WOTC is equal to a percentage of the first-year wages paid or incurred by an employer during the taxable year to employees who are members of a covered targeted group.
 
Although there is no limit on the number of employees who may qualify for the WOTC, the amount of qualified first-year wages that may be taken into account with respect to an individual during a taxable year is generally limited to $6,000 (a $2,400 maximum credit), except in the following cases:

• The wage limitation is $12,000 (a $4,800 maximum credit) in the case of a qualified veteran with a service-connected disability who has a hire date not more than one year after having been discharged from active duty in the armed forces.
• The wage limitation is $14,000 (a $5,600 maximum credit) in the case of a qualified veteran without a service-connected disability having aggregate periods of unemployment during the one-year period ending on the hire date that equal or exceed six months.
• The wage limitation is $24,000 (a $9,600 maximum credit) in the case of a qualified veteran with a service-connected disability having aggregate periods of unemployment during the one-year period ending on the hire date that equal or exceed six months.

 

An employee may not be treated as a member of a targeted group unless he or she goes through a pre-screening process. For an employer to claim the WOTC, the employer must either: (1) obtain a certification from a designated local agency on or before the day the individual starts work confirming that the individual is a member of a targeted group; or (2) complete Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” on or before the day the individual is offered employment and submit the form to the appropriate designated local agency within 28 days after the individual starts work.

 

Empowerment Zone Employment Credit

Under the Empowerment Zone Employment Credit, an employer may claim a 20% credit on up to the first $15,000 of wages paid to certain employees. Substantially all of the services must be provided in the employer’s trade or business within an empowerment zone and the employee’s principle residence while providing the services must be within the zone. 

 

Indian Employment Credit

In general, the Indian Employment Credit may entitle an employer to a 20% tax credit on a portion of the qualified wages and employee health insurance costs paid to an enrolled member of an Indian tribe or the enrolled member’s spouse. To qualify, substantially all of the services must be performed by such an employee within an Indian reservation, and the employee’s principle residence while providing the services must be on or near the reservation where the services are performed.