Work Opportunity Credit
The work opportunity credit provides businesses with an incentive
to hire individuals from groups that have a particularly high
unemployment rate or other special employment needs. Your business
does not have to be in an empowerment zone, enterprise community, or
renewal community to qualify for this credit. You can claim the credit
if you pay or incur qualified first-year wages to a targeted
group employee.
At the time this publication was printed, this credit was set to
expire for individuals who begin work for you after December 2001.
Targeted group employee.
A targeted group employee is any employee who has been certified by
your state employment security agency (SESA) as a:
- Recipient of assistance under Temporary Assistance for Needy
Families (TANF),
- Veteran,
- Ex-felon,
- High-risk youth,
- Vocational rehabilitation referral,
- Summer youth employee,
- Food stamp recipient, or
- Supplemental security income (SSI) recipient.
The employee must meet the requirements explained in the
instructions to Form 8850.
State certification required.
An employee is not considered a targeted group employee without
SESA certification. To receive certification, submit Form 8850
to your SESA.
You must either:
- Receive the certification by the day the individual begins
work, or
- Do both of the following:
- Complete Form 8850 by the day you offer the individual a
job, and
- Submit the form to your SESA by the 21st day after the
individual begins work.
Qualified first-year wages.
Qualified first-year wages are qualified wages you pay or incur for
work performed by a targeted group employee during the 1-year period
beginning on the date the individual begins work for you. Qualified
wages are generally wages subject to the Federal Unemployment Tax Act
(FUTA) without regard to the FUTA dollar limit, but not more than
$6,000 each tax year for each employee ($3,000 each tax year for a
summer youth employee).
If the work performed by the employee during more than half of any
pay period qualifies under FUTA as agricultural labor, the first
$6,000 of that employee's wages subject to social security and
Medicare taxes are qualified wages. For a special rule that applies to
railroad employees, see section 51(h)(1)(B) of the Internal Revenue
Code.
Nonqualified wages.
See Form 5884 for a complete list of wages that do not qualify for
the credit. Some of the most common wages that do not qualify include
wages you pay or incur to an employee who:
- Has worked for you for more than 1 year,
- Is your relative or dependent,
- You rehired, if he or she was not a targeted group employee
when employed earlier, or
- Does not work for you for at least 120 hours.
Amount of credit.
The following table shows the rate you apply to qualified
first-year wages you pay or incur each tax year to a targeted group
employee who works the number of hours shown. The table also shows the
maximum credit you can claim each tax year for each targeted group
employee.
Table 2. Rate and Maximum Credit Each Tax Year
for Each Targeted Group Employee
|
|
Maximum |
|
|
|
Qualified |
|
|
|
First-Year |
Maximum |
Hours Worked |
Rate |
Wages |
Credit |
At least 400 |
40% |
$6,000* |
$2,400 |
Fewer than 400 but at least 120 |
25% |
6,000* |
1,500 |
|
|
|
|
*$3,000 for a summer youth employee
Claiming the credit.
Use Form 5884 to claim this credit.
Effect on salary and wage deduction.
In general, you must reduce the deduction on your income tax return
for salaries and wages by the amount of your work opportunity credit.
Effect on empowerment zone and renewal community employment credits.
Wages you use to claim the work opportunity credit cannot be used
to figure the empowerment zone or renewal community employment
credits. In addition, they reduce the maximum wage amount you can use
to figure either of those credits.
Effect of welfare-to-work credit.
You cannot claim both the work opportunity credit and the
welfare-to-work credit for the same employee during the same tax year.
More information.
For more information about the work opportunity credit, see Form
5884.
Welfare-to-Work Credit
The welfare-to-work credit provides businesses with an incentive to
hire long-term family assistance recipients. Your business does not
have to be in an empowerment zone, enterprise community, or renewal
community to qualify for this credit. You can claim the credit if you
pay or incur qualified wages during the first 2 years of
employment to a long-term family assistance recipient who
begins work for you after December 1997.
At the time this publication was printed, this credit was set to
expire for individuals who begin work for you after December 2001.
Long-term family assistance recipient.
A long-term family assistance recipient is an individual who has
been certified by your state employment security agency (SESA) as a
member of a family that:
- Has received assistance payments from Temporary Assistance
for Needy Families (TANF) for at least 18 consecutive months ending on
the hiring date,
- Receives assistance payments from TANF for any 18 months
(whether or not consecutive) beginning after August 5, 1997, and is
hired not more than 2 years after the end of the earliest 18-month
period, or
- Stops being eligible after August 5, 1997, for assistance
payments because federal or state law limits the maximum period that
assistance is payable, and is hired not more than 2 years after that
eligibility for assistance ends.
State certification required.
An individual is not considered a long-term family assistance
recipient without SESA certification. To receive certification, submit
Form 8850 to your SESA.
You must either:
- Receive the certification by the day the individual begins
work, or
- Do both of the following:
- Complete Form 8850 by the day you offer the individual a
job, and
- Submit the form to your SESA by the 21st day after the
individual begins work.
Qualified wages.
Qualified wages are generally wages subject to the Federal
Unemployment Tax Act (FUTA) without regard to the FUTA dollar limit,
but not more than $10,000 each tax year for each employee.
If the work performed by the employee during more than half of any
pay period qualifies under FUTA as agricultural labor, the first
$10,000 of that employee's wages subject to social security and
Medicare taxes are qualified wages. For a special rule that applies to
railroad employees, see section 51A(b)(5)(C) of the Internal Revenue
Code.
For this credit, qualified wages also generally include the
following amounts paid or incurred by the employer that are normally
excludable from the employee's gross income.
- Amounts received for medical care under accident and health
plans.
- Employer-provided coverage under accident and health
plans.
- Certain amounts excludable under an educational assistance
program, or that would be excludable but for the expiration of the
exclusion. (At the time this publication was printed, this exclusion
was set to expire for courses beginning after December 2001.)
- Amounts excludable under a dependent care assistance
program.
Nonqualified wages.
See Form 8861 for a complete list of wages that do not qualify for
the credit. Some of the most common wages that do not qualify include
wages you pay or incur to an employee who:
- Has worked for you for more than 2 years,
- Is your relative or dependent,
- You rehired, if he or she was not a long-term family
assistance recipient when employed earlier, or
- Does not either:
- Work for you for at least 180 days, or
- Complete at least 400 hours of service.
Amount of credit.
The following table shows the rate you apply to the qualified wages
you pay or incur during each year of employment. The table also shows
the maximum credit you can claim each tax year for each qualified
employee.
Table 3. Rate and Maximum Credit Each Tax Year
for Each Long-Term Family Assistance Recipient
|
|
Maximum |
|
|
|
Qualified |
Maximum |
|
Rate |
Wages |
Credit |
Qualified first-year wages |
35% |
$10,000 |
$3,500 |
Qualified second-year wages |
50% |
10,000 |
5,000 |
Qualified first-year wages.
Qualified first-year wages are qualified wages you pay or incur for
work performed by a long-term family assistance recipient during the
1-year period beginning on the date the individual begins work for
you.
Qualified second-year wages.
Qualified second-year wages are qualified wages you pay or incur
for work performed by a long-term family assistance recipient during
the 1-year period beginning on the day after the last day of the
first-year wage period.
Claiming the credit.
Use Form 8861 to claim this credit.
Effect on salary and wage deduction.
In general, you must reduce the deduction on your income tax return
for salaries and wages by the amount of your welfare-to-work credit.
Effect on empowerment zone and renewal community employment credits.
Wages you use to claim the welfare-to-work credit cannot be used to
figure the empowerment zone or renewal community employment credits.
In addition, they reduce the maximum wage amount you can use to figure
either of those credits.
Effect of work opportunity credit.
You cannot claim both the welfare-to-work credit and the work
opportunity credit for the same employee during the same tax year.
More information.
For more information about the welfare-to-work credit, see Form
8861.
Indian Employment Credit
The Indian employment credit provides businesses with an incentive
to hire certain individuals who live on or near an Indian reservation.
Your business does not have to be in an empowerment zone, enterprise
community, or renewal community to qualify for this credit. You can
claim the credit if you pay or incur qualified wages to a
qualified employee.
At the time this publication was printed, this credit was set to
expire for tax years beginning after 2003.
Qualified employee.
A qualified employee, for any tax period, is any employee who meets
all the following tests.
- The employee is an enrolled member of an Indian tribe or the
spouse of an enrolled member of an Indian tribe.
- The employee performs substantially all of his or her
services for you within an Indian reservation.
- While performing those services, the employee has his or her
main home on or near that reservation.
Also, more than 50% of the wages you pay or incur to the
employee during the year must be for services performed in your trade
or business.
Nonqualified employees.
The following individuals are not qualified employees.
- Any employee to whom you pay or incur wages (including wages
for services outside an Indian reservation) at a rate that would cause
you to pay the employee more than $30,000 if the rate applied for an
entire year. (This wage limit may be adjusted for inflation for tax
years beginning after 2000.)
- Certain related taxpayers.
- Certain dependents.
- Any 5% owner.
- Any individual who performs services involving certain
gaming activities.
- Any individual who performs services in a building housing
certain gaming activities.
Qualified wages.
Qualified wages are any wages you pay or incur for services
performed by an employee while the employee is a qualified employee
(defined earlier). Wages are generally defined as those wages subject
to the Federal Unemployment Tax Act (FUTA) without regard to the FUTA
dollar limit.
Also treat as qualified wages any qualified employee health
insurance costs you pay or incur on behalf of a qualified employee.
However, do not include any amount you pay or incur for health
insurance under a salary reduction arrangement.
The total amount of qualified wages (including qualified employee
health insurance costs) you can use to figure the credit cannot be
more than $20,000 for each employee each tax year.
Effect of work opportunity credit.
Qualified wages do not include any amount you pay or incur for work
performed by a qualified employee during the 1-year period beginning
on the date the individual begins work for you, if you use any part of
these wages to claim the work opportunity credit.
Amount of credit.
In most cases, the credit is 20% of the excess of your current year
qualified wages and qualified employee health insurance costs over the
sum of the corresponding amounts you paid or incurred during calendar
year 1993.
Claiming the credit.
Use Form 8845 to claim this credit.
Effect on salary and wage deduction.
In general, you must reduce the deductions on your income tax
return for salaries and wages and health insurance costs by the amount
of your Indian employment credit.
Early termination of employee.
Generally, if you terminate a qualified employee sooner than 1 year
after the date of initial employment, you cannot claim a credit for
that employee for the tax year the employment is terminated. Also, you
may have to recapture credits allowed in earlier years.
These rules do not apply in the following situations.
- The employee voluntarily quits.
- The employee is terminated because of misconduct.
- The employee becomes disabled. However, if the disability
ends before the end of the first year of employment, you must offer
reemployment to the former employee.
More information.
For more information about the Indian employment credit, see Form
8845.
Depreciation of Property Used on Indian Reservations
Depreciation is a loss in the value of property over the time the
property is being used. You can get back your cost of certain property
by taking deductions for depreciation. This includes the cost of
certain buildings and equipment you use in your business.
Special depreciation rules apply to qualified property that you
place in service on an Indian reservation after 1993 and before 2004.
These special rules allow you to use shorter recovery periods to
figure your depreciation deduction for qualified property. As a
result, your deduction is larger. Your business does not have to use
the property in an empowerment zone, enterprise community, or renewal
community to use these special rules.
Qualified property.
Property eligible for the shorter recovery periods is 3-, 5-, 7-,
10-, 15-, and 20-year property and nonresidential real property. You
must use this property predominantly in the active conduct of a trade
or business within an Indian reservation. Real property you rent to
others that is located on an Indian reservation is also eligible for
the shorter recovery periods.
The following property is not qualified property.
- Property used or located outside an Indian reservation on a
regular basis, other than qualified infrastructure property.
- Property acquired directly or indirectly from certain
related persons.
- Property placed in service for purposes of conducting or
housing certain gaming activities.
- Any property you must depreciate under the Alternative
Depreciation System (ADS).
Qualified infrastructure property.
Item (1) above does not apply to qualified infrastructure property
located outside the reservation that is used to connect with qualified
infrastructure property within the reservation.
Qualified infrastructure property is property that meets all the
following requirements.
- It is qualified property, as defined earlier (except that it
is outside the reservation).
- It benefits the tribal infrastructure.
- It is available to the general public.
- It is placed in service in connection with the active
conduct of a trade or business within a reservation.
Infrastructure property includes, but is not limited to, roads,
power lines, water systems, railroad spurs, and communications
facilities.
Recovery periods.
The following table shows the shorter recovery periods you can use
to depreciate qualified property.
Table 4. Recovery Periods for Qualified
Property
|
Recovery |
Property Class |
Period |
3-year |
2 years |
5-year |
3 years |
7-year |
4 years |
10-year |
6 years |
15-year |
9 years |
20-year |
12 years |
Nonresidential real property |
22 years |
More information.
For more information about depreciation, including the special
rules that apply to property used on Indian reservations, see
Publication 946.
Exclusion of Capital Gains From DC Zone Assets
If you hold a District of Columbia Enterprise Zone (DC Zone) asset
more than 5 years, you will not have to include any qualified
capital gain from its sale or exchange in your gross income. This
exclusion applies to an interest in, or property of, certain
businesses operating in the District of Columbia.
DC Zone Asset
A DC Zone asset is any of the following.
- DC Zone business stock.
- DC Zone partnership interest.
- DC Zone business property.
In determining whether any property is a DC Zone asset, continue to
treat the DC Zone as an empowerment zone for years after 2003.
DC Zone business stock.
DC Zone business stock is any stock in a U.S. corporation that is
originally issued after 1997, if all the following requirements are
met.
- You acquired the stock before January 1, 2004, at its
original issue solely in exchange for cash. (This requirement is also
met if you acquired the stock before, on, or after January 1, 2004,
from another person in whose hands it was DC Zone business
stock.)
- The corporation was a DC Zone business (or was being
organized as a DC Zone business) at the time the stock was
issued.
- The corporation qualified as a DC Zone business during
substantially all of your holding period for the stock. (This
requirement is also met if the corporation ceased to qualify as a DC
Zone business after the 5-year period beginning on the date you
acquired the stock. However, your qualified capital gain cannot be
more than what it would have been if you had sold the stock on the
date the corporation ceased to qualify.)
Redemptions of business stock.
Stock will not qualify as DC Zone business stock if the issuing
corporation makes certain redemptions of its stock within 2 years
before or 2 years after the date the stock was issued. For details,
see sections 1400B(b)(2)(B) and 1202(c)(3) of the Internal Revenue
Code.
DC Zone partnership interest.
A DC Zone partnership interest is any capital or profits interest
in a U.S. partnership that is originally issued after 1997, if all the
following requirements are met.
- You acquired the partnership interest from the partnership
before January 1, 2004, in exchange for cash. (This requirement is
also met if you acquired the partnership interest before, on, or after
January 1, 2004, from another person in whose hands it was a DC Zone
partnership interest.)
- The partnership was a DC Zone business (or was being
organized as a DC Zone business) at the time the partnership interest
was acquired.
- The partnership qualified as a DC Zone business during
substantially all of your holding period for the partnership interest.
(This requirement is also met if the partnership ceased to qualify as
a DC Zone business after the 5-year period beginning on the date you
acquired the partnership interest. However, your qualified capital
gain cannot be more than what it would have been if you had sold the
partnership interest on the date the partnership ceased to
qualify.)
Redemptions of partnership interest.
A partnership interest will not qualify as a DC Zone partnership
interest if the partnership makes certain acquisitions of its
partnership interests within 2 years before or 2 years after the date
the partnership interest was issued. For details, see sections
1400B(b)(3), 1400B(b)(2)(B), and 1202(c)(3) of the Internal Revenue
Code.
DC Zone business property.
DC Zone business property is tangible property acquired after 1997
that meets all the following requirements.
- You acquired the property before January 1, 2004. (This
requirement is also met if you acquired the property before, on, or
after January 1, 2004, from another person in whose hands it was DC
Zone business property.)
- You did not acquire the property from a related person or
member of a controlled group of which you are a member.
- Your basis in the property is not determined either by its
adjusted basis in the hands of the person from whom you acquired it or
under the stepped-up basis rules for property acquired from a
decedent.
- You were the first person to use the property in the DC
Zone. (This requirement is also met if you acquired the property from
another person in whose hands it was DC Zone business
property.)
- Substantially all of the use of the property was in your DC
Zone business during substantially all of your holding period for that
property. (This requirement is also met if you stopped using the
property in your DC Zone business, or your business ceased to qualify
as a DC Zone business, after the 5-year period beginning on the date
you acquired the property. However, your qualified capital gain cannot
be more than what it would have been if you had sold the property on
the date you stopped using the property in your DC Zone business or on
the date your business ceased to qualify.)
Special rule for substantially improved buildings.
Buildings (and land on which they are located) will be treated as
having met requirements (1) and (4) if you substantially improve the
buildings before January 1, 2004. You substantially improve a building
if, during any 24-month period beginning after 1997, your additions to
the basis of the property are more than the greater of the following
amounts.
- 100% of the adjusted basis of the property at the beginning
of the 24-month period.
- $5,000.
DC Zone business.
A DC Zone business for this capital gains exclusion is an
enterprise zone business as defined earlier under Increased
Section 179 Deduction in the discussion of empowerment zones,
with the following exceptions.
- The 35% employee residence requirement listed in item (6)
does not apply.
- The 50% of gross income requirement listed in item (2) is
increased to 80%.
- No area other than the DC Zone can be treated as an
empowerment zone or enterprise community.
For this purpose, the DC Zone is treated as including all
census tracts in the District of Columbia with a poverty rate of 10%
or more as determined by the 1990 census.
Qualified Capital Gain
Qualified capital gain is any gain recognized on the sale or
exchange of a DC Zone asset that is a capital asset or property used
in a trade or business as defined in section 1231(b) of the Internal
Revenue Code (generally real property or depreciable personal
property). But it does not include any of the following gains.
- Gain attributable to periods before 1998 or after December
31, 2008.
- Section 1245 gain. See chapter 3 in Publication 544,
Sales and Other Dispositions of Assets.
- Section 1250 gain figured as if section 1250 applied to
all depreciation rather than the additional depreciation.
See chapter 3 in Publication 544.
- Gain attributable to real property or an intangible asset
that is not an integral part of a DC Zone business.
- Gain attributable, directly or indirectly, in whole or in
part, to a transaction with a related person. For the definition of a
related person, see chapter 2 in Publication 544.
Other rules.
Rules similar to certain rules in section 1202 of the Internal
Revenue Code apply to interests in pass-through entities, certain
tax-free transfers, contributions to capital after the original stock
issuance date, and short positions.
How To Get Tax Help
You can get help with unresolved tax issues, order free
publications and forms, ask tax questions, and get more information
from the IRS in several ways. By selecting the method that is best for
you, you will have quick and easy access to tax help.
Contacting your Taxpayer Advocate.
If you have attempted to deal with an IRS problem unsuccessfully,
you should contact your Taxpayer Advocate.
The Taxpayer Advocate represents your interests and concerns within
the IRS by protecting your rights and resolving problems that have not
been fixed through normal channels. While Taxpayer Advocates cannot
change the tax law or make a technical tax decision, they can clear up
problems that resulted from previous contacts and ensure that your
case is given a complete and impartial review.
To contact your Taxpayer Advocate:
- Call the Taxpayer Advocate at
1-877-777-4778.
- Call the IRS at
1-800-829-1040.
- Call, write, or fax the Taxpayer Advocate office in your
area.
- Call 1-800-829-4059 if you are
a TTY/TDD user.
For more information, see Publication 1546, The Taxpayer
Advocate Service of the IRS.
Free tax services.
To find out what services are available, get Publication 910,
Guide to Free Tax Services. It contains a list of free tax
publications and an index of tax topics. It also describes other free
tax information services, including tax education and assistance
programs and a list of TeleTax topics.
Personal computer. With your personal computer and
modem, you can access the IRS on the Internet at
www.irs.gov. While visiting our web site, you can select:
- Frequently Asked Tax Questions (located under
Taxpayer Help & Ed) to find answers to questions you
may have.
- Forms & Pubs to download forms and
publications or search for forms and publications by topic or
keyword.
- Fill-in Forms (located under Forms &
Pubs) to enter information while the form is displayed and then
print the completed form.
- Tax Info For You to view Internal Revenue
Bulletins published in the last few years.
- Tax Regs in English to search regulations and the
Internal Revenue Code (under United States Code
(USC)).
- Digital Dispatch and IRS Local News Net
(both located under Tax Info For Business) to receive
our electronic newsletters on hot tax issues and news.
- Small Business Corner (located under Tax
Info For Business) to get information on starting and operating
a small business.
You can also reach us with your computer using File Transfer
Protocol at ftp.irs.gov.
TaxFax Service. Using the phone attached to your fax
machine, you can receive forms and instructions by calling
703-368-9694. Follow the directions from the
prompts. When you order forms, enter the catalog number for the form
you need. The items you request will be faxed to you.
Phone. Many services are available by phone.
- Ordering forms, instructions, and publications.
Call 1-800-829-3676 to order
current and prior year forms, instructions, and publications.
- Asking tax questions. Call the IRS with your tax
questions at 1-800-829-1040.
- TTY/TDD equipment. If you have access to TTY/TDD
equipment, call 1-800-829-4059 to ask tax
questions or to order forms and publications.
- TeleTax topics. Call
1-800-829-4477 to listen to pre-recorded
messages covering various tax topics.
Evaluating the quality of our telephone services. To
ensure that IRS representatives give accurate, courteous, and
professional answers, we evaluate the quality of our telephone
services in several ways.
- A second IRS representative sometimes monitors live
telephone calls. That person only evaluates the IRS assistor and does
not keep a record of any taxpayer's name or tax identification
number.
- We sometimes record telephone calls to evaluate IRS
assistors objectively. We hold these recordings no longer than one
week and use them only to measure the quality of assistance.
- We value our customers' opinions. Throughout this year, we
will be surveying our customers for their opinions on our
service.
Walk-in. You can walk in to many post offices,
libraries, and IRS offices to pick up certain forms, instructions, and
publications. Also, some libraries and IRS offices have:
- An extensive collection of products available to print from
a CD-ROM or photocopy from reproducible proofs.
- The Internal Revenue Code, regulations, Internal Revenue
Bulletins, and Cumulative Bulletins available for research
purposes.
Mail. You can send your order for forms, instructions,
and publications to the Distribution Center nearest to you and receive
a response within 10 workdays after your request is received. Find the
address that applies to your part of the country.
- Western part of U.S.:
Western Area Distribution Center
Rancho Cordova, CA 95743-0001
- Central part of U.S.:
Central Area Distribution Center
P.O. Box 8903
Bloomington, IL 61702-8903
- Eastern part of U.S. and foreign addresses:
Eastern Area Distribution Center
P.O. Box 85074
Richmond, VA 23261-5074
CD-ROM. You can order IRS Publication 1796, Federal
Tax Products on CD-ROM, and obtain:
- Current tax forms, instructions, and publications.
- Prior-year tax forms, instructions, and publications.
- Popular tax forms which may be filled in electronically,
printed out for submission, and saved for recordkeeping.
- Internal Revenue Bulletins.
The CD-ROM can be purchased from National Technical Information
Service (NTIS) by calling 1-877-233-6767
or on the Internet at www.irs.gov/ cdorders. The
first release is available in mid-December and the final release is
available in late January.
IRS Publication 3207, Small Business Resource Guide, is
an interactive CD-ROM that contains information important to small
businesses. It is available in mid-February. You can get one free copy
by calling 1-800-829-3676 or visiting the
IRS web site at www. irs.gov/prod/bus_info/sm_bus/smbus-cd.html.
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