The Work Opportunity Tax Credit (WOTC) program has been left unscathed in the Tax Cuts and Jobs Act (H.R. 1) that President Trump signed into law on Dec. 22, 2017. Although employers were initially concerned because provisions in the House version of the tax law would have repealed the WOTC program, the WOTC program will be maintained with no changes. The research and development (R&D) tax credit is also intact, although slightly altered procedurally.
What Is the WOTC?
The Work Opportunity Tax Credit provides qualified employers with federal tax credits to encourage the hiring of employees from certain targeted groups that have historically faced barriers to employment. Employers can receive a tax credit of 40 percent of a certified employee's salary with maximum tax credit per employee ranging from $1,200 to $9,600, depending on the target group the employee belongs to, according to the DOL.
In order to claim WOTC, employers must first prescreen applicants on or before the job offer date using IRS Form 8850 and submit the completed form to the applicable state workforce agency within 28 days after the new hire begins work. Employers can claim the tax credit on employees who are certified as eligibile by their state workforce agency. The credit can be used against business income tax liability or social security tax owed, based on the taxable or qualified tax-exempt status of the employer. The WOTC program remains in effect until the end of 2019, made possible from a five-year extension in 2015.
R&D Tax Credit Relatively Unscathed
The R&D tax credit, available under Internal Revenue Code Section 41, provides general business tax credits for businesses that conduct qualified research and development in the United States. The tax credit is meant to incentivize the invention or improvement of qualified products or processes.
While H.R. 1 maintains the R&D tax credit, it requires organizations to spread out R&D deductions over five or more years, instead of writing them off immediately in a single year. The R&D tax credit can be carried forward up to 20 years. The big scare was the potential for the corporate tax rate to be cut to 20 percent, which could trigger the corporate alternative minimum tax (AMT) for many businesses and eliminate their ability to claim many business tax credits including R&D tax credits. However, as NPR notes, H.R. 1 currently sets the corporate rate at 21 percent and eliminate the corporate AMT altogether.
Financial leaders should, therefore, expect a mixed bag in regards to the R&D tax credit. While organizations may apply less of the R&D tax credit annually because of the longer time frames required for spreading out qualified R&D expenses, the elimination of the AMT helps decrease the chances of another unintended consequence, hopefully keeping things simpler.
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*Updated on Jan. 4, 2018.
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