Earn Tax Credits, Hiring Veterans Helps Win Tax Breaks from the Government
By Blake Christian, CPA, MBT and Chuck Swenson, CPA, PHD
Much is being written and debated regarding getting our troops back home as quickly and safely as possible. Regardless of your political leanings, or specific timetable for the troops to return, we can all agree that once these brave men and women return home, we owe them the opportunity to find good jobs and assist them in starting or resuming their careers.
While business owners should make every effort to assist these returning
veterans by giving them jobs, there are a number of federal and state tax incentives that should provide an added reason to give them top priority in the job market.
Currently, 26 states offer partial, or total exclusions, from state-level taxes for combat and/or other military compensation paid to troops/reserves. The five states offering outright tax exemption for military pay include: Illinois, Michigan, Montana, Arizona and Tennessee. Certain federal changes over the past few years also allow more flexibility for the military in funding IRA's and claiming the Child Care Credit.
Federal tax benefits for hiring many veterans are available to business owners in any state. The federal benefits are available under the Work Opportunity Tax Credit (WOTC) Program. There is up to a $2400 credit if:
- A veteran who is a member of a family that has received Food Stamps for at least 3 consecutive months in the 15 months prior to the date of hire; or
- A person with disability who is participating in a vocational rehabilitation program through US Veteran's Administration.
There is also a WOTC credit of up to $4800 for veterans entitled to compensation for a service-connected disability who:
- were hired within 1 year of having been discharged, or released from activity duty, OR
- who has been unemployed for any 6 of the last 12 months.
Employers hiring multiple WOTC qualified employees can make a significant dent in their federal income
taxes. These benefits are explained and claimed on IRS Form 5884.
In addition to the federal WOTC program, 39 states, including California, have state-sponsored Enterprise Zone Programs. A few of these state programs allow employers to claim credits for a portion of employee wages paid to veterans. For example, California has a very large veteran population, and their state Enterprise Zone Program entitles employers that hire Vietnam-era veterans, or men and women who have been in the Armed Services/Reserves in the last 48 months, to claim up to 50% of the first $22,600 of W-2 wages as a tax credit during the first 12-month employment period. Provided the employee continues employment, a 40%, 30%, 20% and 10% credit is allowed for years two through five, resulting in a cumulative credit of over $35,000 over the five-year employment period (some California EZ websites have not been updated and they erroneously list a different amount). Illinois and Arizona also allow credits for hiring veterans; however, the dollar amounts are only in the hundreds of dollars per employee.
While the programs vary from state to state, most of these credit programs also allow employer-level credits for employees (including veterans) who live in specified census tracts with higher than average poverty rates, were unemployed at some point prior to being hired, or if they were receiving some form of government assistance (e.g., food stamps, welfare, etc.) at the time of hire.
While the federal WOTC program will entitle businesses located in any region to benefit from hiring certain veterans, those states with Enterprise Programs that provide credits for hiring veterans also generally require the business that hires the veteran (or other "qualified" employee) to be located in specified incentive Zones.
Other federal and state benefits, including training funds, tuition reductions, and the aforementioned military pay exemptions, are also available in many states.
Other incentives which may benefit veterans include:
- Federal Welfare-to-Work (WtW) Hiring Credit-Up to $8,500 over a two-year employment period if the employee was receiving welfare benefits prior to finding employment.
- Mentor-Protégé Program-Allows certain government contractors reimbursements for training/incidental costs associated with training physically challenged veterans.
The process for documenting these benefits is fairly straightforward. Generally, the CPA or taxpayer simply:
- Confirms that their business location is located in a specified federal or state incentive Zone.
- Confirms that certain employees working at the location either live in specified areas or meet other "qualification" criteria (e.g., veteran, ex-offender, previously unemployed, etc.).
- The CPA or taxpayer then calculates the credit that is generally a percentage of W-2 wages (with an overall cap), a per-employee credit, or based on the number of months worked.
- The federal or state tax forms (generally one or two simple pages) are then completed.
Systems can be set up to allow the employer to pre-screen the employees before they are hired in order to streamline the documentation process and maximize the hiring credits.
All of the above-referenced credits result in permanent tax benefits and can have a dramatic impact on a taxpayer's tax burden. While the credits cannot generally eliminate Alternative Minimum Tax (AMT), certain programs allow full or partial AMT offset, and unused credits can generally be carried over for five or more years for federal purposes and, in some states, the credits never expire.
These business hiring credits and the resulting tax savings result in enhanced cash flow, lower labor costs, lower after-tax capital expenditures, and enhanced business valuations. Amended returns for three years or more are allowed for federal purposes, and certain states also allow amended return refunds-which can average over $100,000 in many cases.
Ultimately, by claiming these tax incentives, the business owners are rewarded for their hiring practices and are often much more competitive in the marketplace. The long-term impact of the business owners' actions also generally improves the lives of the employees, as well as the communities in which the business operates.
Once business owners and their CPAs understand the financial and social impact of these programs, they do tend to alter their hiring practices and also tend to expand their facilities and workforce within the various federal and state incentive zones.
Additional information on these programs can be found at www.hud.gov, or by checking with your state-level tax authority's web site. For example, information on the California EZ program can be found at www.hcd.ca.gov
Commerce Clearing House (CCH) has also developed a comprehensive web-based tool that consolidates and identifies all federal and state tax credits and provides all cross-referenced forms and instructions. The CPA or taxpayer needs only to type in the client's address to determine eligibility and filing requirements. You can visit their site at: http://tax.cchgroup.com/taxzonelocator/default.htm
NTCG Can Help
If you are veteran who will meet any of the above tax credit characteristics, you can print the "Letter to Employers" which you can give to prospective employers. Or, for a modest fee of $25 (our cost) we can certify that you are credit eligible and provide you a "Tax Credit Card" which you can show to employers. Once hired, we then help the employer fill out the paper work.
Questions can also be directed to the authors at 800.791.3589 or
Blake Christian, CPA, MBT Partner, Holthouse Carlin & Van Trigt LLP Co-Founder, National Tax Credit Group, LLC
Chuck Swenson CPA, PHD Professor, University of Southern California Co-Founder, National Tax Credit Group, LLC
Download the .pdf: Hire A Vet And Win Tax Breaks