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hen manufacturer Superior Walls of Central Illinois opened for business in the Springfield Enterprise Community, it created job opportunities for 42 low-to-moderate-income neighborhood residents. “These employees show great pride in producing a quality product,” says Springfield developer Mike Suhadolnik, owner of Superior Walls.
Suhadolnik’s enthusiasm is matched by that of the new employees, who often are able to walk from their homes to a variety of jobs that include plant management, equipment operation, carpentry, excavating, marketing and office staffing. Superior Walls expects to hire up to 100 employees from the neighborhood as the manufacturing facility moves to full production capacity.
The State of Illinois recently awarded Superior Walls $52,780 to train workers in assembly and production techniques. The award was part of the state’s Industrial Training Program that grants companies financial incentives to train employees.
Historically, the government has used the tax code to encourage worthwhile activities that the government believes corporations might not otherwise undertake on their own, such as making certain charitable contributions or capital investments. Business tax incentive programs draw upon this motivation to enable firms to participate in community investment and enhance their bottom line at the same time. Yet, many businesses forego these profit enhancement opportunities. Typically this is attributable to a false perception that the costs and system resources required to comply with federal and state regulations would likely outweigh the benefit of tax incentive program participation. In addition, many companies perceive that they are not participating in activities that would qualify them for tax incentives, such as hiring individuals from certain demographic backgrounds or training employees.
Incentives in the Wake of September 11
With businesses pursuing a growing number of relocations and expansions because of concerns about the state of the economy and security, these same companies are looking for ways to improve their bottom lines. These companies must carefully consider the tax ramifications of their choices in order to maximize the potential savings from their relocation and expansion activities. Companies today have a great deal of leverage to obtain lucrative tax incentives packages from states jockeying against one another to attract the most new business growth.
Business tax incentives have become an essential tool in the country’s efforts to stimulate the economy. In the wake of September 11 and the “dot-coma,” there has been an alarming convergence where millions of entry-level employees have been left out of work just as those with the fewest job skills are about to reach their five-year lifetime welfare eligibility ceiling. Hiring tax incentives give employers a reason to take a second look at giving jobs to the people who are facing the greatest barriers to entering the workforce in today’s competitive job environment. For instance, a proposed new provision would provide for a special job credit worth 40 percent of the first $12,000 in earnings that would cover anyone hired or working in Manhattan below Canal Street starting on January 1, 2002, and running through December 31, 2002.
Specific Tax Incentive Opportunities
Among some of the most rewarding federal and state business tax incentives are the Work Opportunity Tax Credit (WOTC), the Welfare to Work Tax Credit (WTW), the Empowerment Zone Tax Credit (EZ), the Enterprise Community Tax Credit (EC), and the Job Training Cost Reimbursement. The target audience for these incentives include:
- Businesses that will have large hiring needs,
- Expanding businesses that will be hiring new employees,
- Businesses with relatively high turnover that often need new employees,
- Businesses looking to reduce tax liability,
- Businesses expanding within an EZ or EC that will be hiring new employees,
- Businesses participating in summer youth employment programs, and
- Businesses seeking to qualify as EZ Businesses that must meet the 35 percent Zone resident employee requirement.
The incentives are not relevant to:
- Startup businesses that may not meet the threshold of having large tax liabilities,
- Nonprofit organizations that do not pay federal taxes, and
- Businesses with highly specialized employees (unless there is a training program that can supply appropriately trained employees).
The Work Opportunity and Welfare-to-Work Tax Credit Programs
Let us look in more detail at these tax incentive programs. Image Staffing, a temporary agency with 650 employees located in San Diego, has had great success hiring WOTC eligible candidates. Within the last year, 50 to100 welfare recipients have been placed. A company spokesperson noted that WOTC offers an excellent opportunity for employers to hire individuals and help them get “kick-started” into a career, while simultaneously giving the company’s bottom line a boost from the tax credits generated.
The WOTC program was created by the Small Business Job Protection Act of 1996 and the Welfare to Work Tax Credit by the Taxpayer Relief Act of 1996. The WOTC can reduce an employer’s federal tax liability by up to $2,400 per new hire, a figure based on claiming a percentage of the first year’s wages. A WTW tax credit can reduce an employer’s federal tax liability by up to $8,500 per new hire, based on claiming a percentage of wages over a two-year period. The Departments of Treasury and Labor share administrative responsibility for both tax credits. Certifications are issued by the State Employment Security Agencies.
By design, the WOTC and WTW Tax Credits are intended to further the partnership between the workforce investment system and the private sector in dealing with employment barriers faced by disadvantaged workers. There are nine target groups for the WOTC/WTW tax credits that reflect individuals with few skills and little or no work experience. Many of them receive some form of welfare benefits or other public assistance. The Work Opportunity Tax Credit is targeted at short-term welfare recipients, veterans, food stamp recipients, vocational rehabilitation referrals, ex-felons, SSI recipients, summer youth employees, and residents of Empowerment Zones or Enterprise Communities. Long-term welfare recipients are eligible for the WTW credit.
Empowerment Zone and Enterprise Community Tax Credit Programs
“My business was just a dream until I contacted the Empowerment Zone. They guided me through the financing and found a business location that is the envy of my competitors,” said Joe Maruschak, owner of Charm City Signs in Baltimore, Md. “In the two years since opening my business, the Zone has continually provided networking and procurement opportunities.”
As illustrated by the experience of this small businessman, the Empowerment Zone employment credit gives businesses an incentive to retain or hire individuals who both live and work in an EZ. Businesses can claim a credit, even retroactively, of as much as $3,000 per qualified EZ employee each year. This tax credit is attractive to businesses that are looking to reduce tax liability or that are considering expanding or relocating to a Zone.
The Enterprise Community Credit is available to qualified companies that locate in regions targeted for renewal. The program includes a state income tax credit for each net new job created based on the average wage, training credits, and a refund of sales and use taxes on the purchase of materials used in construction of a new facility or expansion of an existing facility.
On December 15, 2000, Congress approved additional FY 2001 funding for urban EZs, increasing a previously approved amount to a total of approximately $185 million. In addition, Congress approved legislation to designate nine new EZs, seven in urban areas and two in rural areas. The tax incentives encourage businesses both to make capital investments in their Zone and to provide jobs for Zone residents. The EZs and Enterprise Community Tax Credit Programs have used their federal seed money to create partnerships that have leveraged more than $12 billion in public and private investment.
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Job Training Incentives
Many of today’s smart businesses are investing in themselves by investing in their people. Businesses can take advantage of new state and federal tax credits that reward this proactive approach. If a company is retraining its existing workforce to perform more efficiently, it might qualify for state job-training tax credits. If it trains apprentices in manufacturing trades, or if the company offers basic adult education, it might also qualify. Tax credits of up to $5,000 per employee over three years are available.
The objective of the retraining tax credit is to foster the profitability and competitiveness of a state’s existing industry by encouraging workforce development through retraining tax incentives. Eligible retraining programs are those that provide job skills for employees otherwise unable to function effectively on the job due to skill deficiencies or who would otherwise be displaced because such skill deficiencies would inhibit their utilization of new technology.
Eligible training includes implementation of new equipment and/or new operating systems such as workplace reengineering, total quality management, ISO 9000 standards, and employee involvement programs. Executive training, management development training, career development, and/or personal enrichment training are not included.
Outlook for Job-Training Incentives
As matters of technology, globalization, security, and our economy continue to change the way we do business, the need for more advanced skills and materials in the workplace will continue to increase. While employers have historically absorbed these costs themselves, many states are now recognizing the need to have a well-trained workforce in place as they compete with other states for new capital investments and job growth. This realization is leading states to develop new and innovative programs to subsidize the large costs of training and equipping new and existing workers.
As with the WOTC and WTW tax credit programs, there is a perception that most state sponsored training incentive programs will not cover many training costs. However, states are beginning to change this perception by partnering with businesses to develop training programs that keep pace with the global economy.
Misconceptions Abound
A recent Government Accounting Office report to Congress documented that well over 80 percent of all American businesses are not currently using the WOTC and WTW tax incentives. The primary reasons businesses do not pursue the full spectrum of tax incentives, according to the report, were that businesses do not know about the incentives’ existence, presume they do not qualify and are uncertain how to tackle the procedural maze.
Many financial executives are aware of these programs but believe that their firms do not hire individuals targeted by these programs. This perception usually proves false. In fact, say experts, most companies will find that 5 percent to 15 percent of their workforce qualifies for the programs, regardless of the company’s industry sector. Some companies, such as Wal-Mart, have been able to use the WOTC program very successfully. This retail giant, with its tight operating margins, uses the program in all 50 states. The company is able to dedicate staff resources to track down information on available employment incentives, allowing the company to maximize the benefit from programs like WOTC.
But not all companies, particularly smaller ones, have found the program as beneficial. Those businesses that have tried to use the credit cite a difficult certification process that makes using the credit less cost-effective. Even Wal-Mart has noticed that in some states the certification process is slower and sometimes difficult to complete. And Aramark Corp., which employs about 100,000 low-wage workers in food courts, hospitals, and convention centers across the country, has run into similar problems.
For businesses to really buy into a tax credit program, it needs to be easy to use. Complex incentives are not used by many businesses, because the hoops they need to jump through, in the end, may not make using the tax credit as cost-efficient as anticipated. To reduce the resource costs of program participation, the private sector is working with the Internal Revenue Service to develop the electronic version of the IRS Form 8850 for the WOTC and WTW tax credit programs, including determining the open-standard requirements needed for sharing electronic WOTC/WTW data and developing common data transmission standards to support the secure electronic transmission of the IRS Form 8850.
In addition to contacting a tax consulting firm, you may also want to contact your local public State Employment Security Agency as a source for more information about new hire tax credit programs. Basic information about the tax credits are available at either Walton Management’s website (www.waltonmanagement.com) or the Dept. of Labor’s Web site (workforcesecurity.doleta.gov/employ/wotcdata.asp).
