Software of the Month Club 1996 May

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@108 CHAP 8 ┌───────────────────────────────────────────────┐ │ TARGETED JOBS TAX CREDIT FOR HIRING EMPLOYEES │ └───────────────────────────────────────────────┘ If you hire members of certain economically disadvantaged groups, the federal government will pay you a subsidy of up to $2,400 per employee in the form of "Targeted Jobs Tax Credits" against your income tax liability. Unfortunately, most small business employers seem to be unaware of this substantial tax subsidy or else mistakenly assume that it applies only if you hire ex-felons or the like. Part of the reason so many employers fail to take advantage of this tax giveaway appears to be on account of a Catch-22 in the way the program works: To qualify for the targeted jobs credit for hiring a disadvantaged category person, he or she must be certified as such by a designated state em- ployment security agency and the certification must be re- ceived by the employer (or requested in writing) at least one day before the employee begins work. At the same time, state and federal anti-discrimination laws make it very difficult for you as an employer to ask prospective job applicants if they belong to any of the disadvantaged groups that are eligible for the tax credits, since to do so could be considered a discriminatory hiring practice.... Solution? One possibility would be to routinely tell peo- ple when you decide to hire them, but before they start work for you, that your firm pays a $100 bonus to any new employee that can get a certification from the state agency that he or she qualifies as a member of one of the targeted groups. Then give the employee a list of the targeted group categories, and let him or her volunteer the infor- mation if they qualify. Remember, if it appears the new hire qualifies, you must request a certification from the state employment security agency at least a day BEFORE em- ployment begins. The targeted group individuals for whom you can claim the jobs tax credit when you hire them are as follows: . VOCATIONAL REHABILITATION REFERRALS. These are cer- tain handicapped individuals who have completed rehabilitation programs. . ECONOMICALLY DISADVANTAGED YOUTHS. People between ages 18 and 22 who are certified as being members of economically disadvantaged families. . ECONOMICALLY DISADVANTAGED VIETNAM VETERANS. . SSI RECIPIENTS. Persons receiving SSI payments from Social Security. . GENERAL ASSISTANCE RECIPIENTS. Persons receiving state or local welfare payments. . ECONOMICALLY DISADVANTAGED EX-CONVICTS. . YOUTHS PARTICIPATING IN A COOPERATIVE EDUCATION PROGRAM. Certain youths ages 16-20 who have not finished high school. . ELIGIBLE WORK INCENTIVE PROGRAM EMPLOYEES. . QUALIFIED SUMMER YOUTH EMPLOYEES. Economically disadvantaged youths 16 or 17 years old who are hired to work between May 1 and September 15, who were not previously employed by you. On the first $6,000 you pay an eligible target group em- ployee, you will earn tax credits of 40% of the wages, if the employee works a minimum of 90 days or 120 hours for you. (For "qualified summer youths" the minimum period is only 14 days or 20 hours, but the credit is allowed on only the first $3,000 of wages during the first 90 days.) The credit is not allowed for wages paid to strikebreakers or "scabs." NOTE: One drawback of this tax credit is that you must reduce the wages you can deduct dollar-for-dollar for the jobs credits you claim. That is, if you pay someone $1,000 and claim a $400 targeted jobs tax credit, you can only deduct $600 for wage expense on your tax return, not the full $1,000. NOTE THAT THE TARGETED JOBS TAX CREDIT EXPIRED ON JUNE 30, 1992, BUT HAS BEEN EXTENDED AGAIN, RETROACTIVELY, FROM THAT DATE TO DECEMBER 31, 1994. ┌───────────────────────────────────────────────┐ │POLITICAL FOOTNOTE: President Clinton, in 1994,│ │announced that he wanted the Congress to repeal│ │the targeted jobs credit, which he felt was a │ │wasteful subsidy and one that benefits only a │ │very few industries. However, in late 1995, │ │there are some indications in Congress that the│ │targeted jobs credit will be revived. │ └───────────────────────────────────────────────┘ @CODE: CA HI @CODE:NF @CODE:OF @CODE: CA California has its own jobs tax credit program, somewhat similar to the federal jobs credit described above. The California Employment Development Dept. (EDD) is the state agency that certifies individuals as eligible employees under both the federal and state jobs tax credit laws. There is some overlap with the federal targeted jobs cred- it in the categories of eligible employees, but for the most part the state requirements are different. The state jobs credit for eligible and certified employees is as follows: . For the first 12 months of employment, a tax credit equal to 10% of the first $3,000 of wages paid to the employee. . For the second year of employment, a tax credit of 10% of the first $3,000 of wages for such period. Thus, the maximum California jobs credit is $600 per em- ployee, earned over a 2-year period. The state jobs credit is NOT allowed as an offset against the California alterna- tive minimum tax or the corporation minimum franchise tax. Note that the California jobs credit was due to expire on December 31, 1993, unless retroactively extended. California also provides certain special jobs tax credits for hiring disadvantaged or unemployed persons in "Enter- prise Zones" and "High-Density Unemployment Areas" that have been designated in certain parts of the state that are economically depressed. Employers in California may also claim a 50% credit (up to $600 per dependent) under a plan providing child care for employees. ┌───────────────────────────────────────────────┐ │ CALIFORNIA INVESTMENT TAX CREDIT │ └───────────────────────────────────────────────┘ Effective January 1, 1994, California began to allow a 6% in- vestment tax credit (ITC) on certain purchases of equipment and other tangible personal property purchased for use by a "qualified person" where the property is placed in service in California. Such personal property must be used primar- ily in any stage of the manufacturing, processing, refining, fabricating, or recycling of property, beginning at the point any raw materials are received by the "qualified person" and introduced into the process, and ending at the point at which the the manufacturing, etc. process has al- tered the property to its completed form (including packag- ing, if required). (Effective September 11, 1994, if you pay sales tax or use tax on the purchase of equipment that would qualify for the investment tax credit, and if you are "pre-qualified" by the Board of Equalization as a "new business," you may instead elect to receive a refund of the sales or use tax, 6% in 1994, or 5% in 1995, in lieu of claiming the 6% investment credit on your income or franchise tax return. Businesses that operate in Enterprise Zones or Program Areas may be able to claim BOTH a sales tax and income tax credit!) The credit also applies to tangible personal property that is purchased for use by a qualified person, to be used in California: . primarily in research and development; . primarily to maintain, repair, measure, or test the property described above; or . by a contractor purchasing the property either as an agent of a qualified person or for the contractor's own account and subsequent resale to a qualified person for use in the performance of a construction contract for a qualified person who will use the property as an in- tegral part of the manufacturing, processing, refining, fabricating, or recycling process, or as a research or storage facility for use in connection with the manu- facturing process. NOTE: Property that is leased by a "qualified person" to another person DOES NOT qualify for the ITC for the lessor. Under this law, a "qualified person" who can claim the credit (or for whom it can be claimed by an agent) is any person engaged in lines of business described in Codes 2000 to 3999 of the Standard Industrial Classification (SIC) Manual published by the U.S. Office of Management and Budget, 1987 edition. These particular SIC codes are under the heading of "Manufacturing." Note that, in addition to machinery and equipment, "tang- ible personal property" (for purposes of the California ITC) includes: . Equipment or devices (including computers and software) used or required to operate, control, regulate or main- tain the machinery, plus repair and replacement parts with a useful life of one or more years; . Property used in pollution control that meets State Air Resources Board or Water Resources Control Board standards; . Certain special purpose buildings and foundations used as an integral part of the manufacturing, etc., process, but not including warehouses for completed products; . Fuel used or consumed in the manufacturing process; and . Property used in recycling. However, tangible property does NOT (except as noted above) include consumables with a useful life of less than a year, inventory, equipment used in the extraction process, or equipment used to store finished products that have completed the manufacturing process. While the new ITC can be EARNED in 1994, taxpayers cannot actually claim it on their tax returns until the 1995 tax year (along with credits earned in 1995, if any). Credits that exceed your tax liability for any tax year can be carried over for up to seven succeeding years (nine for certain "small businesses"). A "small business" is one that meets any one of 3 tests for the taxable year: . It has gross receipts of under $50 million; . It has net assets of under $50 million, OR . It has a total credit (ITC) of under $1 million. This law provides that the ITC will remain in effect until at least January 1, 2001 (or longer if manufacturing em- ployment does not grow to specified levels). Note that, while claiming the credit as an offset against sales tax is allowed only at the rate of 5% in 1995 and later years, versus 6% if claimed as an income tax credit, there may be advantages to claiming the sales tax credit instead of an income tax credit: . The sales tax credit is available immediately, when you purchase equipment and give proper documentation of your eligibility for the credit to the seller; and . For many new businesses, it may be several years, if ever, before there is any income tax liability against which the income tax credit could be offset, unlike the sales tax credit, which can be used whether or not your business has any net taxable income. (On the other hand, the "tax basis" of the asset must be re- duced for state tax depreciation purposes if the sales tax credit is claimed, which is not the case for the income tax credit. Thus, there are numerous trade-offs to consider.) NOTE: S corporation shareholders get to claim the full 6% income tax investment credit, and the S corporation itself still gets to use 1/3 of the credit against its tax liabil- ity, which is a fairly generous rule. @CODE:OF @CODE: HI @CODE:NF The Hawaii legislature has enacted a "targeted jobs tax credit" equal to 20% of the first $6,000 of "qualified first-year wages." It applies only to wages paid to an individual who is a vocational rehabilitation referral. In addition, Hawaii law provides a capital goods excise tax credit, which is essentially an investment credit of 4% of the cost of equipment placed in service by a busi- ness in Hawaii, which amounts to a full credit for the 4% General Excise Tax paid on the purchase. (This was to increase to 4.5% for 1993 through 2002 if a county excise tax surcharge of 0.5% goes into effect for that period.) This law is modeled after the federal investment credit law that was in effect before 1986.