Wednesday, June 22, 2011

IRS Releases Simplified Draft Work Opportunity Tax Credit Form

Form 5884, Work Opportunity Credit

IRS has released a simplified draft Form 5884, Work Opportunity Credit, for taxpayers to claim this tax credit, which is scheduled to expire for employees who begin work after 2011. For many taxpayers, information previously reported on the form would now be reported directly on Form 3800, General Business Credit.

Background. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act, P.L. 111-312, 12/17/2010) extended the Code Sec. 51 work opportunity tax credit four months to include individuals who began work before Jan. 1, 2012. Under pre-Act law, wages for purposes of the credit didn't include any amount paid or incurred for an individual who began work after Aug. 31, 2011.

The credit allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of first-year wages up to $6,000 per employee ($12,000 for qualified veterans; and $3,000 for qualified summer youth employees). Where the employee is a long-term family assistance (LTFA) recipient, the credit is a percentage of first and second year wages, up to $10,000 per employee. Generally, the percentage of qualifying wages is 40% of first-year wages; it's 25% for employees who have completed at least 120 hours, but less than 400 hours of service for the employer. For LTFA recipients, it includes an additional 50% of qualified second-year wages.

The targeted groups are: Qualified IV-A recipients (qualified recipients of aid to families with dependent children or successor program); qualified veterans; qualified ex-felons; designated community residents (i.e., the former “high-risk youths” targeted group but with the maximum age requirement raised and the residency requirement expanded to include rural renewal residents); vocational rehabilitation referrals; qualified summer youth employees; qualified food stamp recipients; qualified SSI (supplemental security income) recipients; long-term family assistance recipients, i.e., members of a family that receives or received assistance under a IV-A program for a minimum period of time; and unemployed veterans and disconnected youths who began work for an employer after 2008 and before 2011.

Taxpayers use Form 5884 to claim the work opportunity tax credit for qualified first- or second-year wages paid to or incurred for targeted group employees during the tax year. A taxpayer's business doesn't have to be located in an empowerment zone, renewal community, or rural renewal county to qualify for this credit. Taxpayers can claim or elect not to claim the work opportunity tax credit any time within three years from the due date of their return on either an original return or an amended return.

As noted above, the work opportunity tax credit is scheduled to expire for employees who begin work after 2011. In addition, the renewal community designations expired at the end of 2009. Wages paid or incurred for services performed after 2009 by a designated community resident or summer youth employee who lived in a renewal community may no longer qualify for the work opportunity tax credit unless the designation is extended.

Draft Form. The Instructions to the Draft Form 5884 direct taxpayers not to report wages paid or incurred to qualified employees on Form 5884 unless the credit is extended. Further, the Instructions to the Draft Form 5884 direct taxpayers that carryforwards, carrybacks, and passive activity limitations for the credit are no longer reported on Form 5884. Instead, they must be reported on Form 3800.

In addition, taxpayers, other than partnerships, S corporations, cooperatives, estates, or trusts, whose only source of this credit is from those pass-through entities, wouldn't be required to complete or file this form. Instead, they could report this credit directly on Form 3800.

References: For the work opportunity tax credit, see FTC 2d/FIN ¶L-17775; United States Tax Reporter ¶514; TaxDesk ¶380,700; TG ¶14976.

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