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Blake Christian
Blake Christian
Jobs, Jobs, Jobs!

Tax policy and programs to encourage employee hiring and retention.

January 28, 2010
by Blake Christian, CPA, MBT

As the recession continues, reversing the unemployment trend has become a huge priority. The mantra of virtually every federal, state and local government official these days is: “Jobs, Jobs, Jobs!” The obvious reason is record levels of: Unemployment, Unemployment, Unemployment caused by the international recession over the last two years.

While there are numerous incentive programs throughout the country, the employer utilization of many of these job creation programs is surprisingly low. The fact is that, on a national basis, at least 20 percent of businesses have one or more locations that are eligible for these valuable tax breaks, which range from $500 to over $15,000 per “qualified” employee, yet many businesses are unaware of the full scope and value of these program benefits.

This article discusses the variety of the existing federal and state incentives for hiring economically challenged employees, highlights recent changes and proposes ways to improve the participation and effectiveness of such programs.

With the federal unemployment rate in excess of 10 percent and many states such as: California, Michigan, Nevada, Rhode Island and South Carolina with unemployment rates in excess of 12 percent, the short- and mid-term employment landscape is very bleak. Hardest hit sectors include manufacturing, construction, finance, service and retail. Healthcare jobs have fared better than other industries, but are starting to see some softening. Teens, African-Americans and Hispanics have felt the personal impact of unemployment more directly than other groups and Asians have experienced lower-than-average unemployment. 

Even with a full plate of domestic and international economic and political challenges, unemployment is clearly one of the most impactful and complex issues that national, state and local legislators will need to deal with during calendar 2010.

Fortunately there are hundreds of existing state, local and federal hiring credit programs. Eligibility for these federal and state-level programs can vary dramatically by specific program; however, there are some common themes and criteria within the majority of these hiring incentive programs. Program eligibility for employers is generally driven by the prospective employee’s socio-economic status — including those at or near the poverty level, those eligible for certain entitlement programs such as welfare, food stamps, etc. Employers hiring military veterans or re-training employees for a new position or industry are also often rewarded with either tax credits, grants or other incentives.

Depending on the specific program, employers can obtain annual tax credits ranging from $500 to over $15,000 per “qualified” employee hired. These program benefits dramatically reduce the after-tax labor costs for employers and can encourage businesses to either move to or continue operating their business in, a given city, state or the United States — versus cutting back their operations or moving their operations to a lower cost state or country.

There are currently over 8,500 distinct Location-Based Incentive Credit (LBIC) regions throughout the United States ranging from specific blocks, census tracts, counties and occasionally entire states that offer very valuable tax credits and other incentives to businesses that increase employment and make other financial investments in economically challenged regions.

The majority of these programs can be accessed in the current year and most federal and certain state programs can be applied retroactively for up to four prior years. Most federal programs, with the exception of the Work Opportunity Tax Credit (WOTC) program, allow employers to claim these credits on amended returns in those cases where the taxpayer overlooked the benefits. State programs typically require the employer to claim the credits on the originally filed return in order to secure the benefits and some states require the employer to file an application to participate in the specific state Enterprise Zone program prior to claiming credits.

These programs can work very well in lowering the labor costs associated with the billions of dollars of national and local infrastructure projects. In addition to tax credits, there are federal and state grants available for hiring new employees or training existing employees. State grant programs offer varying benefits, for instance, New Hampshire partners with community colleges that offer grants for reimbursement of employees trained in safety, technical skills, management or English as a second language. Tennessee offers training grants of up to $50,000 to companies to enhance skills of existing employees. Florida has implemented its “Back to Work” program, which will pay up to 95 percent of the salary cost of certain employees. Governor Arnold Schwarzenegger (R-CA) recently announced his Green Jobs initiative utilizing California’s Employee Training Panel (ETP) program, as well as a proposal to exempt sales tax on certain green technology equipment.

Wide Variety of LBICs

LBICs include the following incentive hiring credits and other benefits associated with operating in any one of the distinct incentive “zones” throughout the country.

To qualify for these programs, it is generally only required that the employer operate in the specified zone and that the employee live in certain designated areas (generally lower income census tracts).

Federal WOTC Credits

In addition to the location-specific benefits, businesses located anywhere in the country are also eligible for a valuable federal wage credit called the Work Opportunity Tax Credit (WOTC). WOTC can generate up to $2,400 to $9,000 for public assistance employees or residents in the 408 Rural Renewal Counties throughout the country. Any business that hires a resident from one of these counties can obtain a credit ranging from $2,400 to $4,800 for most residents residing in the designated county.

Magnitude of Tax Savings

The amount of tax savings are often in the tens of thousands to hundreds of thousands annually even for single location middle-market companies. Certain states, such as California and larger employers in federal zones, can often generate credits in the $100,000 to $1 million range annually providing them with valuable funds to increase hiring, upgrade their technology and processes and expand operations.

Current Trends in Hiring Incentives

Much of the current federal and state focus is on developing and incentivizing “green jobs,” such as alternative energy development and retro-fitting residences and commercial buildings to be more energy efficient.

At the federal level, President Obama recently announced initial grants for green jobs in the $2.3 billion range, which are anticipated to be matched by approximately $5 billion of private investment. The program will provide a 30-percent tax credit for certain manufacturers of clean energy technology, including solar, wind, geothermal and other renewable energy equipment; plug-in electric vehicles and their components; and energy conservation equipment and a variety of other technologies.

Many state programs have received significant funds under the federal stimulus plans, which are starting to filter through the employee Workforce Development Departments throughout the country. Businesses and employee candidates should contact their local Workforce Development Departments to determine the full scope of incentives, eligible employees and training available under these programs.

Suggestions for Enhancing Federal and State Hiring Incentives

With companies in many industries continuing to incur operating losses, cash-training grants, “refundable” credit structure (in which the current year credit will generate a refund regardless of whether the taxpayer has a current year liability) or liberalized carryback rules will often be more attractive to an employer. Legislators should build in flexibility into their programs by allowing employers to elect to claim a full credit at the time they file their return or (after proving that an employee had met a certain employment milestone), the employer could elect to obtain a lower cash advance. For example instead of getting a 20 percent credit, the employer can elect a lower 15 percent “advanced” credit and receive the money sooner and not be limited to benefits in a loss year.

The revised WOTC program allows the federal credit to offset both regular tax and adjusted minimum tax (AMT) and this is another recommended feature for any incentive program.

Since the vast majority of employee candidates in Governmental and Not-For-Profit Workforce Development Departments’ databases will generate incentives to a prospective employer, these organizations should be intimately familiar with all federal, state and local incentives available in their community. It is highly advisable for these organizations to “pre-screen” all potential employee candidates they are assisting in order to “flag” the benefits for prospective employers who may not be aware of the valuable incentives of hiring their candidates. The organizations should develop marketing materials and develop community outreach programs. View a sample (PDF) of the “Tax Credit Card” program developed in California.

Conclusion

While there are numerous federal and state proposals for developing new hiring incentive programs, by simply expanding and promoting these existing programs via outreach to the business community, the Obama Administration, as well as state and local government officials, can have invaluable economic development tools at their disposal to reduce unemployment while providing much-needed economic incentives to businesses who hire these economically disadvantaged employee candidates.

By utilizing these existing programs, employers and legislators can accelerate the process of getting their constituents back to work in a cost effective manner.

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Blake Christian, CPA, MBT is a tax partner in the Long Beach office of Holthouse Carlin & Van Trigt LLP, and is co-founder of National Tax Credit Group, LLC. He can be reached at (562) 216-1800. In addition to focusing on corporate and high net worth individual tax planning, Blake specializes in federal and state hiring, equipment and eco/green incentive tax credits.