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Employer Assistance and Resource Network on Disability Inclusion

Federal Government Employer Tax Incentives

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NOTE: These tax credits and deductions were not affected by the Tax Cuts and Jobs Act of 2017, signed into law on December 22, 2017. 

WORK OPPORTUNITY TAX CREDIT

The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers for hiring individuals from certain target groups who have consistently faced significant barriers to employment, including:

  • Vocational Rehabilitation Referred Individuals — individuals with disabilities who completed or are completing rehabilitative services from a state-certified agency, an Employment Network under the Ticket to Work program, or the U.S. Department of Veteran Affairs.
  • Qualified Veterans (including disabled veterans) — to be considered a veteran eligible for WOTC, an individual must meet these two standards:
    • Have served on active duty (not including training) in the U.S. Armed Forces for more than 180 days or have been discharged or released from active duty for a service-connected disability; and
    • Cannot have a period of active duty (not including training) of more than 90 days that ended during the 60-day period ending on the hiring date.

To be eligible for WOTC, a veteran must also be one of the following:

  • A member of a family that received Supplemental Nutrition Assistance Program benefits (food stamps) for at least three months during the 15-month period ending on the hiring date.
  • Entitled to compensation for a service-connected disability and was:
    • Hired within one year of discharge or release from active duty; or
    • Unemployed for at least six months in the year ending on the hiring date; or
    • Unemployed for at least four weeks (but less than six months) in the year ending on the hiring date, or at least six months in the year ending on the hiring date.

Employees Who Qualify

Any private sector business that hires a new employee from an eligible target group may apply for WOTC. In addition, the tax credit is available to certain tax-exempt organizations that hire new employees from the WOTC veterans target group.

There is no limit on the number of individuals an employer can hire in order to qualify to claim the tax credit.

Some employees do not qualify the employer for the WOTC. They include:

  • Former employees, regardless of how long it has been since he/she last worked for the employer (except for summer youth);
  • Relatives and dependents of the employer, including sons, daughters, stepchildren, spouses, fathers, mothers, brothers, sisters, step-brothers or sisters, nephews, nieces, uncles, aunts, cousins, or in-laws; and
  • Majority owners of the business.

Wages that Qualify for Tax Credit Calculation

Wages include all remuneration paid to an employee. However, to qualify, the wages must be:

  • Wages for which the employer pays Federal Unemployment Tax Act (FUTA) taxes.
  • Wages actually paid by the employer, including those to on-the-job training (OJT) participants.

If the OJT worker is receiving subsidized wages directly from another party, or indirectly paid through the employer, then the wages do not qualify (although the hours worked for the employer count for the minimum retention period). 

Calculating the Tax Credit 

The amount of the tax credit that employers can claim depends on the target group of the individual hired, the wages paid to that individual, and the number of hours that individual worked during the first year of employment. There is also a maximum tax credit that can be earned for each target group. Employees must work at least 120 hours in the first year of employment for the employer to qualify to claim the tax credit with the Internal Revenue Service (IRS).

The tax credit is generally calculated as follows:

  • After working at least 120 hours. The employer may claim a tax credit equal to 25 percent of the new hire’s first year of qualified wages. The maximum tax credit on first year wages is between $750 and $6,000, depending on the eligible target group.
  • After working at least 400 hours. The employer may claim a tax credit equal to 40 percent of the new hire’s first year of wages. The maximum tax credit on first year wages is between $1,200 and $9,600, depending on the eligible target group.

Maximum Tax Credit Amounts for Veteran Target Groups 

Veteran Target Group Worked at Least 120, but Less Than 400 Hours Worked at Least 400 Hours
Receives SNAP (food stamp) benefits Up to $1,500 (25% of $6,000 of first-year wages) Up to $2,400 (40% of $6,000 of first-year wages)
Entitled to compensation for service-connected disability & hired within 1 year of leaving service Up to $3,000

(25% of $12,000 of first-year wages)

 Up to $4,800

(40% of $12,000 of first-year wages)
Entitled to compensation for service-connected disability & unemployed for at least 6 months Up to $6,000

(25% of $24,000 of first-year wages)

 Up to $9,600

(40% of $24,000 of first-year wages)
Not entitled to compensation for service-connected disability & unemployed at least 4 weeks Up to $1,500

(25% of $6,000 of first-year wages)

 Up to 2,400

(40% of $6,000 of first-year wages)
Not entitled to compensation for service-connected disability & unemployed at least 6 months Up to $3,500

(25% of $14,000 of first-

year wages)

 Up to $5,600

(40% of $14,000 of first-year wages)

 Maximum Tax Credit Amounts for Other WOTC Target Groups

Target Group Worked at Least 120, but Less Than 400 Hours Worked at Least 400 Hours
Vocational Rehabilitation Referral Up to $1,500 (25% of $6,000 of first-year wages) Up to $2,400 (40% of $6,000 of first-year wages)
SSI Recipient Up to $1,500 (25% of $6,000 of first-year wages) Up to $2,400 (40% of $6,000 of first-year wages)

Please note that the maximum tax credit amounts listed above are applicable to private-sector businesses only. For more information on the calculation of WOTC for tax-exempt organizations, visit the IRS WOTC webpage. 

The Application Process

The application process involves five steps. Please note that prior to claiming the tax credit with the IRS, an employer must request and receive certification from its State Workforce Agency (SWA), stating that the new hire is a member of at least one of the WOTC target groups.

Step 1: Complete IRS Form 8850

  • Employers must fill out IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit (PDF), to pre-screen employees, and make a written request to their SWA to certify the new hire as a member of a WOTC target group.
    • Page one of IRS Form 8850 — the job applicant gives information to the employer on or before the day a job offer is made. This information is entered on the form.
    • Page two of IRS Form 8850 — based on the applicant’s information, the employer determines whether or not he or she believes the applicant is a member of one of the WOTC target groups. If so, the employer completes page two of the form.
    • Both the job applicant (or a parent/guardian if the applicant is a minor) and the employer, or an authorized employer representative, must sign and date IRS Form 8850 before submitting the form to the SWA. 

Step 2: Complete ETA Form 9061 

  • Employers must complete U.S. Department of Labor ETA Form 9061 (PDF), the WOTC Individual Characteristics Form.
  • Some states will also accept ETA Form 9062 (PDF), Conditional Certification. This form would be used if a conditional certification is provided to the job applicant by a participating agency, such as a SWA, a Vocational Rehabilitation agency, an American Job Center (also referred to as a One-Stop Career Center), or an Employment Network for the Ticket to Work program. 

Step 3: Submit Completed Forms to State Workforce Agency 

  • Employers must submit completed IRS Form 8850 and ETA Form 9061 to their State Workforce Agency.
    • IRS Form 8850 must be submitted within 28 calendar days after the employee’s start date for it to be considered “timely” filed. WOTC applications that are not submitted within 28 calendar days will be denied by the SWA.
    • To expedite the certification process, submit the forms and documentation together, as a complete application, to the SWA no later than the 28th day after the job applicant begins work.
    • States accept applications through various methods (i.e., via mail, fax or email). Many states have automated systems that accept electronic submissions. Contact your state’s WOTC Coordinator if you are not sure how your state accepts applications.

Step 4: Receive Final Determination 

  • The SWA will issue a final determination for each WOTC application.
    • In some cases before that determination is made, assistance may be requested from the employer to obtain additional information or documentation.
    • The final determination will indicate whether the new employee is certified as meeting the eligibility for one of the WOTC target groups.
    • In those instances where the SWA is not able to verify that the new employee meets the eligibility, the SWA will issue a denial with an explanation.
    • When a certification is received, then the employer can claim the tax credit with the IRS. 

Step 5: File for the Credit with the IRS

Employers also must meet requirements for the Minimum Employment Period, which is the number of hours required to be worked by the employee — at least 120 hours in the first year of employment — before they can file and qualify for the tax credit.

Resources

DISABLED ACCESS TAX CREDIT (Title 26, Internal Revenue Code, Section 44) 

Overview

This Disabled Tax Credit is available to “eligible small businesses” in the amount of 50 percent of “eligible access expenditures” that exceed $250 but do not exceed $10,250 for a taxable year. A business may take the credit each year that it makes an eligible access expenditure.

Details

Eligible small businesses are those businesses with either:

  • One million dollars or less in gross receipts for the preceding tax year; or
  • 30 or fewer full-time employees during the preceding tax year.

Eligible access expenditures are amounts paid or incurred by an eligible small business for the purpose of enabling the business to comply with the applicable requirements of the Americans with Disabilities Act (ADA). These include amounts paid or incurred to:

  • Remove architectural, communication, physical or transportation barriers that prevent a business from being accessible to, or usable by, individuals with disabilities;
  • Provide qualified readers, taped texts and other effective methods of making materials accessible to people with visual impairments;
  • Provide qualified interpreters or other effective methods of making orally delivered materials available to individuals with hearing impairments;
  • Acquire or modify equipment or devices for individuals with disabilities; or
  • Provide other similar services, modifications, materials or equipment.

Expenditures that are not necessary to accomplish the above purposes are not eligible. Expenses in connection with new construction are not eligible.

“Disability” has the same meaning as it does in the ADA.

To be eligible for the tax credit, barrier removals or the provision of services, modifications, materials or equipment must meet technical standards of the ADA Accessibility Guidelines where applicable. These standards are incorporated in U.S. Department of Justice regulations implementing Title III of the ADA.

Examples

Company A purchases equipment to meet its reasonable accommodation obligation under the ADA for $8,000. The amount by which $8,000 exceeds $250 is $7,750. Fifty percent of $7,750 is $3,875. Company A may take a tax credit in the amount of $3,875 on its next tax return.

Company B removes a physical barrier in accordance with its reasonable accommodation obligation under the ADA. The barrier removal meets the ADA Accessibility Guidelines. The company spends $12,000 on this modification. The amount by which $12,000 exceeds $250 but not $10,250 is $10,000. Fifty percent of $10,000 is $5,000. Company B is eligible for a $5,000 tax credit on its next tax return.

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BARRIER REMOVAL TAX DEDUCTION (Title 26, Internal Revenue Code, section 190)

Overview

The Architectural Barrier Removal Tax Deduction encourages businesses of any size to remove architectural and transportation barriers to the mobility of people with disabilities and the elderly. Businesses may claim a deduction of up to $15,000 a year for qualified expenses for items that normally must be capitalized. Businesses claim the deduction by listing it as a separate expense on their income tax return. Also, businesses may use the Disabled Tax Credit and the architectural/transportation tax deduction together in the same tax year, if the expenses meet the requirements of both sections. To use both, the deduction is equal to the difference between the total expenditures and the amount of the credit claimed.

Details

The cost of an improvement to a business asset is normally a capital expense. However, a business can elect to deduct the costs of making a facility or public transportation vehicle more accessible to and usable by people with disabilities or the elderly. The business must own or lease the facility or vehicle for use in connection with its trade or business.

A facility is all or any part of buildings, structures, equipment, roads, walks, parking lots or similar real or personal property. A public transportation vehicle is a vehicle, such as a bus or railroad car, that provides transportation service to the public (including service for customers, even if the business is not in the business of providing transportation services).

A business cannot deduct any costs paid or incurred to completely renovate or build a facility or public transportation vehicle or to replace depreciable property in the normal course of business.

Deduction Limit

The most a business can deduct as a cost of removing barriers to people with disabilities and the elderly for any tax year is $15,000. However, a business can add any costs over this limit to the basis of the property and depreciate these excess costs. 

Partners and Partnerships

The $15,000 limit applies to a partnership and also to each partner in the partnership. A partner can allocate the $15,000 limit in any manner among the partners’ individually incurred costs and the partners’ distributive share of partnership costs. If the partner cannot deduct the entire share of partnership costs, the partnership can add any costs not deducted to the basis of the improved property.

A partnership must be able to show that any amount added to basis was not deducted by the partner and that it was over a partner’s $15,000 limit (as determined by the partner). If the partnership cannot show this, it is presumed that the partner was able to deduct the distributive share of the partnership’s costs in full.

Example 

Emilio Azul’s distributive share of ABC partnership’s deductible expenses for the removal of architectural barriers was $14,000. Emilio had $12,000 of similar expenses in his sole proprietorship. He elected to deduct $7,000 of them. Emilio allocated the remaining $8,000 of the $15,000 limit to his share of ABC’s expenses. Emilio can add the excess $5,000 of his own expenses to the basis of the property used in his business. Also, if ABC can show that Emilio could not deduct $6,000 ($14,000 – $8,000) of his share of the partnership’s expenses because of how Emilio applied the limit, ABC can add $6,000 to the basis of its property.

Qualification Standards 

The small business can deduct costs as a current expense only if the barrier removal meets the guidelines and requirements issued by the Architectural and Transportation Barriers Compliance Board (United States Access Board) under the Americans with Disabilities Act (ADA) of 1990.

The following is a list of some architectural barrier removal costs that can be deducted:

  • Ground and floor surfaces
  • Walks
  • Parking lots
  • Ramps
  • Entrances
  • Doors and doorways
  • Stairs
  • Floors
  • Toilet rooms
  • Water fountains
  • Public telephones
  • Elevators
  • Controls
  • Signage
  • Alarms
  • Protruding objects

The costs for removal of transportation barriers from rail facilities, buses and rapid and light rail vehicles are deductible. More information can be found on the IRS website and ADA.gov. For more information about guidelines and requirements for transportation barrier removal, visit the Federal Transit Administration website.

Other Barrier Removals

To be deductible, expenses of removing any barrier not covered by the above standards must meet all three of the following tests.

  • The removed barrier must be a substantial barrier to access or use of a facility or public transportation vehicle by persons who have a disability or are elderly.
  • The removed barrier must have been a barrier for at least one major group of persons who have a disability or are elderly (such as people who are blind, deaf or wheelchair users).
  • The barrier must be removed without creating any new barrier that significantly impairs access to or use of the facility or vehicle by a major group of persons who have a disability or are elderly.

If the business elects to deduct the costs for removing barriers to people with disabilities or the elderly, the deduction should be claimed on the business’ income tax return (partnership return for partnerships) for the tax year the expenses were paid or incurred. Identify the deduction as a separate item. The election applies to all the qualifying costs the business has during the year, up to the $15,000 limit. If the business makes this election, it must maintain adequate records to support the deduction.

For an election to be valid, the business generally must file its return by its due date, including extensions. However, if the business timely filed its return for the year without making the election, the business can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Clearly indicate the election on the amended return and write “Filed pursuant to section 301.9100-2.” File the amended return at the same address the business filed the original return. The election is irrevocable after the due date, including extensions, of the return.

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SPECIAL EMPLOYER INCENTIVES FOR HIRING VETERANS 

The Department of Veterans Affairs (VA) Vocational Rehabilitation and Employment program provides eligible veterans an opportunity to obtain training and practical hands-‐on experience concurrently through the Special Employer Incentives (SEI) program. The SEI program is for eligible veterans who face challenges in obtaining employment. VA is responsible for determining if a veteran is eligible to participate.

Veterans approved to participate in the SEI program are hired by participating employers, and employment is expected to continue following successful completion of the program. VA facilitates the process by identifying suitable placements and coordinating efforts between all parties. As a result, the SEI program is beneficial for

both veterans and employers.

Employers Who Hire Veterans Receive:

  • Reimbursement of up to 50 percent of the veteran’s salary during the SEI program, which typically lasts up to six months, to cover:
    • Expenses incurred for cost of instruction
    • Necessary loss of production due to training status
    • Supplies and equipment necessary to complete training
  • VA‐provided tools, equipment, uniforms and other supplies;
  • Appropriate accommodations based on individual needs of the veteran;
  • The advantage of minimal paperwork to participate; and
  • VA support during training and placement follow‐up phase to assist with work or training‐related needs. 

Veterans Who Participate in the Program Receive:

  • Immediate income and benefits as an employee;
  • Increased chance of being hired as a result of employer incentives;
  • Valuable skills, learning in a practical setting that meets the employer’s specification;
  • Opportunity for continued employment following successful completion of the SEI program; and
  • One‐on‐one support from a VA Vocational Rehabilitation Counselor or Employment Coordinator to assist with training or work‐related needs. 

Resources

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