Welfare-to-Work Credit: The Section 51A welfare-to-work credit is effective for wages paid to workers who begin work after 1997 but before January 1, 2002. (Congress extended the credit from July 1, 1999 to December 31, 2001). The credit is available for the first $10,000 of wages paid to employees who are ?long-term family assistance recipients.? The credit is claimed on Form 8861 (Welfare-to-Work Credit). A worker for whom the welfare-to-work credit is claimed is not treated as a member of a targeted group for purposes of the work opportunity credit. You can call us for the rules that summarizes the rules for this credit. The maximum size of this credit is $2,400.
The GBC generally is applied dollar for dollar against the first $25,000 of net tax liability (generally, regular tax less personal credits) and against 75% of the remaining net tax liability [IRC Sec. 38(c)]. Additional limits may apply if the taxpayer has significant AMT adjustments and preferences, even if the AMT does not apply. (See Key Issue 36B.)
Unused GBCs arising in 1998 and subsequent tax years generally can be carried back one year and forward 20 years [IRC Sec. 39(a)(1)]. For credits arising in tax years before 1998, the carryback period is three years and the carryforward period is 15 years.
Any unused work opportunity credit, welfare-to-work credit, rehabilitation investment credit, incremental research credit, empowerment zone employment credit, or enhanced oil recovery credit remaining at the end of the carryover period, or at the taxpayer?s death, is deductible in the following year or, in the case of the taxpayer?s death, on the taxpayer?s final return (IRC Sec. 196). The deduction for unused research credits arising before 1990 is limited to 50% of such credits [IRC Sec. 196(d)(2)].
TAX ALERT: Neither the Code, regulations, IRS publications, nor instructions to Form 3800 (General Business Credit) identify where to deduct the unused credit. DeHoff & DeHoff suggest it should appear on the schedule reporting the activity generating the credit (e.g., Schedule C, E, or F).
The amount of the GBC that can be claimed also may be limited by the application of the at-risk and passive activity rules. Special limitation and reporting rules, as detailed in the summary tables in the Quick Reference Binder, apply if the credit is passed through to the taxpayer from a partnership or an S corporation.
TAX TIP: GBCs initially are reported on the appropriate form for each credit [such as Form 5884 (Work Opportunity Credit)]. However, if a taxpayer claims more than one of these credits, reports a carryback or carryforward of a credit, or has credits from a passive activity the amounts from the individual credit forms flow (with the exception of the empowerment zone employment credit) to Form 3800, which summarize all GBCs. The individual credit forms and Form 3800, if applicable, are filed with the taxpayer?s return.
Businesses that hired employees from targeted groups may receive the Work Opportunity Tax Credit for the employees' first year of work. If you hired "target" employees between October 1, 1997 and June 30, 1999, you can receive a 40% credit for the first $6,000 paid to each employee.
The targeted groups include: Aid to Families with Dependent Children recipients, veterans, ex-felons, high-risk youth, vocational rehabilitation referrals, summer youth employees (special limitations apply), food stamp recipients, and supplemental security income recipients.
Last year, Congress breathed new life into the Research and Development (R&D) tax credit, extending the credit to June 30, 1999. The credit is available for 20% of your increased research expenses which you paid or incurred between July 1, 1996 and June 30, 1999. In addition, 75% of payments to nonprofit research groups can qualify for the credit. As important as R&D is to the health of American industry, Congress may reinstate this tax credit again after it expires in June. Contact us to determine its current status. As with all tax credits, be aware of the impact of the AMT, which can substantially diminish these credits.
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