The Center of the California Enterprise Zone Information Universe

Where We Are: WOTC and the PATH Act

Approaching the end of May 2016, where do we stand with the changes made to WOTC in the PATH Act?

The Protecting Americans from Tax Hikes Act of 2015 (“PATH Act” Division Q of P.L. 114-113) was enacted Dec. 18, 2015. That legislation extended WOTC for five years, one year back and four years forward, through the end of 2019. It also added a new targeted group of eligible employees beginning in 2016 called long-term unemployment recipients.

On January 28, 2016 the Dept. of Labor provided “Interim Instructions” to the State Workforce Agencies informing them to expect revised forms IRS 8850 and ETA 9061. The instructions state: “States may accept applications for the New Target Group using the current forms ETA forms 9061 or 9062, yet must postpone processing those certification requests until ETA issues additional guidance.”

On March 23, 2016 the IRS published a revised form 8850 as well as Notice 2016-22. As has been the case following prior periods of program hiatus, the Notice provides transition relief from the standard 28-deadline for submitting applications. Employers who hired members of targeted groups on or after January 1, 2015 and on or before May 31, 2016 may submit applications to the state agencies by June 29, 2016. In the case of employees in the long-term unemployment recipient category, employees must be hired on or after January 1, 2016. The Notice explains that revised forms IRS 8850 and ETA 9061 are necessary to administer the new target group.

The Notice also indicated that a separate self-attestation form or affidavit would be required:

The Treasury Department and the IRS anticipate that the modified forms will include a requirement that the individual signing the form attest that he or she meets the requirements to be a qualified long-term unemployment recipient and a requirement that the individual attest to the period(s) during which the individual was unemployed and the period the individual received unemployment compensation.

It wasn’t until May 10, 2016 that the DOL submitted proposed ETA 9061 and self-attestation forms to the Office of Management and Budget (OMB), the agency that must approve government forms. DOL requested that OMB approve the forms under “emergency” procedures in just three days. Ultimately, OMB approved the forms on May 17, 2016. The new form is called ETA 9175.

In order for the State Workforce Agencies to understand how to utilize the new self-attestation form and how to make qualification determinations in the new target category, they require a Training and Employment Guidance Letter (TEGL) from DOL. Such a TEGL has yet to be provided.

On May 16, 2016 Congressmen Tom Reed (R-NY) and Bill Pascrell (D-NJ) sent a letter to Labor Secretary Thomas Perez, Treasury Secretary Jacob Lew, and IRS Commissioner John Koskinen. In the letter, they pointed out the delay in implementing the new WOTC category passed in the PATH Act and asked that additional transition relief be granted in order to enable the states and employers to make the necessary changes to utilize the new category:

Continued delay of issuance of the forms and guidance needed for WOTC has put states and employers in a difficult position to implement the new provisions. An extended transitional relief period will ensure that employers screening and hiring individuals, as well as state agencies, are fully prepared to comply with the forms and guidance, once issued. We further suggest that because it has taken so long to issue guidance and forms for the long-term unemployed, the requirement that applicant fill out the attestation should only be imposed prospectively from when the forms are publicly available. For those individuals hired in 2016 in the long-term unemployed category, IRS Form 8850 which requires them to attest that ” … you are in a period of unemployment that is at least 27 consecutive weeks and for all or part of that period you received unemployment compensation,” should be sufficient.

Colorado WOTC Bill Killed in Committee

Colorado House Bill 1372, which would have established a state WOTC to supplement the federal credit, was killed in the House Finance Committee on Wednesday.

Below is the audio of the bill’s sponsor, State Representative Dianne Primavera, explaining the fiscal necessity to abandon the bill at this time with the hope it could be reconsidered in the future.

To “PI” a bill in Colorado means, “Postponing Indefinitely.”

California New Employment Credit Update

We recently reviewed the status of California’s business incentive programs that replaced the Enterprise Zone program in 2013. We noted that the New Employment Credit (NEC) seemed to be falling significantly short of expectations. The legislation included a requirement that the FTB report to the Legislature each year on the performance of that credit and, if it would happen to fall short of expectations to explain the reasons behind such a shortfall. The first such report, for tax year 2014, is available here.

The report notes that $3.9 million in credits were claimed on returns for the 2014 tax year. The initial estimate made at the time of the legislation was that, for the first year, $22 million would be used and then presumably increase dramatically after that. The report goes on to list the structural factors of the program that are leading to this dramatic under-performance.

However, even this $3.9 million reflected in the report is inconsistent with the published list of taxpayers and the amounts of credits they claimed (which the legislation also requires FTB to publish). That report only lists about $299,000 in credit claims.

I asked the FTB to explain the difference between the two reports. A representative from the FTB responded that the differences could be categorized in four ways:

1. That there are still some returns processing or that will be processed in the future that will be included in future updates.
2. In some cases, the NEC was claimed incorrectly on a return where the taxpayer meant to claim the enterprise zone credit.
3. Some NEC credit claims were made without the required tentative credit reservation.
4. Some NEC credit claims were disallowed for not meeting other criteria.

So apparently, while the FTB received filed returns with $3.9 million in credits claimed, only about $299,000 of those credits were claimed accurately or properly. $299,000 is just over 1% of the anticipated $22 million first-year usage of the credit.

A California Competes Tax Credit Committee Member Offers Insight Into The Voting Process

The Sacramento Business Journal interviewed Madeline Janis, a member of the California Competes Tax Credit Committee about some of her recent stances on tax credit applications:

ACA: Survey Finds Businesses Think Reporting Requirements are a Significant Administrative Burden

Healthcare consultant Mercer conducted a survey of 644 employers regarding opinions of the Affordable Care Act:

Employers have made their opinion about the excise tax clear. There is another Affordable Care Act (ACA) provision, however, that irks them nearly as much, and that is the “play or pay” rule – the mandate to offer coverage that meets ACA requirements or pay a penalty. In a recent survey of 644 employers, Mercer asked employers what changes they would like to see made to the ACA. Repealing the excise tax was first, with 85% in favor, but repealing the employer mandate was second, favored by 70% (see Figure 1).

“It’s not because they don’t want to offer coverage. It’s because proving that they offer coverage is so much work,” said Tracy Watts, Mercer’s leader for health reform.

The deadline for reporting to the IRS about coverage in 2015 was extended from March to June, and at this point most employers have a handle on their results. Virtually none of the survey respondents believe they will be liable for the “a” assessment – meaning they all offered coverage to substantially all employees working 30 or more hours per week. And just 8% thought they might be at risk for the “b” assessment – meaning that some of their employees might qualify – and obtain – subsidized coverage on the exchange because their employer’s plan did not offer affordable contributions or meet minimum plan value requirements.

“This suggests that penalties are not going to amount to a huge source of revenue,” said Beth Umland, Mercer’s research director for health and benefits. The CBO had estimated that employer penalties would raise $9 billion in revenue in 2016.[1]

Has the employer mandate resulted in more workers gaining coverage in employer plans? About three-fourths of survey respondents say that their enrollment levels have not changed due to the ACA. While 22% have seen an increase in enrollment, most say the increase was slight (less than 5%), and 4% of respondents say enrollment has decreased (see Figure 2). The most recent CBO study reports virtually no change in the number of people obtaining health insurance from their employer since the law was passed. In 2016, 155 million people, or 57% of the population under age 65, will receive employment-based coverage. [2]

When asked about the impact of the ACA on their organization, 20% of survey respondents say they have experienced higher cost and 29% say they have made unwanted plan design changes to avoid excise tax exposure. At the same time, 84% say that the additional administrative burden has had a significant impact – and 51% describe it as “very significant.”

In addition, the requirement to offer coverage to “substantially all” employees working 30 or more hours per week will get harder to meet in 2016 when the definition of “substantially all” increases from 70% to 95%. Limited duration employees, like long-term temps and interns, could trigger an assessment. About one in four respondents say they will pull back on use of these workers, and another 16% are considering it.

“More than half of Americans already get their health insurance from their employer, and three out of four workers are satisfied with their health benefits,” said Ms. Watts. “Under play or pay, employers have had to modify their plans, track worker hours, manage eligibility and report coverage to prove they are doing something they have been doing all along.”

Colorado WOTC Bill Moves Forward

Colorado House Bill 1372 passed a vote in the House Public Health Care & Human Services Committee on April 5 on a party-line vote. The bill was referred to the Finance Committee. In order to reduce fiscal complications, the bill was amended to begin on Jan. 1, 2018 instead of 2017.

Texas Introduces State WOTC Bill

In March, Texas House Member René Oliveira introduced HB 3305, a bill to provide tax credits to businesses that hire certain employees. While not linked to WOTC to the same degree as Colorado’s HB 1372, it is certainly modeled after WOTC.

The bill enumerates five categories of qualified employees focused on veterans and the unemployed.

The bill requires an application for certification within 60-days of hiring the employee using an online form that would be established for the purpose.

The credit amount would be 20% of the qualified employee’s first-year wages up to a maximum of $10,000.

Congresswoman Watson Proposes Another WOTC Target Group

We reported earlier on Representative Bonnie Watson Coleman’s (D-NJ) bill to enhance WOTC for businesses that hire ex-offenders.

The Congresswoman is proposing an additional WOTC category to make “older long-term unemployment recipients” a new targeted group.

Like her previous bill, this bill also proposes to make all of WOTC permanent.

The difference between this bill and the existing long-term unemployment recipient category is that for qualified employees who are 55 or over, the credit would be up to $5,600 and would also be indexed for inflation.

Here is a press release from the Congresswoman’s office.

H.R. 4840: More WOTC Enhancement Proposals

Representative Bonnie Watson Coleman (D-NJ) has introduced H.R. 4840 which focuses on enhancing WOTC for businesses that hire ex-offenders.

The bill would make four changes to the WOTC program:

  1. 1. Increase the amount of qualified wages for an employee qualified in the ex-offender category from $6,000 to $14,000 for a maximum credit of $5,600 (matching the amount available for the long-term unemployed veteran category).
  2. 2. Index that new qualified wage cap to inflation.
  3. 3. Expand the definition of a qualified ex-felon from someone hired within 1 year of conviction to within 3 years of conviction.
  4. 4. And, oh, make all of WOTC permanent.

Performance Review For California’s Enterprise Zone Replacements

When California did away with its enterprise zone tax incentive program in 2013, it replaced that program with three new tax incentives: (1) the California Competes tax credit, (2) a partial sales tax exemption on manufacturing and R&D related equipment, and (3) the New Employment hiring tax credit (NEC). At the time, a press release from Governor Brown noted: “The new Initiative will be funded by redirecting approximately $750 million annually from the state’s outdated and ineffective Enterprise Zone program.” In order to obtain the necessary bi-partisan support, the legislation needed to be revenue neutral and shift the economic incentives from the enterprise zone program to the new programs.

How are these programs tracking compared to the original commitment of $750 million for business incentives?

For fiscal year 2015/2016, the California Competes program was authorized to allocate just over $200 million (which is the amount allowed by statute).

A source from the State Board of Equalization confirmed that taxpayers received $209 million in tax savings as a result of the partial sales tax exemption between July 2014 and December 2015. This is consistent with the Governor’s budget from January which said that utilization of this benefit was forecast to be $160 million in 2015-16 and $180 million in 2016-17 (see here, page 157).

For the NEC, the legislation required that FTB publish the names of taxpayers who claimed the NEC and the amounts claimed. The FTB recently published the first list which pertains to the 2014 tax year. So far, 37 taxpayers have claimed a total of $299,164 in NEC tax credits.

$200 million for California Competes, plus about $200 million for the sales tax exemption comes to about $400 million. That leaves about $350 million before reaching the revenue neutral $750 million mark which convinced legislators to eliminate the enterprise zones. So far, the NEC is providing less than one tenth of one percent of that benefit to California businesses.

One of the requirements of the legislation was that the efficacy of the New Employment tax credits be evaluated annually. From AB 93:

(m) (1) Upon the effective date of this section, the Department of Finance shall estimate the total dollar amount of credits that will be claimed under this section with respect to each fiscal year from the 2013-14 fiscal year to the 2020-21 fiscal year, inclusive.

(2) The Franchise Tax Board shall annually provide to the Joint Legislative Budget Committee, by no later than March 1, a report of the total dollar amount of the credits claimed under this section with respect to the relevant fiscal year. The report shall compare the total dollar amount of credits claimed under this section with respect to that fiscal year with the department’s estimate with respect to that same fiscal year. If the total dollar amount of credits claimed for the fiscal year is less than the estimate for that fiscal year, the report shall identify options for increasing annual claims of the credit so as to meet estimated amounts.

I have not yet been able to confirm if such a report has been provided by the FTB.

Colorado Introduces State WOTC Bill

Colorado State Representative Dianne Primavera has proposed House Bill 16-1372, “Concerning the Creation of the Colorado Work Opportunity Income Tax Credit.”

The bill states as a rationale:

The General Assembly further finds that when such employees are hired and thus move out of unemployment, the federal government and the state see savings in the cost of these public assistance programs because there are fewer individuals in need. In some estimates, the savings to Colorado are in the neighborhood of seventy-nine million dollars just as a result of the federal work opportunity tax credit. Such savings to the state would increase if the incentive to the private-sector business is even greater because the state offers its own work opportunity tax credit.

The bill proposes to create a state income tax credit based on and linked to the federal WOTC program. Businesses who employ employees within the state who have been certified as a member of a WOTC target group would be able to claim an a state income tax credit for tax years starting in 2017. The amount of the credit is up to $9,000 over two years for a long-term family assistance recipient (which is the same as the long-term TANF category in WOTC). The credit possibilities are:

  • 1. 40% of $4,500 in first-year wages for targeted groups besides long-term TANF (if the employee works at least 400 hours)
  • 2. 25% of $4,500 in first-year wages for targeted groups besides long-term TANF (if the employee works between 120 and 400 hours)
  • 3. If the employee is a veteran, the credit is based on $4,800
  • 4. 40% of $10,000 in first-year wages plus 50% of 10,000 in second-year wages for an employee certified in the long-term TANF target group

  • IRS Notice Regarding WOTC Transition Relief and New Qualification Category

    The IRS published today Notice 16-22 concerning the extension of the federal Work Opportunity Tax Credit (WOTC) and the addition of a new qualification category. Consistent with recent IRS action, the Service is allowing a period of transition relief to allow taxpayers to submit WOTC applications to the states despite the requirement that applications must normally be submitted within 28-days of an employee’s start date. For employees not in the new qualified long-term unemployment recipient category, taxpayers will have until June 29, 2016 to submit applications for employees hired between 1/1/2015 and 5/31/2016.

    The new category of qualified employee added by Congress to WOTC last year is long-term unemployment recipients. These are individuals who have been unemployed for at least 27 consecutive weeks prior to being hired by the taxpayer applying for the credit, and who received unemployment compensation benefits during some of that time. Since this category did not become effective until 2016, the transition relief period for submitting applications with this category is until June 29, 2016 for employees hired between 1/1/2016 and 5/31/2016.

    The new qualification category requires the use of a new IRS Form 8850 and Department of Labor Form 9061 which have yet to be published. The notice indicates that these new forms may require employees qualifying in this new category to attest to their periods of unemployment and receipt of unemployment compensation.

    Ryan, Inc. Wins Suit Against GO-Biz

    According to the Sacramento Business Journal:

    A Sacramento judge has thrown out a state rule that bars site-selection consultants from claiming a share of incentives awarded by the California Competes program.

    Sacramento Superior Court judge Timothy Frawley on Thursday sided with a Dallas firm that challenged the rule. That firm, Ryan, sued the Governor’s Office of Business and Economic Development over a 2014 regulation involving tax credits the state provides to businesses that create jobs here.

    The administration imposed the ban to ensure that businesses — not consultants — received the entirety of awards from its California Competes program. But Frawley wrote that the agency, known as GO-Biz, “exceeded its statutory authority” with its regulation. The ban does not advance the program’s goals of stimulating job growth and business investment in California, he concluded.

    “The only thing the ban is likely to accomplish is discourage businesses with contingent fee arrangements from participating in the California Competes tax credit program,” Frawley wrote.

    GO-Biz declined to comment on the ruling or say if it plans to appeal. A representative of Ryan was not immediately available for comment. Ryan filed the suit in August 2014.

    The IRS Just Delayed the Due Dates for ACA Employer Reporting

    On December 28, the IRS published Notice 2016-4 providing additional transition extending the due dates for filing 2015 Section 6055 and 6056 reporting. The due date for furnishing 1095-B or 1095-C forms to employees has been extended from 2/1/2016 until 3/31/2016. And the deadline for filing 1094-B/C forms with the IRS has been extended from 2/29/2016 to 5/31/2016 for those not filing electronically, and from 3/31/2016 until 6/30/2016 for those who are filing electronically.

    The Notice explains that all other options for requesting individualized extensions are now superseded by this Notice and no other extensions will be granted:

    In view of these extensions, the provisions regarding automatic and permissive extensions of time for filing information returns and permissive extensions of time for furnishing statements will not apply to the extended due dates. Employers or other coverage providers that do not comply with these extended due dates are subject to penalties under section 6722 or 6721 for failure to timely furnish and file. However, employers and other coverage providers that do not meet the extended due dates are still encouraged to furnish and file, and the Service will take such furnishing and filing into consideration when determining whether to abate penalties for reasonable cause.

    ACA Employer Reporting: IRS Clarifies that Employees Don’t Actually Need 1095-Cs to File Taxes

    In a new FAQ regarding employer ACA reporting, the IRS is stating very clearly that individuals do not actually need their 1095-B or 1095-C in order to file their taxes:

    While the information on these forms may help you complete your tax return, they are not needed to file. You can file your federal tax return even if you have not received one of these statements.

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