The research credit is an important feature in the tax code to encourage research and experimentation by the private sector.
The IRS continues to see significant misuse of the research credit. Improper claims for this credit generally involve a failure to participate in or substantiate qualified research activities and/or a failure to satisfy the requirements related to qualified research expenses.
To qualify for the credit, a taxpayer’s research activities must, among other things, involve a process of experimentation using science that is intended to improve a product or process the taxpayer holds for sale or lease. However, there are certain activities, including research after commercial production, adaptation of an existing business product or process, foreign research and research that is funded by the customer that are specifically excluded from the credit. Qualified activities also do not include activities where there is no uncertainty about the taxpayer’s method or capability to achieve a desired result.
The IRS often sees expenses from non-qualified activities included in claims for the research credit. In addition, qualified research expenses include only in-house research expenses and contract research. Qualified research expenses do not include expenses without a proven nexus between the claimed expenses and the qualified research activity.
In a comprehensive tax reform effort, everything in the tax code will be scrutinized. That includes the Work Opportunity Tax Credit.
Senators on the Finance Committee had the opportunity to submit written questions to Treasury Secretary nominee Steven Mnuchin to ask questions beyond what was covered in his live hearing. Senator Ben Cardin (D-MD) asked the following question about WOTC:
President Trump has repeatedly indicated that he wants to address poverty and joblessness in America. He has also emphasized the need to help those who have lost their jobs because the company they were working for moved overseas as well as the desire to encourage businesses to relocate back to the U.S.
One of the programs for which the Treasury Department shares responsibility with the Department of Labor is the Work Opportunity Tax Credit (WOTC). WOTC helps over 1.3 million Americans find work in the private sector. Studies by Dr. Peter Cappelli, a Wharton School of Business Labor Economist, indicate that the program more than pays for itself in savings from entitlement programs and that employers using it change their hiring practices to hire those who are eligible.
Will you work with our office to make WOTC a permanent part of the President’s goal of reducing poverty, encouraging comppanies to bring jobs back to the United States, and helping Americans displaced by overseas competition?
Bringing jobs back to the United States and helping American workers displaced by factories moving overseas are cornerstones of the President’s platform, so I join you in your desire to
encourage businesses to relocate back to the U.S. If confirmed, I will work with you and all stakeholders to ensure that economic incentives are aligned to facilitate job creation and business relocation here in the U.S.
Despite the fact that the Department of Labor’s TEGL 25-15 states that employers may submit WOTC applications through September 29, 2016, the IRS (which is the agency with jurisdiction over transition relief of this kind) clarifies that the deadline is today, September 28, 2016.
See IRS Notice 2016-40.
Representatives McDermott (D-WA), Reichert (R-WA), Davis (D-IL), Reed (R-NY), and Doggett (D-TX) have introduced H.R. 5947, a bill “To amend the Internal Revenue Code of 1986 to include foster care transition youth as members of targeted groups for purposes of the work opportunity credit.”
The language of the bill has not been made available yet, but according to a draft of the bill, a new target group would be added called, “A qualified foster care transition youth.” This is defined as an individual under the age of 27 at the time of hire who had been in foster care after age 16. This target group would be eligible for the standard $2,400 credit.
Congressman Jim McDermott commented, “The outcomes for transition age foster youth in this country are heartbreaking: nearly half are unemployed at age 24; half will spend time in a homeless shelter; and 70% will be reliant on government assistance after emancipating from foster care. The federal government has both an economic and moral interest in improving this grim reality for foster youth. In 2008, Congress passed the Fostering Connections to Success and Increasing Adoptions Act, which recognized the challenges faced by youth transitioning out of foster care by enabling them to continue to receive support services until they turn 21. In authoring that bill my goal was not to extend dependency on the foster care system, but rather to use the additional time spent in extended foster care to help these youth become independent. While extended foster care is providing a critical lifeline for thousands of youth across the country, more needs to be done to help these youth connect with career opportunities and attain self-sufficiency.”
Congressman Tom Reed (R-NY) stated, “We care about our foster kids and want to give them every opportunity to reach their highest potential. This bill is part of that process. This proposal provides a simple adjustment that encourages businesses to hire these kids, which breaks a cycle of dependence, and often a lifetime of poverty. It’s only right that we do our part to stand with our foster kids as they mature into adulthood and enter the workforce. As a member of the Congressional Foster Care Caucus, we are proud to support this bill.”
California’s Governor’s Office of Business and Economic Development has announced the dates for three new rounds of California Competes tax credits.
The application rounds will take place:
1. July 25, 2016, through August 22, 2016 ($75 million available)
2. January 2, 2017, through January 23, 2017 ($100 million available)
3. March 6, 2017, through March, 27, 2017 ($68.3 million plus any remaining unallocated amounts from the previous application periods)
The dates for the CalCompetes Committee meetings at which credit awards are finalized will be:
1. November 17, 2016
2. April 13, 2017
3. June 15, 2017
On Friday, June 17, the Department of Labor issued a long-awaited TEGL providing the states critical guidance regarding the renewal and expansion of WOTC which were included in the PATH Act passed on December 18, 2015.
A previous post reviewed the timeline of events through the end of May.
The TEGL provides the following critical points:
1. The IRS had previously provided transition relief for the 28-day application requirement for employees hired back to 1/1/2015 through 5/31/2016. Given that the release of this TEGL was delayed passed that deadline, the TEGL references a new IRS Notice 2016-40 (which has yet to appear on the IRS website as of this writing) which extends this transition relief through 8/31/2016. Specifically, applications for employees in all target groups, except for the new long-term unemployment recipient category, with hire dates between 1/1/2015 and 8/31/2016 can be submitted through 9/29/2016. Applications for employees in the new long-term unemployment category with hire dates between 1/1/2016 and 8/31/2016 can also be submitted through 9/29/2016. Essentially, this extends the current transition relief for 90 days without any other changes.
2. The TEGL describes the procedure states should take in order to certify eligibility for the new long-term unemployment recipient category. DOL is directing the state agencies to arrange for access to their states’ unemployment insurance claims and wage records. They will then need to develop a process to review this data to validate that applicants were in fact unemployed for at least 27 consecutive weeks and received some unemployment compensation during that unemployment. Only where the data is unavailable to validate those requirements are the states directed to use the new Self Attestation Form, ETA form 9175.
3. Regarding applications for the long-term unemployment recipient category that have been submitted thus far in 2016 prior to this TEGL, the DOL is directing the states to attempt to determine eligibility using UI claims and wage records. Where that data is insufficient to make a determination, the TEGL directs the states to send a “needs letter” to the employer requesting that they obtain a completed self-attestation form from the employee in question. There appears to be no remediation for cases in which it would be impractical to obtain the form.
Update: IRS Notice 2016-40 is available here. The IRS clarifies that the end of transition relief is 9/28/2016, not 9/29/2016 as the DOL had stated.
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 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.”
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.
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:
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.
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. 
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 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.
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.
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.
The bill would make four changes to the WOTC program:
- 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. Index that new qualified wage cap to inflation.
- 3. Expand the definition of a qualified ex-felon from someone hired within 1 year of conviction to within 3 years of conviction.
- 4. And, oh, make all of WOTC permanent.