If your business has expanded its workforce this year, or hired workers from particular target groups, you may be eligible for some valuable state and federal tax credits.
The state of Tennessee promotes several types of credits to encourage businesses to hire new employees. The two most widely beneficial are the state's job tax credit and enhanced job tax credit. Both of these can reduce the amount your company pays in business franchise and excise tax.
The Standard Job Tax Credit is one of the most commonly used credits for expanding businesses. It allows a credit of $4,500 per new job for companies creating at least 25 net new full-time jobs within a three-year period and investing at least $500,000.
Eligible business must fall into certain categories, including manufacturing, warehousing, distribution, research and development, goods processing, computer services, call centers, data centers, headquarters facilities, aircraft repair, high-tech industries and convention and trade show facilities.
The savings can be significant, depending on the number of new jobs: $112,500 for 25 new jobs, $450,000 for 100 new jobs and $2.25 million for 500 new jobs. The credit offsets up to 50 percent of franchise and excise taxes in any given year, and any unused credit can be carried forward for as many as 15 years.
The Enhanced Job Tax Credit can quadruple the benefit for companies that locate or expand in more rural counties, allowing them to take the credit for an additional three years if the county is categorized as Tier 2 and five years if the county is categorized as Tier 3. For example, those companies investing $500,000 and creating at least 25 new jobs in Dickson, Maury or Hickman counties in Middle Tennessee can get the $4,500 per job credit and get it again for an additional three more years. Tier 3 counties get the benefit for an additional five years. See the Tennessee Department of Economic and Community Development website for a map of Tier 2 and Tier 3 counties.
At the federal level, two important tax credits tied to stimulating the economy expired on Dec. 31, 2013. However, these credits have in the past been retroactively renewed by Congress back to the date of expiration, so they are worth watching for businesses whose employees fall into certain categories.
The Work Opportunity Tax Credit (WOTC) is a federal tax credit for employers who hire individuals from eligible target groups with significant barriers to employment. Those target groups include veterans, those receiving Temporary Assistance for Needy Families, food stamp recipients, ex-felons, certain individuals with disabilities, summer youth employees and workers receiving supplemental security income benefits.
The credits vary, but can reduce an employer's federal income tax liability by as much as $9,600 per employee hired. Employers have no limit on the number of individuals they can hire to qualify to claim the credit.
The Empowerment Zone Employment Credit (EZ Credit) is an incentive for businesses located in an empowerment zone (EZ) who hire or retain employees who also live in the zone. Businesses are eligible for a wage credit of up to $3,000 per year per eligible employee.
There are four empowerment zones in Tennessee (Chattanooga, Clinch-Powell, Knoxville and Memphis). Both full-time and part-time employees may qualify, as long as they work at least 90 days during the year in which the credit is claimed.
Check with your accountant or financial services firm to see if any of these credits might work for you.
Jonathan Cooke is a partner in the LBMC Audit, Tax & Advisory, the largest regional accounting and financial services family of companies based in Tennessee. Contact Jonathan at firstname.lastname@example.org or 615-309-2222.