On Dec. 20, 2019, U.S. President Donald Trump signed H.R. 1865, providing for numerous extensions of tax incentives, provisions relating to tax relief due to natural disasters, and other changes to the federal tax code. Two tax incentives extended by the legislation and of particular interest to many businesses over the past couple decades are the New Markets Tax Credit and the Work Opportunity Tax Credit.
New Markets Tax Credit
The legislation provides a one-year extension of the New Markets Tax Credit (NMTC) through 2020 and increases the allocation limitation from $3.5 billion to $5 billion. The legislation also extends the carryover limitation one year from 2024 to 2025.
Enacted in 2000 to infuse investment dollars into low-income communities, the NMTC program can provide resources to projects for which capital is generally more difficult to obtain. Each year, the Community Development Financial Institutions (CDFI) Fund awards credits to Certified Community Development Entities (CDEs) through a competitive application process. Third-party investors receive the credits for making qualified equity investments into these CDEs. The CDEs then invest the capital raised into projects and businesses located in low-income communities.
The NMTC financing structure offers third-party interest-only forgivable loans to projects in severely distressed census tracts across the United States. The NMTC loans are added to the capital stack, reducing the overall investment needs for projects in these distressed areas. After seven years, the NMTC loans are forgiven, resulting in significant back-end benefits to these projects. Recipients can use these funds for real estate, construction, machinery and equipment, and even operating costs. NMTC financing is available to both for-profit and not-for-profit businesses.
CDEs submitted applications in October for the calendar year 2019 allocation with awards expected in 2020. Without the extension, the calendar year 2019 allocation was scheduled to be the final allocation in the program.
Work Opportunity Tax Credit
H.R. 1865 also provides a one-year extension of the Work Opportunity Tax Credit (WOTC) to Dec. 31, 2020.
WOTC is a federal income tax benefit administered by the U.S. Department of Labor for employers that hire individuals from specified target populations. WOTC applies to numerous classifications including unemployed and disabled veterans, Temporary Assistance for Needy Families recipients, Supplement Nutrition Assistance Program (SNAP) recipients, ex-felons, Supplemental Security Income recipients, certain summer youth employees, and many others.
The tax credit available to the employer depends on the target group of the individual hired, the amount of wages paid to that individual in the first year of employment, and the number of hours that individual worked. The credit can be as high as $9,600 per eligible employee. Importantly, eligible employees must be certified and claims must be filed within 28 days of the hiring date.
Congress has extended WOTC numerous times since its inception in 1996, the last extension occurring in 2015. The credit was scheduled to sunset on Dec. 31, 2019.
For more information on this and other training and hiring incentives, please read our article, 5 myths that keep companies from filing for WOTC and refer to RSM’s Training and Hiring Incentive Consulting portal.