Urgent Update on Work Opportunity Tax Credit Transition Relief

12/30/2020

By Jennifer Rohen, Principal T. 310.930.1780, Email and Patrick Hanlon, Director T. 314.925.4435 Email

Key insights

  • Two categories of WOTC eligibility — designated community residents in an empowerment zone and qualified summer youth employees — have been affected by recent legislative changes.
  • There is a brief window for employers to retroactively capture credit for certain eligible employees hired on or after January 1, 2018.
  • Employers must submit Form 8850 to the designated local agency (DLA) by January 28, 2021.
  • If an employer previously submitted Form 8850 to the DLA and did not receive a denial notification, they do not need to resubmit.

Employers can save up to $9,600 per employee with the Work Opportunity Tax Credit (WOTC), available to organizations that hire employees from certain targeted groups and keep them employed for at least 120 hours in the initial year of employment. To claim the credit, an employer must typically submit an application to the state workforce agency within 28 days of an employee’s start date to certify eligibility. The eligibility categories are broad and are discussed in more detail in here.

The IRS issued a recent notice that states two of these categories — designated community residents in an empowerment zone, and, less commonly, qualified summer youth employees — can now be claimed past the 28-day window if an eligible employee started work between January 1, 2018, and December 31, 2020.

New retroactive certification of eligibility

This opportunity is a result of 2019 legislation that both extended the WOTC through December 31, 2020, and retroactively extended the period during which an empowerment zone designation is in effect from December 31, 2017, to December 31, 2020.

On December 11, 2020, the IRS issued Notice 2020-78, which explains that, due to these extensions, employers may need additional time to comply with the “designated local agency” (DLA) certification requirements. The expiration of empowerment zone designations at the end of 2017, coupled with the uncertainty as to whether empowerment zone designations would be extended, meant that organizations could have failed to claim the WOTC. Some employers that hired members of targeted groups may not have submitted Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to the DLA within 28 days of an eligible employee’s start date.

Summary

Given the very short timeline allotted to see if and how you can secure this tax credit, let’s review the facts:

  • Notice 2020-78 provides relief to employers that did not submit Form 8850 to the DLA within 28 days of an eligible individual beginning work. Employers must submit completed Form 8850 to the DLA by January 28, 2021.
  • An employer that hired a designated community resident or a qualified summer youth employee who began work on or after January 1, 2018, and before January 1, 2021, can satisfy the eligibility requirements if the organization submits the completed Form 8850 to the DLA by January 28, 2021.
  • Transition relief for a new employee is not available to employers that hire a member of a targeted group who begins work for that employer on or after January 1, 2021.
  • If an employer received a previous denial from the DLA by reason of the expiration of the empowerment zone designations, they must resubmit the completed Form 8850 by January 28, 2021.
  • An employer that has previously submitted Form 8850 to the DLA and was not issued a denial notification does not need to resubmit.