Tapping Into Tax Incentives for Hiring Veterans
While many entrepreneurs bemoan the tax burdens the government imposes upon small businesses, Uncle Sam does, on occasion, reward small business owners for doing the right thing. Case in point, the federal government provides several tax credits that encourage businesses to hire veterans, particularly unemployed veterans. States also offer a variety of tax credits and incentives for including veterans on your payroll.
Of course, there is a catch. Most of these tax credits can be claimed only when you newly hire a veteran, and many credits will expire by the end of the year. Before you lose out on these tax advantages, familiarize yourself with the tax credits and programs available.
The Returning Heroes Tax Credit
Signed into law on November 22, 2011, as part of the VOW to Hire Heroes Act, this credit is aimed at reducing the number of unemployed veterans, which as of June has dropped to 9.5 percent for Iraq- and Afghanistan-era vets from May's 12.7 percent.
If you have you have your eye on hiring an unemployed veteran, you have until January 1, 2013, to qualify for this two-fold tax credit. Unfortunately, this tax credit has to be taken advantage of in the earliest phases of the hiring process, meaning current employees who were unemployed veterans aren't eligible. The good news, though, is this credit is available per veteran. The more qualifying veterans you hire, the more times you can claim this and the Wounded Warriors credit.
The Returning Heroes credit offers two tiers based upon the length of the veteran’s unemployment.
- Short-term unemployment. If the veteran you hire was unemployed for at least four aggregate weeks, your business qualifies for a credit worth 40 percent of the veteran’s first $6,000 in wages (a $2,400 maximum credit).
- Long-term unemployment. If the veteran you hire was unemployed for longer than six aggregate months, your business qualifies for a credit worth 40 percent of the veteran’s first $14,000 in wages (a $5,600 maximum credit).
If the veteran also qualifies for the Wounded Warrior Tax Credit, you can claim a larger tax credit. You'll complete the same paperwork either way, so there's no reason not to check.
The Wounded Warrior Tax Credit
If a veteran has a service-related disability, you, as the employer, can receive a larger tax credit. The Wounded Warrior credit contains two components:
- service-disabled veterans unemployed for at least four aggregate weeks may qualify for a credit worth 40 percent of the veteran’s first $12,000 in wages (a $4,800 maximum credit)
- service-disabled veterans unemployed for at least six aggregate months may qualify for a credit worth 40 percent of the veteran’s first $24,000 in wages (a $9,600 maximum credit)
Because Wounded Warriors are also Returning Heroes, there is some overlap. The maximum credit available is $9,600 per veteran. You cannot claim, for example, $5,600 from the Returning Heroes credit plus $9,600 from the Wounded Warrior credit.
Once you've determined your business's eligibility, completing the paperwork promptly is urgent. You must:
- submit IRS Form 8850 (PDF) electronically or via fax within 28 days after the qualifying veteran begins working for your business
- in order to claim the credit, complete IRS Form 5884 to determine the size of your credit
- include the credit amount in IRS Form 3800, the General Business Credit Form
- keep the forms in steps 2 and 3 readily available when you complete your annual employer's income tax return
To review the nitty-gritty details of the credit-claiming process, download IRS Notice 2012-13 (PDF).
State Government Tax Credits
To further lighten your tax load, some states provide a variety of tax credits for hiring veterans. In Illinois, the state’s existing veterans tax credit of 10 percent of annual wages recently jumped to 20 percent of annual wages. The Land of Lincoln also raised the cap from $1,200 to $5,000.
In California, home to 1.9 million veterans, business owners can receive hiring tax credits worth up to $12,500 per veteran hired in any of the 42 California Enterprise Zones. The governor of Alaska, the state with the highest percentage of civilians who are veterans, signed legislation in mid-June that includes tax credits for businesses that hire qualifying veterans.
Scour your state’s revenue and veterans departments's websites and publications to see what credits or incentives are available. You might be surprised by how many tax savings you've been missing out on.
Hiring qualifying veterans offers numerous benefits beyond tax savings, but there's no reason not to help your business's financials with a reduced tax bill as well.