The Work Opportunity Tax Credit can be carried forward and backward
Many organizations already claim the WOTC, but some may not realize that it not only relieves tax burdens now, but also in the past and/or future.
For context, there are two kinds of tax credits–”use it or lose it” credits, and those that can be carried forward and/or backward across tax years. The Work Opportunity Tax Credit (WOTC) is the second kind.
This blog describes how using WOTC carryforwards or carrybacks can make a difference for your organization.
Carryforwards
WOTC credits can be carried forward. This means that if you are unable to fully use the credit in the year it’s earned, you can use it in the future, up to 20 years later.
For example, if your business earns $100,000 in WOTC credit but only owes $50,000 in tax, you can carry the remaining $50,000 forward to a future tax year. This allows businesses to make the most of their tax benefits over an extended period, providing a valuable financial cushion.
Carrybacks
WOTC credits can also be carried backward. This means that if you are unable to fully use the credit in the year it’s earned, you can apply it to the immediately preceding year’s tax liability.
For example, if your business earns $100,000 in WOTC credit but only owes $50,000 in tax, you can carry the remaining $50,000 back to the immediately preceding tax year’s balance due.
One caveat: carrying the WOTC back cannot result in a negative tax liability. What this means is, continuing the example above, if your balance due from the immediately preceding tax year was only $25,000, then $25,000 is the maximum amount of WOTC you could carry back.
However, if you already paid $25,000 in taxes in the immediately preceding tax year, you could still carry back your surplus WOTC credit, which could result in a refund of the amount you already paid–in this example, $25,000.
Using WOTC in this way is a great example of how it can directly add to your bottom line.
Caution
Using WOTC carryforwards and carrybacks is simple in concept, but can be complicated in execution. Consider these three tips if you decide to carry out this strategy.
1. Document thoroughly
Ensure that you maintain meticulous records of all tax credits earned and their associated documentation. This will be crucial for accurately claiming credits in future years.
2. Consult tax pros
Engage a tax advisor or professional who is well-versed in business tax credits, like Arvo Tech. They can provide tailored advice and help you navigate the intricacies of claiming credits.
3. Stay Informed
Stay up to date with changes in tax laws and regulations that may impact the availability or application of specific tax credits.
The full value of WOTC
Understanding the power of carryforwards and carrybacks can provide a long-term advantage for your business, but it’s only the tip of the iceberg when it comes to WOTC. Ensure that you optimize your tax position and reap the full benefits of available credits by contacting Arvo today.