In the Zone?: Spreading the Gospel of Wage-Based Tax Credits in Lean Times
You've cut back on as many napkins and ketchup packets as you can, reduced your maintenance costs, renegotiated with suppliers, and maximized employee efficiency (see page 68)--and margins are still razor-thin. Interested in a way to add some zeroes (000's) to those savings, without spending a dime up front? It's time to take a new look at wage-based tax credits.
"Yawn," you say? Agreed. Doing the paperwork, tracking, and other administrative tasks needed to achieve these savings (not to mention deciphering IRS rules) is not the most exciting thing in the world for a hard-charging, road warrior entrepreneur, but listen up--and consider this:
- you can hire someone to do it for you;
- you don't pay them a penny (much less a dime) until the savings come through, and;
- you're probably already hiring people who qualify, so why not get some credit for it--to the tune of thousands or tens of thousands of dollars annually--especially since bankers aren't extending any?
Do we have your attention yet? If not, listen to Phil Wilkins, a four-unit McDonald's franchisee in Lexington, Ky. Not very long ago, he signed on with RetroTax, one of the growing number of firms that identify and administer federal and state wage-based tax credits, and he's already reaping the benefits.
"My accountant called me and said, 'Do you realize the tax savings you've had because of these tax credits?' It's real money and got my attention," says Wilkins. "The credits have been very significant and worthwhile, so I've been teaching the gospel to fellow small-business owners."
Until the savings come through, your only investment is time, and a small tweak in your hiring process. "There are no incremental costs, no equipment to buy, and no layout of cash. I get paid a percentage of the dollar value of the credits that we find," says Stan Friedman, president and COO of Indianapolis-based ACI Franchising, which began franchising as RetroTax in April 2008. (The parent firm, Associated Consultants Inc., has been in the business for 12 years.)
"They really take the burden off the hands of the owners," says Wilkins. "The employees fill in the forms, we send it to them, they do it, and we send them a check for their portion." And only when the tax credits come through.
"It's one thing to get a deduction, another to get a credit that comes straight off. It's like putting extra money in your cash flow every month," he says. "With margins being stressed today, everybody's trying to cut back and find every available dollar they can. This is something that's out there that a lot of people don't realize might be available for them. It's like free money."
So what's not to like?
Jeff Newcorn, president of Des Plaines, Ill.-based R. Jeffrey & Associates, which was founded in 1998, says that it's "a labor of love and detail when you do this." He describes his job as educating potential small-business clients and making sure they follow the administrative procedures to receive credit where it is due. "It's hard for a typical medium-sized or small company to do this themselves," he says.
However, he cautions, these programs are becoming victims of their own success, at least in some states. The combination of increased awareness with cutbacks in the state agencies that certify these claims has slowed the processing time--which is now up to a year or more in some places.
While a growing awareness of wage-based tax incentives appears to be good news for Newcorn and the other firms operating in this field, it's not good for his clients when the credits are delayed--and so are his contingency fees. Once you're in the pipeline and the credits begin to flow, however, the savings keep on coming.
"There are plenty of players soliciting this business, so there is more awareness," agrees Ron Feldman, CEO of Siegel Financial Group in Philadelphia. Siegel, best known for its expertise in connecting franchise borrowers with lenders, became a RetroTax franchisee last summer. He says the rewards are well worth any potential delay, and he's spreading the word on wage-based tax credits to franchisees and franchisors alike.
Which employees qualify?
The wage-based credits discussed here come in two basic types: demographic (individuals) and geographic (location).
- The Work Opportunity Tax Credit (WOTC) is based on the individual demographics of 11 target groups. The two most common are people on welfare (Temporary Assistance to Needy Families, TANF) and those on Food Stamps (Supplemental Nutrition Assistance Program, SNAP, ages 18-39). Others include disabled veterans, and ex-felons hired one year or less after conviction or release from prison. (Note: For all programs, check with the IRS, state labor departments, and professionals in the field for delimiting conditions.)
The American Recovery and Reinvestment Act of 2009 added two new target groups to the WOTC program: unemployed veterans and "disconnected youth." The WOTC Program has been reauthorized until August 31, 2011.
- Empowerment Zone (EZ) and Renewal Community Wage Credit (RC) programs are geographic-based tax incentives to promote hiring within a designated geographical area. It's all laid out in the mind-numbing IRS Publication 954 (all the more reason to run any of these programs by your accountant and then hire a third party to do it for you!).
For a handy, easy-to-read table on EZs ("Take This to Your Tax Preparer") go to www.hud.gov/offices/cpd/economicdevelopment/library/taxincentivesez.pdf. So, is it good for you? Probably!
"I don't care who the multi-unit guy is--if he's multi-unit anything, he's carrying a payroll and this makes sense," says Friedman. "Even if they're not profitable and can't use it this year because the recession is killing them, they can take the credits and put them in the bank. They can apply them to last year or carry them forward 20 years."
What is the purpose?
The California Employment Development Department provides a good, short summation of the purpose of the WOTC on its website:
- To promote the hiring of individuals who qualify as a member of a target group; and
- To provide a federal tax credit to employers who hire these individuals.
The same holds for the geographic-based programs. Says Wilkins, "You're helping a workforce that needs to be put back to work." And in the process, you're helping yourself get paid to do good in the communities you have your stores.
Businesses who hire qualified individuals are entitled to this money, says Newcorn. "They're taxpayers helping to fund this. We have the knowledge to connect them with their money."
Is it legal?
You bet. Also check on the availability of wage-based tax credits with the individual states your units are in. There also may be unique municipal and special zones. The credits can be combined.
"When times are good, this is a good idea. But when money is flowing, business owners are not as likely to drill as deeply to bring more to the bottom line," says Friedman. "In times like now, with margins slimmer and the average ticket price lower, especially in food, a multi-unit franchisee is leaving no stone unturned to bring more to the bottom line. And that is why this makes compelling sense now."
Says Feldman, "One client missed out on $380,000 of potential credits on the WOTC side over the past three years because they weren't participating in this program. That's never to be gotten again because it's a one-time credit for hires."
For the WOTC, you must file the paperwork within 28 days after hiring a new employee. If you don't, you lose the chance to take a tax credit for that individual. And unlike with the geographic credits, where you can go back three years. "If you don't take this credit in the year you're eligible, you lose the opportunity," says Friedman.
"Lots of companies are struggling to keep their doors open. We can go back three years and get back taxes they've paid," he says. "In many cases you can uncover five and six figures. They get cash back--and when you get a percentage of that, it's beautiful for you, too."
How much can I get?
For the WOTC, an eligible employee must work a minimum 120 hours to qualify for the tax credit. If they make it to 400 hours, your company can claim a credit of 40 percent of their first $6,000 in wages, or $2,400, for a first-time hire. Turnover, for all its downsides, can actually be your friend here: In theory, if you happen to fill a position two or three times in a year, each new employee is eligible for the credit.
To qualify for the geographic credits, a unit must be located in the designated zone and the applicants must meet the requirements of the IRS rules governing the programs. These include the Empowerment Zone Wage Credit Program (up to $3,000 in annual tax credits per qualified employee); the Renewal Community Wage Credit Program (up to $1,500); and the Work Opportunity Tax Credit (up to $9,000); plus several state programs. These retroactive tax credit programs cover the open tax year and the three prior years.
Quoting from IRS Form 8844, used to file for the geographic credits, let's do the math:
For tax years that include December 31, 2009, the credit is:
- 20% of the employer's qualified wages (up to $15,000) paid or incurred during calendar year 2009 on behalf of qualified empowerment zone employees plus
- 15% of the employer's qualified wages (up to $10,000) paid or incurred during calendar year 2009 on behalf of qualified renewal community employees.
What role should franchisors play?
Newcorn says franchisors should take an active role in letting their multi-unit operators know about these programs. And many are, he says through franchisee meetings, newsletters, and emails. "They can inform, and they do, but it's a completely optional program. I give them credit for at least keeping it on their radar screen," he says.
Friedman says both franchisors and franchisees stand to gain. "Anyone employing people can benefit from these credits, whether for the corporate headquarters, company-owned locations, or franchisees nationwide." Franchisors, he says, can become heroes by passing this knowledge and opportunity to their franchisees.
Adds Feldman, "I'm pushing education on the franchisor side, because anything they can do to help franchisees make money also helps the franchisor grow."
Too good to be true?
"At first it seems like a fairy tale," says Friedman. "We tell them to google IRS Publication 954. They see it's real and start digging a little deeper." He says that while large vendors such as ADP provide these services for big corporations, firms like his and Newcorn's focus on the small business space. (Note to expansion-minded multi-unit franchisees: He's positioning RetroTax as ideal for executives and business owners seeking a white-collar, B2B, Monday-Friday concept.)
Feldman says he's seen a few consistent reactions when he presents the opportunity to business owners. One common response: "It's too good to be true." Another is feeling angry at their accountant for not knowing or telling them about it. "It's not the accountant's fault," he's quick to add, as the field of wage-based tax credits is a separate area of expertise that requires a lot of investigative and compliance work.
It requires a working knowledge of changing tax law, an eye for detail, patience, diligence, and follow-through. To his firm's credit, says Newcorn, "In 12 years we've never have a credit overturned."
Where to begin?
Multi-unit franchisees, says Newcorn, "are terrific at organizing and multi-tasking, always on the go, and a lot of them are very hands-on. They have to make choices on how to run their business, and this is one they have to make. It has to fit into their priorities," he says. "Many smart people choose not to, for very good reasons."
Questions they ask, he says, include: "If I do it, how much money or energy do I have to spend?" and "What's the ROI?" Newcorn says his role is to present the information and let them decide. And while the benefits can be significant, he says, "It's not a perfect system, and they need to know that going in."
Implementing the process is simple, but requires commitment. "Multi-unit franchisees often shudder at 'more paperwork.' It's straightforward, but it still adds to their burden," he says--but not that much when weighed against the potential ROI.
All it really takes is adding an extra step on the intake application process, says Newcorn. "Include a questionnaire on the front end to prescreen and qualify the people who apply for jobs," he says. You need two pieces of paper, one for the IRS and one for the state certifying agency (usually the Department of Labor). This helps employers identify affirmatively that the applicant is in one of the target groups. (For a look at the IRS form, go to www.irs.gov/pub/irs-pdf/f8850.pdf. You can even download the form, type the applicant's information directly into it, and save it as a pdf file for printing or emailing.)
Getting this done requires buy-in from unit managers doing the front-line hiring. At the organizational level, he says, multi-unit franchisees must ask, "Can our managers who handle the application process deal with this?" Of course they can, but to nudge them in the right direction, it's important to educate them on the possibility that this could, perhaps, save their job by keeping the business profitable. You might even consider cash incentives when the credits come through.
Who should do it?
Anyone, everyone. These programs are most popular in the QSR and retail space, which tend to have many employees and high turnover; and for businesses with units located in an Empowerment Zone, a Renewal Community, or a Rural Renewal County.
"If you're in the zone, the opportunity is there," says Friedman. "If you employ a lot of people the opportunity is there."
Be proactive, says Newcorn: you may already be hiring employees who qualify. And to other multi-unit franchisees, Wilkins says: "These kinds of companies are available and it would be worthwhile for them to look into it."
Who to choose?
While large firms such as ADP and Ernst & Young are in the game to serve large companies, firms like Newcorn's and Friedman's are targeting smaller firms, to give them the same benefits large corporations have been cashing in on for years.
"They know the process, the criteria, and who qualifies," says Wilkins. "Who has time? I don't. It's money out there that's legal. I'm perfectly willing to share in the savings--it's no work for me--and split the benefits. It makes all the sense in the world."
A key consideration is to choose someone you trust. Since he had already known Friedman for some time before RetroTax was formed, that was an easy choice. For others? "There are some reputable firms out there, not just his."
Says Nate Greenberg, president and COO of Siegel Financial Group, "If you're a franchisee, multi-unit franchisee, or franchisor, you might be missing opportunities to help your people be and stay profitable. Once you know that gold is there, how can someone afford not to put this in place?"
We've include a sampling of firms offering wage-based tax credit services. It is not meant to be an endorsement.
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