Fed Tax Incentives: Indian Employment Credit

Background

 

The Indian Employment Credit is a federal tax credit designed to encourage employers to hire and retain Native Americans who live on or near an Indian reservation. The credit creates economic opportunities and quality jobs for Native Americans and their families, while providing employers with vital tax benefits to stimulate immediate growth and growth in future years.

In general, this credit may entitle an employer to a 20% tax credit on a portion of the qualified wages and employee health insurance costs paid to an enrolled member of an Indian tribe or the enrolled member’s spouse.  To qualify, substantially all of the services must be performed by such an employee within an Indian reservation, and the employee’s principle residence while providing the services must be on or near the reservation where the services are performed.

Employers can claim an annual federal tax credit of up to $4,000 (20% of 20,000 qualified wage cap) per qualifying employee. There is no limit to the total value that can be claimed through the credit.

Amount Of Credit

In general, the amount of the Indian employment credit determined under IRC § 45A(a) with respect to any employer for any taxable year is an amount equal to 20% of the excess (if any) of—

  • I.R.C. § 45A(a)(1) — the sum of (1) the qualified wages paid or incurred during such taxable year, plus (2) qualified employee health insurance costs paid or incurred during such taxable year, over

  • I.R.C. § 45A(a)(2) — the sum of the qualified wages and qualified employee health insurance costs (determined as if this section were in effect) which were paid or incurred by the employer (or any predecessor) during calendar year 1993.

I.R.C. § 45A(b)(3) Limitation — The aggregate amount of qualified wages and qualified employee health insurance costs taken into account with respect to any employee for any taxable year (and for the base period under subsection (a)(2)) shall not exceed $20,000.

Qualified Wages & Qualified Employee Health Insurance Costs

Qualified Wages

In general, qualified wages includes any wages paid or incurred by an employer for services performed by an employee while such employee is a qualified employee (see I.R.C. § 45A(b)(1)(A)). I.R.C. § 45A(e)(1) provides the term “wages” has the same meaning given to such term in section 51.

It doesn’t include wages attributable to services rendered during the 2-year period beginning with the day the employee starts work for the employer if any portion of such wages is used in figuring the Work Opportunity Credit (i.e. "Long-Term Family Assistance Recipients") on Form 5884.  

 

The term qualified wages” shall not include wages attributable to service rendered during the 1-year period beginning with the day the individual begins work for the employer if any portion of such wages is taken into account in determining the credit under section 51 (Work Opportunity Credit). If any portion of wages are taken into account under section 51(e)(1)(A) ("Long-Term Family Assistance Recipients"), the preceding sentence shall be applied by substituting “2-year period” for “1-year period”. See I.R.C. § 45A(b)(1)(B)

Qualified Employee Health Insurance Costs​

As provided in I.R.C. § 45A(b)(2), qualified employee health insurance costs includes any amount paid or incurred by an employer for health insurance to the extent such amount is attributable to coverage provided to any employee while such employee is a qualified employee. However, qualified employee health insurance costs do not include amounts paid or incurred for health insurance under a salary reduction agreement. See I.R.C. § 45A(b)(2)(B)

Qualifying Employees

In general, for an employee to qualify a business for the Indian Employment Credit, they must meet the following requirements pursuant to IRC § 45A(c)(1):

  • (1) The employee must be an enrolled member of an Indian tribe or the spouse of an enrolled member of an Indian tribe. Each tribe determines who qualifies for enrollment and what documentation, if any, is issued as proof of enrollment status. I.R.C. § 45A(c)(1)(A)

    • Examples of appropriate documentation will vary from one tribe to another and may include a tribal membership card, Certified Degree of Indian Blood (CDIB) card, or letter from the tribe or tribal enrollment office. Employers should retain a copy of the proof of enrollment status provided by the employee.

    • IRC § 45A(c)(6) Indian Tribe Defined:

      • The term “Indian tribe” means any Indian tribe, band, nation, pueblo, or other organized group or community, including any Alaska Native village or regional or village corporation, as defined in, or established pursuant to, the Alaska Native Claims Settlement Act (43 U.S.C. 1601 et seq.) which is recognized as eligible for the special programs and services provided by the United States to Indians because of their status as Indians.

  • (2) The employee performs substantially all of his or her services for the employer within an Indian reservation. I.R.C. § 45A(c)(1)(B)

    • IRC § 45A(c)(7) Indian Reservation Defined: 

      • The term “Indian reservation” has the meaning given such term by section 168(j)(6).

  • (3) While performing said services, the employee’s principal residence must be on or near that Indian reservation. I.R.C. § 45A(c)(1)(C)

    • However, the employee shall be treated as a qualified employee for any tax year only if more than 50% of the wages paid or incurred by the employer to the employee during the tax year are for services performed in the employer's trade or business. Each member of a controlled group must meet this requirement independently.

Non-Qualified Employees Include the Following:

  • (1) Any individual described in subparagraph (A), (B), or (C) of section 51(i)(1) pursuant to I.R.C. § 45A(c)(5)(A)

    • Any individual who bears any of the relationships described in sections 152(d)(2)(A) through 152(d)(2)(G) to, or is a dependent described in section 152(d)(2)(H) of, the employer.

    • If the employer is a corporation, any individual who bears any of the relationships described in sections 152(d)(2)(A) through 152(d)(2)(G) to, or is a dependent described in section 152(d)(2)(H) of, an individual who owns (or is considered to own under section 267(c)) more than 50% in value of the outstanding stock of the corporation.

    • If the employer is an estate or trust, any individual who is a grantor, beneficiary, or fiduciary of the estate or trust (or a dependent, as described in section 152(d)(2)(H), of that individual), or any individual who is a relative, as described in sections 152(d)(2)(A) through 152(d)(2)(G), of the grantor, beneficiary, or fiduciary of the estate or trust.

    • If the employer is other than a corporation, estate, or trust, any individual who owns directly or indirectly more than 50% of the capital and profits interest, including constructive ownership, in the entity.

  • (2) Any 5% owner (as defined in section 416(i)(1)(B)) pursuant to I.R.C. § 45A(c)(5)(B)

    • If the employer is a corporation, any person who owns (or is considered to own under section 318) more than 5% of the outstanding or voting stock of the employer or, if not a corporate employer, more than 5% of the capital or profits interest in the employer.

  • (3) Any individual if the services performed by such individual for the employer involve the conduct of class I, II, or III gaming as defined in section 4 of the Indian Gaming Regulatory Act (25 U.S.C. 2703), or are performed in a building housing such gaming activity. See I.R.C. § 45A(c)(5)(C).

  • (4) Individuals Receiving Wages In Excess Of $30,000 Not Eligible pursuant to I.R.C. § 45A(c)(2)

    • An employee shall not be treated as a qualified employee for any taxable year of the employer if the total amount of the wages paid or incurred by such employer to such employee during such taxable year (whether or not for services within an Indian reservation) exceeds the amount determined at an annual rate of $30,000.

    • I.R.C. § 45A(c)(3) Inflation Adjustment — The Secretary shall adjust the $30,000 amount in § 45A(c)(2) for years beginning after 1994 at the same time and in the same manner as under section 415(d), except that the base period taken into account for purposes of such adjustment shall be the calendar quarter beginning October 1, 1993.

  • (5) ​Employment Must Be Trade Or Business Employment pursuant to I.R.C. § 45A(c)(4) 

    • An employee shall be treated as a qualified employee for any taxable year of the employer only if more than 50% of the wages paid or incurred by the employer to such employee during such taxable year are for services performed in a trade or business of the employer. Any determination as to whether the preceding sentence applies with respect to any employee for any taxable year shall be made without regard to subsection § 45A(e)(2).​​​​​

Early Termination of Employee
In general, as provided under I.R.C. § 45A(d)(1), if the employer terminates a qualified employee less than 1 year after the date of initial employment, the following rules apply:

  • No wages or qualified employee health insurance costs may be taken into account for the tax year the employment is terminated. See I.R.C. § 45A(d)(1)(A)

  • Any credits (if any) allowed under section 38(a) for prior tax years by reason of wages paid or incurred (or qualified employee health insurance costs) to that employee must be recaptured. Include the recapture amount on the line for recapture taxes on your income tax return. Also, any carryback or carryover of the credit must be adjusted. See I.R.C. § 45A(d)(1)(B)

  • I.R.C. § 45A(d)(2) Carrybacks And Carryovers Adjusted — In the case of early termination of employment applies, the carrybacks and carryovers under section 39 shall also be properly adjusted.

  • I.R.C. § 45A(d)(4) Special Rule — Any increase in tax under 45A(d)(1) shall not be treated as a tax imposed by this chapter for purposes of—

    • I.R.C. § 45A(d)(4)(A) — determining the amount of any credit allowable under this chapter, and

    • I.R.C. § 45A(d)(4)(B) — determining the amount of the tax imposed by section 55 (Alternative Minimum Tax).

However, I.R.C. § 45A(d)(3)(A) states the early termination rules under I.R.C. § 45A(d)(1) do NOT apply if:

  • The employee voluntarily quits (see I.R.C. § 45A(d)(3)(A)(i)),

  • The employee is terminated because of misconduct (see I.R.C. § 45A(d)(3)(A)(iii)), or

  • The employee becomes disabled. However, if the disability ends during the first year of employment, the employer must offer reemployment to that employee (see I.R.C. § 45A(d)(3)(A)(ii))

See IRS Link for additional background:

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