Availability of the Work Opportunity Tax Credit to Tribes and Tribal Entities

The Work Opportunity Tax Credit (WOTC) provides a business tax credit to certain employers who hire workers from certain targeted groups. The WOTC is generally claimed as a credit against income tax.

IRC Section and Treas. Regulation

IRC Section 38 – provides for a general business credit against the taxpayer’s income tax liability
IRC Section 51 – states that for purposes of IRC Section 38, a work opportunity credit (WOTC) equal to 40 percent of qualified first year wages is allowed.
IRC Section 3111(e) – qualified tax-exempt organizations that hire a qualified veteran can claim the WOTC

Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)

Notice 2012-13 – provides guidance for employers seeking to claim the WOTC for hiring veterans, including certain qualified tax-exempt organizations.

Analysis

Indian tribal governments, affiliates of a tribal government, and tribally owned businesses generally don’t qualify for the WOTC because they aren’t subject to tax.

Rev. Rul. 67-284 states that Indian tribal governments are not subject to federal income tax. The WOTC is a general business credit against an entity’s income tax liability. 

IRC Section 3111(e) provides a special rule allowing a qualified tax-exempt organization that hires a qualified veteran to claim the WOTC. IRC Section 3111(e)(5)(A) defines a qualified tax-exempt organization as an employer that is an organization described in Section 501(c) and exempt from taxation under Section 501(a). Under this special rule, the WOTC is applied against the employer’s share of the qualified tax-exempt organization’s social security liability. Qualified tax-exempt organizations use Form 5884-C to claim the WOTC. Form 5884-C instructs an entity that isn’t described in Section 501(c) and exempt from tax under Section 501(a) not to use the form because the organization can’t claim the credit. 

The regulations under IRC Section 501(c)(3) explain that an entity must be both organized and operated exclusively for one or more exempt purposes. To be operated exclusively as a Section 501(c)(3) exempt organization, it must engage primarily in activities which accomplish one or more of the following exempt purposes specified in Section 501(c)(3): Religious, Charitable, Scientific, Testing for public safety, Literary, Educational, or Prevention of cruelty to children or animals.

Rev. Rul. 60-384 provides that a state or municipality itself will not qualify as an organization described in IRC Section 501(c)(3) since its purposes are clearly not limited to those described in Section 501(c)(3). Citing Rev. Rul. 60-384, Rev. Rul. 2004-50 concludes that an Indian tribal government isn’t described in Section 501(c)(3) because it is a government and its purposes are not exclusively those described in Section 501(c)(3).

Similarly, an Indian tribal government isn’t exempt under any other provision in Section 501(c), e.g. as a business league, labor organization, fraternal society, social club, veterans organization, etc. because it fails to meet the exemption requirements for those types of exempt organizations. 

Thus, because an Indian tribe generally isn’t an entity subject to tax under Chapter 1 of the Code and isn’t described in Section 501(c) as an organization exempt from tax under Section 501(a), it normally can’t claim the WOTC.

Rev. Rul. 60-384 holds that a wholly-owned state or municipal instrumentality which is a separate entity and which is organized and operated exclusively for purposes described in IRC Section 501(c)(3) may qualify for exemption from Federal income tax under Section 501(a) as an organization described in Section 501(c)(3).

Notice 2012-13 clarifies that an employer that is an agency or instrumentality of the federal government, or of a state, local, or Indian tribal government can only claim the WOTC if it is an organization described in IRC Section 501(c) that is exempt from tax under IRC Section 501(a). Therefore, certain tribal entities that have received exemption under IRC Section 501(a) may claim the WOTC by filing Form 5884-C.

Rev. Rul. 94-16 provides that tribal entities incorporated under state law are subject to income tax. Such taxable entities may also qualify for the WOTC provided they meet the other requirements under Section 51. Form 5884 is used by such taxable entities to claim the WOTC.

NOTE: The number of agencies or instrumentalities of tribal governments, plus other tribal entities that have received exemption under Section 501(a) is small, as is the number of tribal entities that are taxable due to incorporation under state law.

Issue Indicators or Audit Tips

Indian tribes and tribally owned entities generally can’t claim the WOTC.

Certain tribal entities incorporated under state law may qualify to claim this credit. Confirm qualifying wages were paid as required under IRC Section 51.

Tribal entities that are exempt from tax under IRC Section 501(a) must meet the requirements under IRC Section 3111(e) to qualify for the credit and file Form 5884-C.

Check whether Form 5884, Work Opportunity Credit, Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans, or Form 3800, General Business Credit were filed to identify whether this credit was claimed.