Out of Court Settlement & Exconvicts

[Yardley CPA]

I have a client, New Jersey Schedule C, who is a landsccapper with about 20 employees.  A couple of questions pertaining to his business:

1.  He was involved in a lawsuit brought by a client.  He agreed to a $20,000 out of court settlement.  Wondering if that amount is something that is deductible for him?

2.  Also (and maybe this is why he has lawsuits) he hired an ex-convict (did not know the individuals past).  He heard there may be some tax advantages afforded to him for hiring someone who was previously incarcerated.  I am not aware of any but wanted to see if anyone knew.

Thank you.

[Pacun]

Yes, the 20K are deductible because it was not a penalty or fine. That's normal business practice and/or expense in this suing society.

2.- I think they are referring to a program in 2010 that expired and it was for hiring unemployed or part time individuals. I don't think such an animal exists anymore.

 

[Pacun]

One more detail... did you hit the receiver with a $20K 1099-misc? You should check that.

[Catherine]

Form 3800 employment credits.  Specifically, work opportunity credits.  Form 5884 that then flows to Form 3800.

WOTC Chart

Form 5884 at IRS site

[jklcpa]

Also see this IRS page on the WOTC and additional requirements on the employer to verify that the employee is in one of the targeted groups:

https://www.irs.gov/businesses/small-businesses-self-employed/work-opportunity-tax-credit-1

Because this was retroactively extended, there's transitional relief with extended dates for Form 8850 described in Notice 2016-22. Links to those are also on that IRS page. The deadlines differ by target group, but all are coming up in a couple of  days or about a month depending on which group it is. Form 8850 is used by the employer to request certification from the state agency for each employee that certifies that the employee is a member of the targeted group. 

[Yardley CPA]

Thanks very much for the replies!