Mission to Grow: A Small Business Guide to Cash, Compliance, and the War for Talent

Shannon Scott: And again, these time periods also vary depending on the category, but to kind of give you a base of some of the research that's been done here recently is about 30. To 35 percent of all new hires that are in the United States right now are typically eligible for an employer to take these credits

Mike: Little known employer tax credits, WOTC, R& D, and so much more. Hi, I'm Mike Finale, host of Mission to Grow. And this is a cool topic today. Uh, I think we're coming out of this, I don't know, call it a couple of year, uh, season, if you will, where, uh, the big tax credit news was always about ERTC. And I think it probably stole the headline, understandably why it did.

Um, but tax credits are not a new thing for small businesses, and there is tons of money available to small businesses, specifically about, uh, WASI, R& D, we'll, we'll unpack what those topics even mean and whatnot in today's show, uh, but these things have been around for quite a long time. Where state and federal government incentives are available to small businesses to help give you stimulus, to stimulate the economy, to stimulate local economies.

Uh, and I think it's just a gigantic opportunity that so many small business owners are missing out on. So. Uh, got a great guest today to unpack this topic. Uh, he's a serial entrepreneur, uh, and, and founder. He knows that entrepreneur is a lot just, uh, is a lot more than just business. Uh, he's passionate about putting money back in the hands of small businesses.

He helps businesses use tax credits to benefit employees while saving money. He's the CEO of HR Logistics. Welcome to the show, Sheehan Scott.

Shannon Scott: Thanks, Mike. I appreciate it. Excited to be here today.

Mike: Yeah, me too. This is a, this is a cool topic. I think, I think, uh, most entrepreneurs and business owners know that there are some tax credits. I don't think hardly anyone has any idea. I know I didn't. How many tax credits really are available and what kind of money we're talking about here. Um, maybe question number one, what, what do you think, Shannon, that the number one thing that small business owners, um, And senior managers of midsize companies.

What's, what's the number one thing that they need to know about employer based tax credits?

Shannon Scott: Well, I think, you know, obviously, like you said, the headlines in the last couple of years has been about the Employee Retention Credit. Um, obviously, you know, a lot of different small business programs came out because of COVID. I think we all remember the PPP loans. Um, you know, and what people need to know is, so, Small businesses typically and mid sized businesses typically don't take advantage of these credits simply because they're not educated on these programs.

Um, you know, I always like to say the IRS doesn't hold classes on how to avoid paying taxes, right? That's just not something they do. They don't issue a lot of memos on these things. Now, you see large employers take advantage of these things all the time because they have internal tax teams, they have internal tax lawyers, and they can research and have the bandwidth to research these types of programs.

But these things have been around. for decades and decades and decades. Um, the problem is typically small businesses, they're getting their tax returns filed by a CPA. Um, CPAs are not expected to be experts at these kinds of things. Uh, you know, if you read a tax law guide, it's about 1, 500 pages long of about, You know, 8 point font.

It's the most boring document in the world to read. But tax credits typically, and the ones we're going to talk about today, cover just a few paragraphs of that, right? You know, so, um, there's a lot of technology that needs to go in to being able to process these things, and there's a lot of research, um, that goes in because these credits are not just, from a federal perspective, they're state, they're local, there's thousands of these things.

And so, you know, groups like us are the ones that do all the education and make sure that everybody's processing it, uh, you know. Accurately, completely, um, you know, it's just, the tools are, are not available to the small businesses that they are to the larger businesses. And that's where we're trying to reach out to the masses and say, Hey guys, just because you're a small business doesn't mean you can't take advantage of the same things that you see these larger and fortune 500 corporations taking advantage of.

Mike: She, let's maybe just kind of get def definitional here. So what, what exactly is an employer tax credit?

Shannon Scott: So it can vary depending on the type of tax credits. Uh, they're typically an income tax reduction. Uh, so what it is, if you have an income tax liability from a federal government. or state governments at the end of the year. These types of incentive programs will reduce the amount of taxes you owe to the federal or state government in an income tax situation.

There are other types of credits. Some can be applied to payroll taxes, but majority of the credits that we're going to talk about, especially cover today, are income tax base.

Mike: Okay. So, so whereas ERTC, that was, that was a payroll tax deduction. And so most of the time here, we're talking about. Uh, coming right off of your, your income tax. Does it matter? Uh, sole proprietor S Corp, C Corp, how does that play in?

Shannon Scott: In most cases, it doesn't matter. It just matters how they're applied. You know, in a situation like a sub S or an LLC. The tax credits will flow through to the individuals, just like any tax liability does when you get your K ones at the end of the year. Whereas C Corp, it's gonna flow to the company, so the company's actually gonna get the advantage of the income tax reduction.

And I will just point out the difference in the, in the employee retention credit and why they made it a payroll tax credit was because obviously during covid when a lot of the businesses had to shut down, there was no revenues coming in. So what you had at the end of 2021 and 2020 was a lot of businesses didn't owe income taxes.

Because of the lack of revenue, so they had to find an alternative way to let employers take advantage of that without, with the understanding that a lot of these companies were not going to be in a profitable situation.

Mike: Well, and when the CARES Act passed end of March of 2020, I mean, We, we, we didn't know that the sky was falling. We didn't know, was this going to be the two week temporary shutdown to, to, to bend the curve? Or was, you know, nobody probably knew it was going to be a two year thing. Like I ended up being, they literally were just erring on the side of caution and putting cash in employers hands to, to keep people employed and keep them getting a paycheck just so society wouldn't collapse, right?

Really a different scenario than, than what we're talking about the, the traditional employer based tax credit. So maybe before we get, and so I, so I jumped ahead per perhaps a bit, but, so, uh, it doesn't matter LLC, uh, uh, s corp, uh, or if you're a C Corp. In, in, in, in any, in any case, these generally fall to an income, income tax, uh, uh, uh, deduction or reduction, I should say.

Other. Are there other types of criteria? What are the types of criteria to be able to get these types of credits?

Shannon Scott: So there's, there's multiple types of criteria. Let's just cover a few here. Um, the income tax, Yes, it is a reduction on your future income taxes, but there are credits out there from the federal government that you could go back three years and amend return and actually get a cash refund on. Um, just, but you would have to amend a return to do that.

So there are some refundable, what we call refundable incentives out there. Now, in order to take advantage of these credits, typically, obviously you need a tax liability, right? If you're not paying taxes, you probably don't need to use tax credits or incentives. But these are typically based on either where your business is located geographically or the demographics of, of the types of individuals you're hiring typically on a daily basis, where we're seeing a higher qualification rate is typically people who are hiring with high turnover rates, because a lot of these incentives are based on hiring, you know, types of individuals from certain demographic groups.

They're trying to pump up, you know, categories like veterans, disabled veterans, uh, felons, people who are receiving, you know, food stamps, welfare. Um, trying to, cause these typically, you know, what they've seen the department of labor and the research and wisdom and said, these two groups are having a higher barrier to employment for whatever reason.

Um, so they're trying to encourage employers to hire from these groups, giving them a fair chance and saying, if you do that, We'll incentivize you with these types of, of income tax reductions.

Mike: Yeah. Okay. So, so let's actually start getting definitional about the different types. So I mentioned that the top there's, there's WOTC, there's R& D. I think, I think WOTC is the big one. Let's, let's start maybe there. What, what the heck is it? It's, you know, uh, spoiler alert, it's an acronym. Uh, uh, but, uh, take us through what WOTC is.

Shannon Scott: Yeah. So W WATS E stands for Work Opportunity Tax Credit. Um, it has been in several different forms as far as naming conventions are concerned. Back in the day, it used to be called Well, welfare to Work, it was TJTC. So it's been, it is changed as Congress continues to update the law. They changed the name of it a little bit, but what that credit is, it is a new higher credit and it is up to a $9,600.

Income tax reduction per hire if you hire from certain demographic groups. Again, the groups we've already previously mentioned. Now, this is a credit. There's certain caveats around this credit. Number one is the employee has to work for 120 hours minimum in order to qualify for the credit, and it's based on the amount of wages.

So the longer they're employed, the higher the wages they earn, the more that credit's going to be of value to your organization. They do that simply because they don't want people just hiring and firing people simply because they think they're just going to get a flat fee credit. Um, so the 120 hours is a minimum and they have to be processed within 28 days of the day of hiring.

And what processing means is we actually, as a consulting firm or any other consulting firm, we have to submit information on that hire, on that To the state WOTC offices, even though this is a federal program at the federal, uh, WOTC team has states offices all over. So we have to submit it to the state that they're working in.

And then at that point, they'll send us back a certificate that says this ploy is a qualified, and then we have to calculate the value of them. So that's really the three main things is 120 hours. They have to be submitted within 28 days. of the day that they're hired and they need to come from one of those demographic or targeted groups.

Mike: it might be unfair if I put you on the spot to list, I mean, you're rattling off some of them. Is it, is it, is it giant list? Are there, are there, are there 50 different qualifications? Is it a, is it a,

like I'm used to,

Shannon Scott: list.

Mike: I'm used to HL1 and HL7 where you got a very discreet list of things you can't discriminate against, right?

What are the, what are the categories here?

Shannon Scott: So, um, there, there are subcategories in each category, but the best is the easiest way to describe it is, is the veteran status. Disabled status, whether you're a veteran or not veteran, if you're a disability or receive any kind of disability, vocational rehab, government benefits. This is going to be kind of subcategory where you're talking about food stamps, WIC, welfare, any kind of government assistance you receive within a certain time period.

And again, these time periods also vary depending on the category, but to kind of give you a base of some of the research that's been done here recently is about 30. To 35 percent of all new hires that are in the United States right now are typically eligible for an employer to take these credits. That kind

Mike: 30%. That's huge.

Shannon Scott: it is huge.

I mean, it tells you how many, uh, current U. S. either employed or, or unemployed, uh, individuals have received some type of government assistance in the last few years. Um, which is, you know, it's a number for businesses to take advantage of, but, you know, economically, it's a number that seems pretty high.

But if you think about all the types of government assistance out there, that's available for families, you know, it's, the number's not that shocking.

Mike: So the employer who's maybe, maybe they've, uh, they've suffered through the first, uh, I don't know, what are we at 10, 15 minutes into the show thinking, ah, this probably doesn't apply to me. Uh, I don't live in a niche area where there's these kinds of incentives. 30 percent of the workforce that, I mean, this is, this is a really material, this is a material portion of the entire workforce.

If you have, if you have hourly. Employees. You likely have eligible employees, right?

Shannon Scott: Yes, and depending on the industry, the numbers vary. We see anywhere, you know, if you're more of a hospitality or kind of medical situation, you look about 10 percent of employees where you're fearing, like, manufacturing, warehousing, transportation, you're looking at sometimes up to 30 percent back to that 30 percent number of all these hires.

And again, here's the best part is most people don't, don't participate because they think I don't hire people from these demographic groups, but you would be surprised, right? You know, and it doesn't necessarily have to be the individual you hire. It could be somebody else in the household. So if you live in a household with somebody who's receiving benefits as well, that is a qualifying event too.

Um, so, you know, you're taking care of an elderly mother, maybe you have a spouse that's on disability. You know, those categories can qualify too in many cases. So that expands that number just, you know, a little bit. And an interesting fact here that that's really something to come out is there's also a lot of pushback of, well, these employees are high risk, but what we've seen in numbers that have come out recently is these employees that come from these demographic groups actually stay at jobs longer.

The ones that don't. So, you're not only getting the benefit of the program, you're getting an employee who typically, numbers wise, is staying a little bit longer at their job and not, then, that could lower cost of turnover as well.

Mike: Wow. That's awesome. So, so WOTC work opportunity tax credit, um, up to 9, 600 bucks. How, how does that calculation work? Is that, is that really only a best case scenario? I'm paying, you know, a hundred thousand dollars a year to these folks and they got to stay for all year. What about the person who's maybe 15 an hour, they work 30 hours a week.

How does that

calculation work?

Shannon Scott: So, the, the maximum amount, the 9600 is based on the type of credit. That's going to be a veteran credit. Um, you know, so, where You know, you get down into some of the government assistance programs, you're going to be like 2, 400 maximum amount.

Mike: Got it.

Shannon Scott: yeah, so each one of those categories can vary.

And again, even if you make 15 an hour, if you work long enough, if you work up to 400 hours, you're going to maximize that credit. You know,

Mike: Well, this isn't, so 400 hours is not excessive. I mean, that's yeah, you can be a part time employee. It doesn't take long to get there.

Shannon Scott: Right. You know, you, you typically, if you're paying someone a hundred thousand dollars, they're probably not on a government assistance, right. Cause they've come from a job, but since it's interesting though, is, you know, when you, you talk about felons being a category, I mean, you know, in a lot of states, a DUI is a felony, right.

So you can be making whatever, be, you know, be included in that. So, I mean, that's not a massive category of what we're seeing, but, you know, that's again, sometimes we overthink it and say, well, I couldn't be hiring people from

these

Mike: that's exactly where I was going with it. 'cause I, I, I, like, I didn't realize, like you talked about other dependents. I mean, I, you know, I make, I make a good living. Uh uh but if I'm taking, if, if I'm taking care of an elderly parent who's on some type of government assistant assistance, then my, I would be, uh, eligible, but my employer would not have any idea of that.

Unless, unless you went through an application process to figure it out. Right. So why discriminate? Sure.

Shannon Scott: Right. And the caveat is your family doesn't qualify, right? So if you have a small restaurant and you're just hiring your, your kids and your wife, you know, and your brother. That's not going to qualify you. So that's the one kind of, you know, disqualification event is if you're an immediate, if you're hiring an immediate family, they're, they're not going to be able to qualify for the program.

Mike: Yeah, right, right. So if I'm an employer, I'm like, okay, uh, up to 9, 600 per. So that's the best case that's veterans. I can see, I can see why I would maybe want to implement a veteran recruiting strategy. Um, but, but across all these, I think one of the big points that things I'm realizing is as an employer, I don't know if my employee has, you know, been on government assistance and it's kind of none of my business to ask.

I feel like I've been trained in HR to not ask because that feels discriminatory. How does the employer get this information to then take advantage of the tax credit?

Shannon Scott: So you're absolutely right. I mean, from an outside perspective, it can seem that way. Um, if you've ever had anybody apply to Walmart. You know, McDonald's, any of these large, you know, fortune companies, uh, they're going to see this questionnaire. So what happens

is there's a questionnaire that's presented to the employee, either in the applicant process or the onboarding process that has these questions.

Have you received these types of benefits? Now there's a legal disclaimer at the top of these questions that say, number one, this cannot be used for make a decision on whether or not we

hire you information. Number two, It says that you, this is completely voluntary. You don't have to take the survey if you don't

want to. Now, in cases where employers try to process this stuff in house, they're going to see that information, which is a little bit more risky from that perspective. When you use a group like an outsource group, we're not even going to show the employer the answers to the questions, right?

It's coming directly to us, and the only thing we're going to tell the employer is this person is or is not qualified.

We're not going to tell them the benefit that they made, that they were on. We're What they qualified for. So it does kind of shield a little bit of that risk there. Right.

Uh, but the department of labor has even come out years ago and said, look, all things being equal, you know, if, if you have Sally and you have John and they have basically the same job experience and same resume and Sally's a credit, hire Sally, that's what the program is there for, right.

To try to give.

Benefit and put it make it level playing field for people who've typically had a higher barrier to getting hired

Mike: That's interesting. So because it's voluntary, Um, it makes it okay. And actually it's interesting cause it actually fulfills the purpose that they, the, the program is designed to help people who struggle getting employment to get employment. Um, never thought about that either, about, uh, the benefits of outsourcing it.

Obviously, you know, you have a, you have a vested interest cause this is your industry. But I can't, if I've asked the question, Hey, are you a veteran? Do you get government benefits? Um, You answer, yes, I can't unknow that, right? And so if, if it's maybe part of the onboarding process, maybe less risk, but certainly if it's part of the applicant process, um, I'm, I'm looking at a risk factor for someone coming back and suing me.

Oh, they didn't hire me because they, you know, they, they thought XYZ of me because I, I've had some government subsidies, right? By just completely outsourcing and you never see it. Uh, that's yet another, I'd say HR best practice protection. Is that fair? Sure.

Shannon Scott: not going to take the stance of an hr expert I can only speak to the tax credit side of things and what the department of labor has said But but absolutely again if you're if you're only getting a positive or negative You're not getting information on whether it was food stamps or a veteran, right?

So it's hard to be kind of claim that there's some kind of discriminatory situation there

because we're encouraging to hire veterans and um So, and that's kind of that shield of protection. But also again, the voluntary, you know, clearly states if you don't feel comfortable answering these questions, don't answer these questions, just skip past this part.

Um, and that's one of the things where we have to really educate because you would be surprised at how many employers we do run into that don't. Uh, that are not aware that are participating in this program. They're not aware that it has to be voluntary and they're just forcing it as part of the application

process. And when we let them know that they're like, Oh my goodness, you know, wow. We need to kind of rethink the situation here. So education is very important. It's very important that you understand what you're. What you're doing when you start asking kinds of questions like this.

Mike: So how, what's the process like, like logistically and mechanically, how does, how does this work? Um, I've got a, I've got either, uh, an application process or not an onboarding process. I'm asking these questions so that information comes in. I get this binary yes or no, that they're eligible from either I've made the determination or somebody like your firm's made the determination says, yes, they're eligible.

How does the, how do you calculate over the year then how, how much the credits are? How do, how do we. Lapsed period over period because presumably you're not hiring all these folks on January 1st to tie out to a to a tax season How does all that work?

Shannon Scott: So again, it's based on the amount of wages and the hours worked. So once they're maxed out, they're done. And you're right. You know, most of the time you're not hiring someone in January and giving them a full year. What happens is you're going to, they're going to get the credit no matter the year, as long as they're continuing to work.

So you might have to take partial credit. the year that they're hired, and then you may have to take the rest in the following year if they're still employed with the organization. So if I hire somebody, if I hire somebody November of 2024, um, I may take a partial credit on them for my 2024 return and then finish the rest of that credit in 2025 when they finally reach that max point.

Mike: Got it. And then how long of a period you said I hear you say is three years you had to to accumulate the total credit

Shannon Scott: There's no moving forward. There's no accumulation. The three years is on a look back opportunity to see what you missed, but that's not the work opportunity tax credit. That is a, that's a zone credit. That's an empowerment zone credit. That doesn't, you know, work with the work opportunity. It is a new hire kind of moving forward credit.

So it's future credit

Mike: so how long do you have it's a one year

Shannon Scott: till they max out.

Mike: Oh, just until they

Shannon Scott: yeah, yeah. So if it takes them more, it's going to be difficult, you know, unless you're working on two or three hours a week, right. It's going to be difficult not to max out within a calendar year perspective. Um, because if you're, you're talking about, you know, maybe three months of work here.

Um, but. Again, if it takes more than a year, then you just continue to accumulate that credit, um, and use it on whatever tax return you choose. Now, these credits can be used on quarterly estimates if there's companies that are paying quarterly estimates on returns. So, if you don't want to wait till the end of the year to take advantage of the program, you just take the credit that's been accrued and write it off on your quarterly estimates.

Mike: Which is going to, you know, since most, uh, most small businesses are LLCs and, uh, you know, that flow to an owner's income statement, they're paying quarterly estimates anyway. So that makes a lot of sense. So you don't necessarily have to wait for the full year here.

Shannon Scott: Right, you don't have to wait for the full year. Um, you know, we, depending, it's really a tax strategy. Obviously, we don't want to advise you and each business owner on their tax strategy. We encourage you to do that with your CPA firm, but we'll provide all the information to whoever does prepare your returns so that they can use them if they wanted to against their quarterly estimates.

Mike: What, what questions am I not asking? What, what are, what are, what are the, what are some of the gotchas maybe that around, uh, watsi that so people get interested for obvious reasons. The last things we've just been talking about, this is compelling. Um, what, where are areas that people make mistakes? Either don't capitalize or they, they track making claims that weren't in fact eligible and there's penalties.

I, I, I, I made that scenario up because I don't even know if that's what happens, but, you know, where, where do folks get hung up?

Shannon Scott: What's a little bit more difficult, now there has been situations where people have made false claims, um, and this was years and years ago. That's, that's a little bit more difficult. It's almost impossible to do now because they're getting certified by the state. So, If you claim that you've received, you know, a veteran and, you know, we capture a DD 214, which is a form that veterans are very familiar with, um, we send that to the state.

The state's going to verify that information before they certify the person. So, it's kind of hard to fudge those numbers now. Um, yeah, you can absolutely make up income and revenue, but again, if you're using an outsource group, that's really hard to do because we're going to check and balance that situation out.

Where I think there's a got you is most people probably hear this and say, well, you know what? Uh, I'm fairly new or I'm coming out of COVID and I may not be able to use this credit this year. So it's really not worth my time. One of the things about this program is you can carry these credits forward for up to 20 years.

So if you can't use them all in one year, let's say you only have a 20, 000 tax liability and, and you're, you know, you find 50, 000 worth of, Tax Credits. You could carry forward that balance to the next year's tax return. So it's almost like banking credits. Uh, and that's something that a lot of people don't realize and don't understand when they're looking at that situation and saying immediately, I can't use this.

Um, where,

Mike: Shannon, is that specific to WOTC or is that all the employer credits?

Shannon Scott: that's specifically to WOTC. Now there are other credits that you can carry forward. And there are other credits you can carry backwards, but for WOTC specifically, it is a 20 year carry forward.

Mike: Got it. Anything else about WOTC that we should talk about?

Shannon Scott: You know, I, I, the other thing too, is I think, um, it's just reiterating kind of a point is when we go speak at trade shows and we talk to individual business owners, The first and most common answer we get is again, like we stated, we don't, there's just no way we're hiring from this type of demographic.

Um, maybe we should, but we're not. So again, I mean, the numbers are, the numbers are hugely, you know, from a, from an unemployed perspective, the people that are on these types of benefits, I mean, they don't have to be on these benefits for 10 years, right? You're talking about someone who maybe got hurt, got on disability for six months, you know, came back into the workforce.

You know, there's, there's millions and millions of qualified applicants out there right now in that kind of situation. So, you know, and in most cases, these are cost recovery services, so they're contingency fee based, there's no risk. So as an employer, if there's no financial risk for you, you should probably just take a look and say, you know, let's run this program for a little bit, let's see, you know, what the results are, give it a shot.

Again, you know, in most cases there's, there's no financial risk to the employer and I think that's where they get confused because most employers look at that, their small business are tight on budget. They're tight on cash, you know, but they don't want to pay for things up front. And I think a lot of people think the word, they just hear the word tax.

Number one, it scares them. Number two, they're like, Oh gosh, I'm gonna have to pay somebody a lot of money up front to do this. So

Mike: Right. Something, and I know we want to get to other credits and it probably applies to all these, but what's your experience with WOTC and CPAs? You hinted at it in the opening. My experience like with ERTC is, you know, we're trying to help employers out by, you know, getting the tax credit that they were legally entitled to.

And because it tied to payroll is something we actually became fairly knowledgeable about. Um, and, and there were clearly, uh, businesses who were ERTC eligible, that their CPAs were quite reluctant, but yet there's a natural trust relationship between the, the, the entrepreneur and their CPA. I'm not dogging CPAs, uh, you know, I could, I, you know, massive respect, but How does that dynamic work there?

Because I, you alluded to it, my sense is a lot of times the CPA doesn't know about this.

Shannon Scott: yeah. Yeah. Well, so I think it's human nature to be cautious. Um, when things like this pop up because, you know, rules change. Um, and you know, a lot of CPA firms we've worked with through the years, you know, we, we come in with them and we kind of create a tax strategy based on what they're currently doing and how much in tax credits they can use.

Our first question we ask any employer is how much do you need? Right. Because if we're going to find too much and you don't need them and you don't want them, we'll cut it off, right? We'll cap it. And so, but these are things you have to kind of strategize with the CPA. I think with ERC, naturally when things pop up and they're short term, um, a lot of businesses are just like, we don't have the time, A, to build the technology, you know, B, to learn this credit.

It's going to go away in two years. And if we don't have the time. And we really don't have time to study it. We're just going to tell you cautiously, probably should avoid it. Now, some of these CPAs were just on the nose because I don't, if you've seen what the IRS has done over the last two years with this ERC program, they've changed the rules three different times, you know, um, They were accepting certain types of qualifications and they came on and said, no, no, no, we're not going to do that.

We're not going to accept any more of these anymore. Then they came back, you know, and then the bill got expanded and the IRS came back, you know, after a year of the bill got expanded, they said, no, no, no, no, no, I mean, I know it reads this way, but we're not going to really accept these claims. And then the IRS comes out and then says, Hey guys, if you think maybe you don't qualify it and you've already filed, you can give us your money back and keep 15 percent of it with no penalty.

You know, it's like, uh, you know, and so if you're a CPA, that makes you real nervous,

Mike: Yeah, and honestly, it's really well said that it was a, it was a program with a definitive end and a lot of fairly public fraud. I mean, the IRS is really clear. There's a lot of fraud going on here. You know, uh, I mean, there, there were, there were unscrupulous players, uh, that, that, that didn't do it right.

Uh, and unfortunately those few folks, you know, planted seeds of doubt across that entire business. Um, interesting that, like you say, the, the WOTC has been there under different names for a long enough period of time that you probably don't have that same barrier, I'm guessing.

Shannon Scott: Yeah, you don't. And you know, look, there's around these types of disaster type situations, there's always fraud related. I mean, look at the PPP loans, you know, there was, it was rampant and fraud as well. But I mean, you know, you're not as a business owner going to stop taking loans from banks, right? You just got to, you know, it's all about reputation, finding reputable provider, finding someone who's been doing this for a long time.

If you, you know, if you get somebody that approaches you for this type of work, and they've been in the business for four months, It's probably not the right situation for most businesses, especially when you're talking about a short term credit. That's got a high benefit. Um, you better make sure that the people that are processing these things and sending data to the IRS know what they're doing.

And it's like anything else, I wouldn't encourage a business to hire a CPA. That's never, you know, two days in business, right? Typically I would say, I know you've got to start somewhere, but if you're complex and you have multi corporations, you probably want to go to a firm that. You know, it's got some legs behind them.

Mike: Let's, let's maybe move on from, from WOTC. is the biggest ones, the most common, uh, I've learned a couple of things here, you know, 30 percent of the workforce is eligible. That's just a massive opportunity of people that you probably didn't even know existed, uh, that's already in your hiring pool. Um, but get beyond, uh, WOTC.

I, I, like I know off the top of my head, uh, uh, R& D credits, but I think there's, there's, you mentioned thousands, how many different types of employer credits are there?

Shannon Scott: If you, I mean, if you count state and local credits, there are three, there's over 3000 types of credits. Um, and they're very nuanced. You know, it could be within three city blocks of a certain city that if you have a business and you operate there and your employees live there, you could have a credit.

There's, and there are look back opportunities and there's going forward. So there's, there's a massive amount. In fact, I think that read a study just the other day that something like 17 billion in earmarked tax credits did not get paid out last year. That tells you how much is available out there. Um, but again, they're not, they're not encouraging businesses to use them because the government wants to keep those tax dollars.

Mike: Yeah, of course.

Shannon Scott: IRS.

Mike: It's interesting, the legis the legislators pass the credits to incentivize and create, you know, to spur economic development, whether it's in a city or a county or a state or the federal, but the other side of that same coin, they're the ones responsible for collecting the revenues, right?

Shannon Scott: yeah, I mean, they're like, in a lot of cases, they're, you know, this, let's, let's be honest, this is politics, right? Um, you're a certain state Senator. You get some money earmarked for, you know, a big city in your state, not counting the fact that money will be ever, you know, ever be used. I mean, in the CARES Act and in the, uh, you know, there's a lot of money put aside for the IRS.

You know, billions of dollars potentially for the IRS to use for whatever they wanted to do. Um, and it was never really used. And now that, you know, now Congress is like pushing the IRS, like you've got to spend this money, like we earmarked it. So you see that quite frequently. Um, I would say this, that most employers are going to qualify for something, whether it be a geographic in nature or work opportunity tax credit.

Credit is just about researching it and getting yourself in a position to do that. The R& D credit is one you brought the name up. We could just kind of touch on that if you'd like. It's

Mike: Yeah. Define what it is.

Shannon Scott: So research, research and development credit, you know, again, most the misnomer behind that credit is most companies think I have to be a large employer and I have to be building something to qualify.

Um, I need to be a car manufacturer. I need to be building rocket ships. That's not, that's not the case at all. Small businesses could qualify for this credit. Just as, you know, Boeing can qualify for this credit. You need to be either performing a function that improves the process. Manufacturing something, doing research on things to improve processes or to manufacture.

I mean, we've seen restaurants, chefs developing recipes get R&D credits. You know, it, it can get that detailed in nature. Um, now you do need to be performing some of those functions, right? I mean, we've seen dentist offices because they're Approving processes or creating a new type of, you know, denture or working with a group that's doing that, that, that have been able to be included in these types of credits.

Again, it's just a situation where you automatically, business owners like us think we're not, we're not going to be approved for these types of situations. And it's about the research. R& D can be very lucrative. It's a permanent credit 5 years.

Mike: What does that mean it's a permanent credit? Got

Shannon Scott: Congress is not going to take it back up.

Um, now they could repeal it, which they won't do, but like Work Opportunity Tax Credit, about every four or five years, they're going to review the credit, see how much was spent, see how many businesses took advantage of it. See if they need to tweak it a little bit. And they've been doing that with R& D on and off for many, many years.

Now it's permanent. Now they've kind of passed the permanency. Now they've got some restrictions on R& D they need to get rid of. And we're hoping by the end of this year, Congress releases some of those restrictions. Uh, because, you know, in hindsight, they missed a few things when they passed it last time, right.

And they, they made it permanent, but you know, it's a situation where if you're a business and you're doing any of the functions that I just talked about. You should research it. You should look into it. This is not an easy credit, right? You know, it's not something you're just going to be able to go to the IRS and say, Hey, I do software design.

Believe me, you know, there's an attestation period we have to calculate payroll, but it's available out there. And it could be, you know, in some cases it could be hundreds of thousands of dollars for a small business.

Mike: So I want to ask questions in maybe a couple of different directions. So, so beyond just a testing, I'm assuming you're going to, you're going to have to demonstrate some type of proof of work. So let's go down the first path. Like I work for a software company. Sure. Right. We developed technology. So there's clear capitalizable expense.

We're developing something new. Okay. What, what in that kind of a traditional software where we actually use the words R& D, um, uh, what, what, what does the process look like? How onerous is it for applying for these credits?

Shannon Scott: Uh, it's not as, it's not as difficult if you have clear cut, you know, path. You have employees that are paid salaries that are developing product and software. You obviously have IP you can produce if need be. Now, listen, the IRS is not coming in and being like, show me your software. Uh, they're not going to do that, but they could at some point, right?

You're attesting that this is what you do for a living. You've built the software. You've, you've spent X amount of dollars on salaries, benefits. To build this technology to improve a process or to improve on the software. In some cases, you can actually even write some of this R& D credit into outsource groups that you use to improve processes, some of their fees as well.

But again, you're going to test these things. You're going to give us payroll files. We're going to have to calculate the value based on whatever you're qualifying for there. Um, and then, you know, push that credit moving forward. The good news is we don't really see, I, we don't see a lot of audits around tax credits.

And these, these, these credits are, because everybody, that's the one buzzword that people like to use. The word audit, it scares everybody. Well, if you file this tax credit, the IRS may audit you. You know, Congress passes these particular credits there because they're trying to encourage companies to stay in the United States.

I mean, can you imagine every other, pretty much every other country that's competitive with us in the software market has an R& D type situation, right?

And some are cash benefits, some are, some are tax credits, but the U. S. has to stay on top of these things. So they're not encouraging the IRS, unless it's just absolute blatant fraud around these types of long term credits to come in and audit these types of situations.

So, but again, you know, if you could prove it, You've got substantial evidence. You've got the payroll to back it up. It's a credit that you should take advantage of.

Mike: So traditional R& D, I'm developing a technology, I'm clearly developing stuff. Maybe this is not even newsflash for anybody. Um, that was a really interesting use case you said earlier. Talks maybe more about the fringe. I'm a restaurant. If I've got an expensive, you know, chef, uh, or a team in the kitchen that's experimenting with new, coming up with new recipes, That's that it's development, right?

So is, does that matter state by state where that would or wouldn't qualify? Is that where is, is, is that's, that's part of federal R& D credits. Maybe break that part down state versus federal for R& D. I think I'm hearing you say it's federal.

Shannon Scott: Well, there is a federal credit and there's also some states that offer their own version of it. Um, now it's going to vary. There's no flat ruling there. Uh, there are states that say, Hey, we have our own R and that's to encourage businesses to relocate to those states. Um, and just like any other credit, I mean, there's credits out there for job creation, right?

If you come to my state and you create more than five jobs a year, We're going to give you a credit where that may apply in Georgia, but in Alabama, it may not apply to you. Right.

Mike: That's why governors go on speaking tours to other states and industry conferences. Hey, relocate to me.

Shannon Scott: Right. Yeah. And, and most of the time, you know, a lot of businesses think that again, these only apply to, let me just speak for the state of Alabama, Alabama has a big shipping port. You know, in mobile. And so they put a lot of incentives in place to relocate businesses, to manufacturing things in, in mobile.

Now, these were incentives, like kind of cash upfront incentives, like we'll help you build these facilities. We'll give you these types of credit for these facilities. That's different. That's more of a negotiated incentive, right? Where these credits, these backend credits I'm talking about, like job creation also apply there.

But most businesses, again, think I don't have the people. Or the staff to go out and negotiate these credits with the state. That's, that's not what you need to do, right? You just need to understand the law and process it accordingly, like a job creation credit. In Georgia, if you create more than five jobs a year, these are net new jobs.

These aren't replacing jobs. Then you get a credit, you know, in each one of those jobs you create over that amount. So.

You know,

Colorado has the same thing.

Mike: that's really interesting. Cause I think, I mean, I grew up in an entrepreneurial home. I've been involved in small businesses and worked for big companies my whole life and, uh, in a lot of situations. And in my head, uh, I always just kind of thought, okay. You're negotiating with the local mayor or a city council, or, uh, you got, you're, you're partnering with a chamber of commerce who is helping you find different credits, but in more of these like one off negotiated ways, uh, it, it, it is mind opening how many ongoing permanent employer, just got to hire somebody new as long as they meet these qualifications credits there, there really are.

Shannon Scott: Yeah. I mean, and they're popping up every day. I mean, once you see these states that are kind of struggling financially from a, from a job creation perspective, um, you'll see them pop up and say, okay, for a year, we're going to pass this credit that says if you're within this zip code. And you're creating jobs or you're within the census track.

And that's where things can get complicated because sometimes it's based on zip code. Sometimes it's based on census track. We've literally seen businesses where the same business owner owned two gas stations, one right across the street from each other. The gas station on the left hand side of the street was a tax credit.

The gas station on the right hand side of the street was not, uh, believe it or not. Uh, again, it's, it's, you can get very nuanced and very detailed here. Um, but it's all in the details, right? It's all in the research. On what it takes to get in and take advantage of this. And that other business on the left hand side, I think had like 50, 000 a year in credits where the one on the right did not have anything.

And I just remember that talking to the CEO of that company, he was very frustrated. He's like, I don't understand. They're literally across the street from each other. And I'm

like, well, welcome to the world of the IRS, right?

Mike: Yeah. Right. Right. Um, Shannon, I know that your, your, uh, your expertise lies more on the tax credit side, not the HR side, but it's clearly there's a little bit of overlap here. What do you see as some best practices for employers to take on the recruiting side? to take advantage of these tax credits.

You, you, you and I talked earlier, uh, you know, no coincidence that when these credits came available, all of a sudden Walmart became very patriotic and started recruiting veterans and hate to sound so cynical, but not a coincidence, right? Can you speak into that?

Shannon Scott: No, you're right. It's not a coincidence. And it's not, I mean, it's not anything that Walmart's doing wrong. They're taking advantage of the laws that exist, right? You know, But, but also they count on these funds and these tax credits as a big portion of what their financial statements are. I mean, You know, their job is to be profitable.

Like you're as a CEO of any size business, whether you're two employees or 2 million employees, your job is to make the company profitable. And these are profitability type situations. So when it comes from a recruiting perspective, you know, I, I think again, that, that number earlier, we had a conversation about what we're seeing and what we're hearing, um, is typically that these people that are being targeted from these demographic groups are staying at the job longer.

Now, the reasoning behind that, whether that's, you know, they're just appreciative to have an opportunity. Where nobody else was giving them an opportunity. So they feel a sense of loyalty. I can't really answer that question, but the numbers are there, but I think if you're really kind of looking toward kind of looking a hiring type situation in a work opportunity back to the HR department, look at the veteran pool.

There's a tremendous amount of veterans out there that are currently unemployed. There's a lot of nonprofits out there that have veteran pools. that you can pull from their job. They're job trained. They're certified in certain things. Uh, you can work with Department of Rehabilitation Services. Every state has one, right?

They have a pool of candidates that are looking for jobs. Um, and that's a lot of cases. If you're HR, those are free. So, you know, you might pay tens of thousands of dollars to recruiters that go out and look for individuals or, you know, typical job boards can get very expensive where there's a lot of free resources out there that give you the best of both worlds.

You're going to get a qualified candidate. You're going to get to take advantage of a tax credit. And you're going to get, get to give someone who's got a higher barrier to employment, uh, a job.

Mike: So let's go through my head is, you know, uh, necessity is the mother of invention, right? And so we, we talk an awful lot on the show about, uh, labor supply and demand and an aging workforce and lower birth rates 30 and 50 years ago. So the supply of labor, you know, how we're kind of permanently in this sub 4 percent unemployment rate world.

The, the war for talent is real. It's hit main street. It's not going away. Talk a lot about that. Um, But if you are an employer, who's, maybe you're just a well known company in the area and people like you, cause you're, well run, you treat your people right. You don't have a recruiting problem. And, and maybe pandemic hits and people start working a little bit more virtual, opens our mind up to, Oh, I could hire somebody remote, but why, when I could just hire someone local, because that's what we've quote unquote, always done. But man, if you have some job functions that could be virtual, you may have just expanded your available workforce from, you know, a 30 minute commute, just sort of circle around your place of business to the entire United States. If you're targeting veterans or other people from these other groups, because, oh my gosh, I mean, I'm just thinking about the math on veterans.

If you just hired, you know. One in X number of your employees were veterans at 9,600 bucks. I mean, you get to real money real fast.

Shannon Scott: Yeah, absolutely. And you know, people, and there's, there's a kind of a way to expand, especially with this remote for workforce, you know, there's a lot of accommodations that has been, employers have made in the past and continue to do so to, for, for all types of demographics, like just, let's just take people on disability or disabled individuals, you know, whether you're making accommodation from the specific type of desk.

Or certain types of, you know, visual aids and computers with remote workforce. Now, a lot of these things are more freely open and, you know, you don't have to make physical accommodations if they're working remotely, because I'm sure they've got setups and they're, they're doing these things in their homes and they're still being able to take advantage.

You know, of these programs and again, give gainful employment to someone who really needs it. But, but on top of that too, I think, um, yeah, I think there was kind of a socially redeeming value to think about these types of programs, right? To think about really getting in and creating a veteran centric program.

I'm not encouraging you, I'm not saying you have to go out and hire every veteran, um, but there is a social redeeming value. And if you want to talk about, you know, HR and you want to talk about, you know, just a social perspective of your organization, To be able to kind of, you know, you need employees, you need to fill that pool, but you're also giving back to the community in those ways.

And you're taking advantage of programs like this. You know, it's, it's, to me, it's just a win, win. I mean, you're, You know, it's so, you know, I ran into, this is a kind of an off story, but I ran into a young lady the other day, uh, who has a coffee shop in Georgia and all she hires is disabled individuals.

And she, we were talking about the Work Opportunity Tax Credit Program and she doesn't hire a lot, but man, I'll tell you what, that store, you can't get in and get a cup of coffee in that store, right? Um, it's just a line around the corner. It's the, the community wants to be involved. They want to help.

They want to contribute. Um, and it's a great way of doing it too. And, you know, uh, and we're seeing more and more, uh, these, uh, you know, businesses being more socially conscious when it comes to things like that.

Mike: Yeah. Yeah. It's, it is a good, uh, it's a good marriage between social responsibility and. I'm not going to be unapologetic capitalism and trying to find ways to cut costs and increase revenue to, to, to grow your business, right. Unapologetically. And so if you have a, if you can employ people that almost becomes part of your marketing and not in some manipulative Machiavellian way, you know, uh, that, that you can, you can provide goodness to those employees.

You can provide goodness to your customers by providing that service from those employees.

Shannon Scott: Yeah, absolutely. I mean, this is what these programs were created to do, right? You know, it's, it's, um, Hey, we're going to give you an incentive to go out. And, you know, hire from these pools of individuals that, you know, a lot of times they just don't have access to the education programs or, you know, again, on the job disabilities prevent them from being able to do things.

You remember it's out of, you probably remember this, um, when you used to fill out a job application, I remember my first job at a pizza restaurant. They say, can you lift over 50 pounds? You remember that question? I don't know if you ever filled out an application. And I was just like, well, I was like, I remember doing this when I was 17.

I was like, so what are you going to do if I can't?

Mike: Yeah.

Shannon Scott: that mean I don't get a job here?

Mike: They make some really big pizzas there. Yeah.

Shannon Scott: yeah, but I mean, it was, and you would see the hiring manager go, I don't know, like, I don't know if you said no to that, what we would, what we could do. Um, but you know, the world has changed so much and times have changed.

And like you said, it's a great point with a remote workforce. It opens you up to all kinds of hiring, you know, possibilities that you've never thought, thought about before.

Mike: Yeah. That's great. Shannon, any, anything that we haven't talked about, about tax credits, you think I'd say any business, but let's, let's assume that the big companies have the resources to get ahead of this. They've got tax professionals. They've got tax departments to get on top of this. Uh, but probably advocating mostly for the small and mid sized companies who Either just don't know about this or think it's beyond them.

What, what, what final guidance would you give them?

Shannon Scott: I would just say, you know, pay close attention. And there's, there's a lot of information out there. A lot of, you know, very simple research you can do. You can always reach out to groups. I mean, there are firms out there that specialize in these things and, you know, the worst case scenario is they're going to say, Hey, you're not qualified.

Or maybe. Maybe we can't handle you because of whether a size restriction or anything like that. But, you know, again, most businesses are going to qualify for something. It just takes a little time and a little research. And once you've got the programs in place, you can just continue to take advantage of these programs over and over again.

And, and one thing we didn't cover, and I would just say is there's a lot, you know, we've, we've, this country, the last five or six years, forget the pandemic. But there's been a lot of other disasters out there. There's been hurricanes, floods, fires, tornadoes. Typically when things like that happen, a lot of these credits follow those types of natural disasters.

So if you have been affected by hurricanes or floods or fires, there, the federal government and state governments typically come in and say, For a short period of time, maybe a two year window, maybe a three year window, we have some advantages, some tax advantages for you. If you continue to retain employees, like you keep higher, you know, keep your employees on payroll while maybe you're shut down or maybe you're trying to rebuild.

So I would say that as well, you know, pay close attention if you've been affected by these types of things, because those credits have also been around for a very, very long time. Um, but it's just, it's about education, right? You know, do the research, pick up the phone, call somebody. And this is not something you can expect your CPA to know.

Uh, they don't get bulletins on these things, right? Um, so it's, it's something that you might have to reach out and maybe expand that re you know, that research a little bit,

Mike: I think that's the punchline for me. A couple of things here. Number one is. Uh, it's not a shot at your CPA for not knowing these things because they just come from a different path. These are, certainly there's the federal WOTC and R&D but there's all the state and local tax credits, uh, that are meant for economic development.

They're not traditional IRS to CPA. Things that they have to have to understand. So it's okay that they don't know this stuff. Certainly get their, uh, their, their, I don't know if I want to say permission, but run it by them if you have, if you have questions, but it's, it's reasonable for your CPA not to know all these things.

Number two is this is not big company stuff that the percentage of the workforce that, that, that is eligible is kind of massive. It kind of puts what you said, something really interesting. I didn't, I didn't follow up on it. You think. The majority of companies have some eligible employees. Is that accurate?

Shannon Scott: I would say eligible employees, or they're located in a certain area of the country that makes them eligible. So it may be, they're not hiring as many people from the demographic groups, but they may be located in a city. That like San Antonio, Texas, massive empowerment zone in that area. You may, your business may be sitting in an area where you just automatically qualify just because of where

Mike: Yeah. Yeah. Yeah. So it's, it's okay to not have known about it before this show. Uh, it's okay for your CPA not to have known about it and the, and the opportunity really is massive. So, uh, there, there's, dare I say, not a reason for employers not to at least explore to see what types of tax credits that might be eligible for.

Shannon Scott: Absolutely. I mean, it doesn't hurt. And again, most of most cost recovery services, groups charge contingency or success fees. So it, you know, it's not a financial burden on you up front to be able to try to participate in these programs.

Mike: Yeah. Cause the, I assume the value is, I mean, it's the knowledge. If there's 3000 plus of these things, who on earth at an, at a traditional employer is going to know of all what they are, it takes a firm like yours to actually do the research and have the knowledge in the first place, what they are, how many there are, how you qualify, how you apply, et cetera.

Is that, is that fair?

Shannon Scott: Yeah, that's fair. I mean, it's the knowledge is one thing and you can research it on Google, but then you have to learn how to process it. And that's where the IRS is really going to pay attention to the Department of Labor and watch the officers are going to be like, are you doing this correctly? Now you know about it's great, but are you really doing it correctly?

Mike: Sean, maybe put you on the spot. Uh, I'd be curious for what are some of the most obscure tax credits that you know of?

Shannon Scott: Oh, goodness, obscure. You know, um, I would say I've seen tax credits. Okay, so there's been tax credits. California is a good example. There was a massive empowerment zone, which was a, Basically a location based credit. Um, and California was given out, this was years and years ago. It's not an obscure credit, so the way they handled it was pretty obscure.

California was giving out massive amounts of, of credits. I mean, hundreds of millions of dollars a year in credits. And, but it was encouraging these businesses to relocate to California. Um, and they just one day woke up and said, you know what, we're just going to do away with this program. I mean, no warning, really.

It's just like, we're going to let it expire. We're not going to renew it. And you saw a massive, you've seen this like in that state, right? Let's be honest. It's not just the tax rates. You've seen a massive amount of, you know, exits from an employer perspective out of that state, because they basically cut just a lot of these programs.

Um, they've had multiple opportunities to renew it. Now they're trying to bring some of it back, but it's kind of a little too late. It's a little too late. And there are a lot of people that have been really held responsible for kind of the downfall. Of that program. And a lot of these businesses, especially small businesses that have either relocated or decided to, you know, Arizona and these other states.

And so what you've seen though, is these other states use it as a recruiting tool. You know, so they're like, Hey, if you're in these states that don't do this anymore, come on over here, say it's kind of creating like battlegrounds. Um, and the obscurity is if you're not paying attention. And you're not a state that's paying attention, you're going to lose some of this revenue, and that's what you're seeing out there.

Mike: Yeah, there's, there's, there's a clear war going on. It's not just. You know, yeah. Governors fighting with each other to try to get the businesses to relocate and the startup. Yeah. It's, it's, it's, it's for sure a competitive landscape. Um, another, another one, maybe what's the, what's the biggest annual tax credit you've ever seen for somebody to say under 25 employees?

Shannon Scott: Oh, goodness. Um, I think we've probably seen, so there, there was a group, and I have to recall this, it was about five years ago, that had a, uh, they were, they were a large veteran hiring organization. So I think they were receiving somewhere around 25, 000 a year in the WOTC credit, but they also were located in Empowerment Zone.

Um, so there was a 3 year look back of almost 120, 000 that we were able to grab for them as well. So it was kind of a double whammy for them. Um, well, yeah, so, I mean, in total, they were doing a recurring about 20, year, but that 120, 000. He actually took that, that money, if I recall this particular client correctly, and actually at 120, 000 put a down payment on another business to buy, uh, down the street.

So that's how he used his money. So he expanded his kind of, his enterprise and was able to kind of create more jobs that way.

Mike: Oh, that's awesome. That's awesome. All right, Shannon, I really enjoyed talking to you. There's, there's certainly facets about this that I, that I didn't know coming into this conversation. I think, uh, I think the more I learn, uh, the more I know how much I don't know, but, uh, really enjoyed the conversation.

Shannon Scott: Absolutely. I appreciate you having me on. Look forward to talking again.

Mike: And to everybody else for joining today, if you got value from today's conversation, if you liked the conversation, uh, I invite you, like it, comment on it, certainly share it with someone else and please subscribe on whatever platform you choose, uh, whether that's a podcast, YouTube, or our website, uh, until next week.

Thanks for joining Mission to Grow. Thanks again, Shannon.