Tax credits for hiring disabled workers

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(FORTUNE Small Business) -- Dear FSB: My company recently bid a manufacturing job, and one of the requirements is that the parts must be powder-coated. To powder coat the parts, we can use a company that employs mentally disabled workers and is a nonprofit. My question: is there any tax advantage to my company for having them do the secondary work?

- Steven Lago, Sun Valley, Calif.

Dear Steven: There are several tax incentives for hiring mentally disabled workers. One significant benefit is the Work Opportunity Credit, according to Vicki Meyer, of counsel to Thomas Howell Ferguson PA in Tallahassee, Fla.

The program provides eligible employers with a tax credit of up to 40% of the first $6,000 of first-year wages of a new employee if the employee is part of a "targeted group." An employee with a disability qualifies "provided that the appropriate government agencies have certified the employee as disabled," Meyer says.

Other "targeted groups" can include qualified veterans, ex-felons, food stamp recipients and long-term family assistance recipients, adds Gregg Wind, vice chair of the California Society of CPAs in Redwood City, Calif. There are tax credits available to disabled employees as well as to employers that modify their workplace to accommodate the needs of their disabled employees.

One red flag: "To my knowledge there are no tax advantages to a company subcontracting work to a nonprofit that employs disabled workers," Wind says.

The credit is taken by the employer of the disabled worker, says Meyer. "The question becomes: Who is the employer? The company or the nonprofit organization?"

Many businesses misclassify workers in a sheltered workshop as independent contractors when they really are employers. Check with the nonprofit organization. "They should be able to assist you with the determination or enter into an arrangement that may qualify the company to take the credit," she says.

If the nonprofit is truly a subcontractor, "your business would get a deduction for the payments to the nonprofit subcontractor to the extent the work done by the subcontractor was a business expense, but there's no special added benefit," says Tom Ochsenschlager, vice president of the American Institute of Certified Public Accountants in New York.