Damian Contreras

Senior Tax Accountant

Is your business fully leveraging available tax credits? The Returning Citizens Credit is a valuable incentive that could reduce your tax liability while supporting workforce reintegration for formerly incarcerated individuals.

What is the Returning Citizens Credit?

The Returning Citizens Credit, initially introduced in Illinois in 2006, as the “ex-felon tax credit” is a tax benefit designed to encourage businesses to hire formerly incarcerated individuals. Originally businesses were eligible for a 5% tax credit on wages paid to eligible employees, with a cap of $1,500 per individual. 

Beginning in 2025, the program was renamed  the “Returning Citizens Credit” and expanded to provide a more substantial benefit: businesses can now receive a tax credit equal to 15% of wages paid to eligible employees, up to a maximum of $7,500 per individual per year. This adjustment aims to further incentivize employers to provide opportunities to those reentering society. 

Eligibility for the Credit

To qualify for the Returning Citizens Credit, an individual  must meet the following criteria outlined in the Illinois credit code 5380.

• Criminal Conviction: The individual must have been convicted of a crime in Illinois or  another jurisdiction. However, offenses that would require registration under the Sex Offender Registration Act are excluded.
• Incarceration: The individual must have served a period of incarceration in an Illinois adult correctional facility.
• Hiring Timeline: The employee must have been hired by the business after being released from incarceration, within the following timeframes:
  
  • Before January 1, 2025: The individual must have been hired within three years of their release.
  
  
  • On or after January 1, 2025: The individual must have been hired within five years of their release.

How to Claim the Returning Citizens Credit

The process of claiming the Returning Citizens Credit varies depending on your business’s structure. The credit is reported on the following forms:   

• Partnerships and S-Corporations: Illinois Schedule 1299-A
• C-Corporations: Illinois Form 1299-D
• Individuals: Illinois Form 1299-C  

When claiming the credit, a business will need to provide the following information for each qualifying returning citizen:

• Name and Social Security Number
• Month and year of hire
• Qualifying wages paid
• Amount of any prior credits claimed for the individual (if applicable)

Once the credit is correctly calculated and the respective form is completed, it will be reflected on schedule K-1p for partners or shareholders, IL-1120 for C- Corporations and IL-1040 for individual tax returns.

What Are Qualifying Wages?

Qualifying wages for the credit are  those subject to unemployment tax under IRC Section 3306. Additionally, wages must be paid within one year of the employee’s hire date to qualify for the credit.  

It’s important to note that you can only claim the wages paid during the tax year in which you are filing for the credit. If you claim the credit for multiple years, you’ll need to include the amount of the credit claimed in the previous years, as the maximum credit  per returning citizen is capped.

The Returning Citizens Credit is a tool for businesses looking to reduce their tax burden while offering a second chance to those who have been incarcerated. By understanding the eligibility criteria, qualifying wages and the necessary steps to claim the credit, you can ensure that your business can take advantage of this opportunity. The qualified tax professionals at CK can help you navigate the process and optimize your business’s tax benefits. You can call us at 630-953-4900 or contact us here.