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Businesses Impacted by Hurricanes may Qualify for Employee Retention Tax Credit by Ed Cooper, CPA

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Posted on October 16, 2017 by Edward Cooper

Businesses located in federally declared disaster areas and impacted by Hurricanes Harvey, Irma and Maria may qualify for an Employee Retention Tax Credit when they continue to pay wages to employees who were displaced by inoperable work locations.

Under the Disaster Tax Relief and Airport and Airway Extension Act of 2017, eligible employers may receive an income tax credit in an amount equal to 40 percent of the first $6,000 of qualified wages they paid to eligible employees during the specified dates the business’s primary location was inoperable. Therefore, the maximum credit available to affected businesses is $2,400 ($6,000 x 40 percent) per employee.

“Eligible employers” are those that conducted an active trade or business during the specified dates and for which that trade or business became inoperable “as a result of damage sustained by reason of” the named disasters. The damages need not be to the employer’s place of business. Rather, a business will be considered inoperable if, for example, the disaster caused the business to be physically inaccessible to employees, raw materials, utilities or customers.

For victims of Hurricane Harvey, the tax credits are for qualified wages paid by eligible employers to eligible employees after the specified dates of Aug. 23, 2017, and before Jan. 1, 2018. The eligibility period for victims of Hurricane Irma applies to qualified wages paid after Sept. 4, 2017, and before Jan. 1, 2018. For businesses impacted by Hurricane Maria, qualified wages would have to be paid after Sept. 16, 2017, and before Jan. 1, 2018.

“Eligible employees” include those workers whose principal place of employment as of the applicable date was with an eligible employer that operated a business in one of the Hurricane disaster zones.

“Qualified wages” generally refer to the definition of wages for unemployment tax purposes. The wages must be paid or incurred 1) by an eligible employer to or for an eligible employee and 2) beginning on the date the business’s principal place of employment became inoperable until the date the business resumed significant operations at that principal location. In addition, to qualify for the Employee Retention Tax Credit, the employer must have paid wages regardless of whether or not an employee actually continued to perform services during the time the principal place of employment was inoperable, even if such services were performed at a business’s other locations.

Generally, tax credits provide taxpayers with a dollar-for-dollar reduction of taxes, and are generally more valuable than a deduction, which only reduces taxable income. Thus, for high-income individual taxpayers, a dollar of wage expense would reduce their tax liability by approximately 40 cents, while a conversion of the expense to a credit would provide a $1 reduction of tax liability.

The Employee Retention Tax Credit is part of the Internal Revenue Code Sec. 38(b) general business credit, and is therefore subject to certain rules that may prevent some taxpayers from enjoying the full use of the credit to reduce their tax liabilities in the tax year that the credit is claimed.

The tax advisors and accountants with Berkowitz Pollack Brant have extensive experience helping individuals and businesses prepare for and navigate through complex laws related to disaster planning and recovery, including proving property and economic losses and substantiating credits, deductions and claims related to those losses.

 

About the Author: Edward N. Cooper, CPA, is director-in-charge of Tax Services with Berkowitz Pollack Brant, where he provides business- and tax-consulting services to real estate entities, multi-national companies, investment funds and high-net-worth individuals. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.