Employee Retention Tax Credit For Businesses Affected By Natural Disasters Extended For 2018 and 2019

March 2020

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Summary

On December 20, 2019, President Trump signed the Further Consolidated Appropriations Act, 2020, which includes an Employee Retention Credit for employers affected by qualified disasters that occurred during 2018 and 2019. Like the credit provided to victims of Hurricanes Harvey, Irma, and Maria by the “Disaster Tax Relief and Airport and Airway Extension Act of 2017,” eligible employers can take a credit up to $2,400 for qualified wages paid an eligible employee.
 

Details

The Employee Retention Credit is available to employers who operated in a qualified disaster zone and became inoperable on account of the disaster, also referred to as a qualified employer, and continue to pay employees whose principal place of business is in the designated disaster zone, also referred to as qualified employees. For this credit, qualified disaster zones are determined by the President for the periods of January 1, 2018, to February 18, 2020. The amount of the credit is based on qualified wages paid by an eligible employer to an eligible employee.
 
“Qualified wages” include wages paid or incurred during the time the employer’s trade or business located in a qualified disaster zone was inoperable due to a disaster (up to 150 days after the disaster) and includes wages paid without regard to whether the employee performs any services, performs services at a different location from his or her principal place of employment, or performs services at the principal place of employment before significant operations have resumed. Employers can claim qualified wages regardless of whether the employer was reimbursed by insurance.
A location may be inoperable for more than a physical closure. Some examples of inoperability may include:
  •  Reduced sales or customer visits
  •  Increased employee absence
  •  Reduced production or employee attendance
  •  Supply chain delays in qualified disaster zone areas
 
The credit amount is equal to 40% of the qualified wages paid to each eligible employee, up to $6,000 (making the maximum credit $2,400 per eligible employee). Notably, the credit cannot be claimed for an employee for any payroll period in which the employer may claim the Work Opportunity Tax Credit (WOTC) for such individual. The following example illustrates the interaction of the Employee Retention Credit and the WOTC:

Calendar year employer hired a veteran on January 1, 2018, at a salary of $2,400 per month. As a veteran, the employee is a member of a targeted group for which the employer may claim a WOTC equal to the lesser of $9,600 or 40% of the employee’s first-year wages, provided the employee works over 400 hours for that year. The employer is located in a federal declared disaster zone and was rendered inoperable by the disaster on September 4, 2018. Significant operations did not resume before January 1, 2019. Is the employer entitled to claim both the WOTC and the Employee Retention Credit with respect to the employee on its 2018 return?

The employer cannot claim the Employee Retention Credit to the extent the WOTC is available to the employer. Where the employee worked 400 hours and earned $24,000 by October 31, 2018, the employer may claim the maximum WOTC of $9,600 ($24,000 x 40%) for services rendered during the period January 1, 2018, through October 31, 2018. The employer may claim the Employee Retention Credit for wages paid during the period beginning on November 1, 2018 and ending on December 31, 2018. Name
 

BDO Insights

  • Georgia, Florida, South Carolina, North Carolina, California, and Texas were hit especially hard during 2018 and 2019, making it beneficial for any business that was disrupted by a natural disaster to investigate filing for this credit.
  • The credit of up to $2,400 per eligible employee provides financial assistance to employers who continue wages to employees even though sales and productivity is disrupted.  
  • The credit limit of up to $2,400 is per employee per disaster, and therefore is not eligible for each year when wages are paid during two different tax years affected by the same disaster.
  • Pending IRS guidance, BDO anticipates the credit will be claimed in the same way as similar retention credits on Form 5884-A, which is filed with the employer’s tax return.
  • Unlike prior legislation, the dates of the disaster are not necessarily specified in this legislation. BDO can assist you in determining applicable time periods and help quantify the eligible credit.
 


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