Own a business that was disrupted due to a hurricane in 2017? You may qualify for Disaster Tax Relief in the form of an Employee Retention Credit of up to $2,400 per employee.
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Business Owner Summary of the New Employee Retention Credit:
If one or more of your business locations were rendered inoperable due to the impact of a hurricane this year, and you paid that business location’s employees during this inoperable period, you probably qualify for an Employee Retention (Tax) Credit of up to $2,400 per employee.
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We are currently working with several business owner clients and their CPA's exploring the application of this new Employee Retention Credit for 2017. Below we provide an overview of this new credit that might be relevant to you for further discussion with your professional advisors.
It has been a difficult hurricane season this year with the damage caused by Hurricane Harvey, Irma and Maria resulting in the creation of hurricane disaster zones in Texas, Florida, Puerto Rico and beyond[1]. As part of the relief effort, Congress enacted the “Disaster Tax Relief and Airport and Airway Extension Act of 2017” (“Disaster Tax Relief Act”).[2] For business owners with locations in one or more of these hurricane disaster zones, a key provision of the Disaster Tax Relief Act is the Employee Retention Credit (“Retention Credit”), which provides for a tax credit of up to $2,400 per eligible employee[3].
Given the level of hurricane related damage sustained by businesses this year, the application of this Retention Credit appears likely to be very broad and, for businesses that qualify, the Retention Credit can be significant for 2017.
If a business owner satisfies the criteria referenced in the “Employee Retention Credit Criteria” section below, they likely qualify for a Retention Credit of up to $2,400 per Eligible Employee.[4] The Retention Credit is computed by taking 40% of Qualified Wages paid to Eligible Employees up to a maximum of $6,000 in Qualified Wages.[5] (Example, $2,400 Retention Credit = $6,000 Maximum Qualified Wages per Eligible Employee x 40% Retention Credit Rate.) The following are a couple of examples of the application of this Retention Credit:
Example #1: Assume a Houston, Texas based medical practice with a staff of 15 paying weekly wages in the aggregate of $15,000 was forced to shut down for 2 weeks, starting on August 26, 2017, due to Hurricane Harvey’s extensive flooding in their area and loss of power to their building. The aggregate, maximum Retention Credit available for this medical practice for wages paid to the 15 staff would be about $12,000 = ($30,000 (2 weeks wages) x 40% Retention Credit rate).[6] Note that the actual Retention Credit is computed on a per employee basis, we used aggregate wages in this example to keep the example simple.
Example #2: Assume a logistics company in Miami, Florida with staff of 275 sustained Hurricane Irma related wind and water damage and loss of electricity, forcing them to close operations for five (5) days starting September 6th, 2017. The owners of the logistics company continued to pay their staff during the shutdown period. The total for five (5) days of wages paid to the staff was $330,000. The aggregate, maximum tax credit available to the owners of the logistics company for wages paid to the staff of 275 would be about $132,000 = ($330,000 (1 month of wages) x 40% Retention Credit rate).[7] Note that the actual Retention Credit is computed on a per employee basis, we used aggregate wages in this example to keep the example simple.
Employee Retention Credit Criteria:
Now that we covered a couple of examples, let's look at what is needed to qualify for the Retention Credit and its relevant rules. This Retention Credit is available to business owners who meet the following criteria:
The business owner has a business location in one or more of the hurricane disaster zones[8];
One or more of these business locations were “rendered inoperable” due to damage caused by Hurricane Harvey, Irma or Maria (such a business location would be counted as an “Eligible Employer” for Retention Credit purposes)[9];
Note that the Disaster Tax Relief Act does not fully define what is meant by “rendered inoperable” as a result of damage sustained by reason of a hurricane, however, it seems reasonable that one or more of the following could cause a business location to be “rendered inoperable”[10]:
Physical hurricane damage to the business location;
Systemic damage to the business location’s community, utilities and supply chains;
Inability to reach customers; and/or
Inability of employees to reach the business location;
The business owner continued to pay the Eligible Employer’s employees who were based in the same hurricane disaster zone[11] as the Eligible Employer (hereinafter these employees will be called “Eligible Employee”); and
The Retention Credit computation period starts on the date an Eligible Employer becomes inoperable due to hurricane damage and ends when an Eligible Employer “resumed significant operations” or 12/31/2017, whichever occurs first.[12] Wages paid to Eligible Employees by Eligible Employers during this inoperable period are “Qualified Wages” used in the Retention Credit computation. Please note the available Retention Credit applicable date ranges per hurricane below (i.e., a business location's inoperable period must fall within the date range relevant to their hurricane);
Retention Credit applicable date ranges:
For Hurricane Harvey, any day after August 23, 2017 and before January 1, 2018,
For Hurricane Irma, any day after September 4, 2017 and before January 1, 2018,
For Hurricane Maria, any day after September 16, 2017 and before January 1, 2018.
Note that the Qualified Wages paid to Eligible Employees during this inoperable period count for the Retention Credit irrespective of the Eligible Employees’ provision of service to the Eligible Employer during this inoperable period. Basically, during this inoperable period, Eligible Employees can (1) work from home, (2) work from another location, or (3) not work at all, and the Qualified Wages paid to them will still count towards the Retention Credit until such time as the Eligible Employer resumes significant operations.[13]
Some additional rules that apply to the Retention Credit include the following:
Wages paid to a greater than 50% owner, or their extended family members, will NOT count for the computation of a Retention Credit;[14]
An employer cannot take a Retention Credit on an employee that they take a Work Opportunity Tax Credit;[15]
Qualified Wages are mainly traditional wages paid to employees and do not generally include the value of benefits excluded from an employee’s income (e.g., medical insurance premiums, retirement benefits or other fringe benefits).[16]
In conclusion, the Retention Credit provided for in the Disaster Tax Relief Act gives needed tax relief to businesses rendered inoperable by this year’s hurricanes. One should seek the advice of their tax professional to determine the availability and magnitude of any Retention Credit to their actual situation. Consistent with our multi-disciplinary team approach, Hamilton Gray Wealth Management works closely with our clients and their other professional advisors to explore the impact of new tax law developments, such as the Retention Credit, on our clients. This article is for educational and discussion purposes only.
FOOTNOTES AND IMPORTANT DISCLOSURES:
[1] FEMA Disaster Zone Maps link: https://www.fema.gov/ Texas: https://www.fema.gov/disaster/4332 Florida: https://www.fema.gov/disaster/4337 and Puerto Rico: https://www.fema.gov/disaster/4339
[2] Disaster Tax Relief and Airport and Airway Extension Act of 2017, Pub. L. No. 115-63, H.R. 3823. Link to enacted Bill: https://www.congress.gov/bill/115th-congress/house-bill/3823/text
[3] Disaster Tax Relief and Airport and Airway Extension Act of 2017, Pub. L. No. 115-63, H.R. 3823, Sections 501 & 503.
[4] Disaster Tax Relief and Airport and Airway Extension Act of 2017, Pub. L. No. 115-63, H.R. 3823, Sections 501 & 503.
[5] Disaster Tax Relief and Airport and Airway Extension Act of 2017, Pub. L. No. 115-63, H.R. 3823, Sections 503.
[6] Note that the actual Retention Credit amount will be different because the credit is computed on a per employee basis and NOT in the aggregate as shown in this example.
[7] See the above footnote.
[8] FEMA Disaster Zone Maps link: https://www.fema.gov/ Texas: https://www.fema.gov/disaster/4332 Florida: https://www.fema.gov/disaster/4337 and Puerto Rico: https://www.fema.gov/disaster/4339
[9] An “Eligible Employer” is one with an active business location in one or more of the hurricane disaster zones before the hurricane rendered said business location inoperable on any day during the applicable date range for each of the three hurricanes, see section 4 of this article for these date ranges.
[10] See the following Question and Answer exchange copied from the IRS Employee Retention Credit FAQs sheet of 2007 / 2008 for additional IRS insight on the types of damage that can render a business “inoperable”. Note that this Question and Answer exchange was for a prior disaster relief law and NOT for the Disaster Tax Relief Act.:
“(03/09) Q: To meet the inoperable requirement, must the building in which the employer conducted an active trade or business be damaged, or can the inoperable requirement be met for other reasons?
A: The statute requires that the business be inoperable “as a result of damage sustained by reason of” the Midwestern Disasters. The damage need not be to the employer’s place of business. For this purpose, a business is inoperable if, for example, because of the disaster,
the business is physically inaccessible to employees, raw materials, utilities, or customers.”
Link to IRS Question and Answer Exchange: https://www.irs.gov/businesses/small-businesses-self-employed/faqs-for-hurricane-victims-employee-retention-credit
[11] Such payments would count as “qualified wages” paid to “eligible employee” under the Disaster Tax Relief Act.
[12] The Disaster Tax Relief Act does not define what “resumed significant operations” means, but clearly it is contemplated that some businesses will have a ramp up period before they reach full pre-hurricane operations and a reasonable portion of this ramp up period should qualify for Retention Credit purposes. A business owner should use a reasonable and good faith approach to determine at what point their business has “resumed significant operations”.
[13] H.R. 3823 Sec. 503(a)(2)(C), (b)(2)(C) & (c)(2)(C)
[14] H.R. 3823 Sec. 503(a)(3), (b)(3) & (c)(3) and IRC Sec. 51(i)(1).
[15] H.R. 3823 Sec. 503(a)(4), (b)(4) & (c)(4) and IRC Sec. 51.
[16] IRC Sec. 51(c)(1).
IMPORTANT DISCLOSURES
This content does not provide Investment, tax or legal advice. The information presented here is not specific to any individual’s personal circumstances.
This publication is provided as a service to clients and associates of Hamilton Gray Wealth Management, LLC solely for their own use and information. The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified. The content in this publication is for general information and education purposes only and not intended to serve as individual investment advice. You should seek independent advice from a professional based on your individual circumstances. The information in these materials may change at any time without notice. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
This communication is strictly intended for individuals residing in the state(s) of FL and TX. No offers may be made or accepted from any resident outside the specific states referenced.