U.S. tax laws provide for two separate types of Employee Retention Credit related to qualifying natural disasters. One credit, provided in the CARES Act, is an Employee Retention Credit claimed as a credit against payroll taxes for employers due to COVID-19. I discussed this credit in my article COVID-19 Related Tax Consequences for Payroll and Payroll Taxes.
The other type of Employee Retention Credit began as natural disaster relief for several disasters that occurred in 2017; Hurricane Harvey, Hurricane Irma, Hurricane Maria, and the California Wildfires. This credit intends to provide tax relief for employers who continue to pay employees during natural disaster related periods of business inoperability. The credit has been extended to other natural disasters that occurred from January 1, 2018, to February 23, 2020. Keep reading for details on this natural disaster related type of Employee Retention Credit.
How Does the Employee Retention Tax Credit Work?
Eligibility for the natural disaster relief eligibility depends on the stated criteria in the tax code. Therefore, the process is a matter of matching your circumstances to the natural disaster eligibility criteria, calculating the credit, and then claiming it on the appropriate tax return. Follow the steps described below to see how this could work for you.
Step 1. Who Qualifies for the Employee Retention Tax Credit?
You need to meet each of the following natural disaster relief eligibility criteria to be eligible for the natural disaster-related employee retention credit.
Natural Disaster Relief Eligibility Criteria
- Is an active trade or business on the natural disaster date(s),
- Is located in the designated natural disaster zone, and
- Becomes inoperable on any day during the date range specified for a particular natural disaster.
- After the date the business became inoperable at the principal place of employment of the employee because of the natural disaster, and
- Before the date on which the business resumed significant operations at the principal place of employment.
In the case of 2017 designated natural disasters, qualified wages must be paid no later than December 31, 2017. In the case of 2018 and 2019 designated natural disasters, qualified wages must be paid no later than 150 days after the last day of the designated disaster period.
Step 2. How do I Calculate the Natural Disaster Related Employee Retention Credit?
The credit is equal to 40 percent of qualified wages up to $6,000 for each employee. Thus, the maximum Employee Retention Credit amounts to $2,400 per eligible employee.
Step 3. When do I Claim the Natural Disaster Related Employee Retention Credit?
The natural disaster-related Employee Retention Credit is claimed using Form 5884-A. This form is attached to the federal income tax return for the employer’s business for the year of the natural disaster. It may be claimed on an original return or an amended return. An amended return must typically be filed within 3 years of the due date of the return for the year of the natural disaster.
With this in mind, a 2017 tax return may be amended to include an employee retention credit as late as 3 years after the due date of the 2017 return. For instance, a calendar year C-Corporation has until April 15, 2021, to claim an employee retention credit related to Hurricane Harvey. The group of available credits that include the Employee Retention Credit is limited to the tax computed on the return and is non-refundable. However, any unused credit can be carried forward on future tax returns for up to 20 years.
- Example 1
Company A operates an oil refinery business in Harris County, Texas, a declared Hurricane Harvey Disaster Zone County. The refinery closed on August 23, 2017, because of the effects of the hurricane. Significant operations at the refinery resumed on November 30, 2017. The company is eligible for hurricane tax relief in the form of the Employee Retention Credit. The Company had 25 eligible employees who each had qualifying wages of $6,000. Five of these employees were transferred to Company A’s Nome Alaska oil refinery immediately after the hurricane hit the Harris County, Texas refinery. Note that it is permissible to include the wages of these five transferred, eligible employees. All the qualified wages were paid within the qualified wage period as shown in the chart below. At the 40% credit rate, a $60,000 tax credit (25 * $6,000 * 40%) can be claimed on Company A’s 2017 Income Tax Return.
As stated previously, this credit is not a refundable credit. However, it can be used to offset current and future income taxes of the business with a carryforward period of 20 years.
- Example 2
Company B runs a retail store in Lee County Alabama. A hurricane severely damaged the store on March 3, 2019. The area was declared to be a federal disaster area. Forced to cease operations to rebuild, Company B finally re-opened again on November 1, 2019.
Company B continued to pay 25 employees during the closure. The qualified wage period ended on July 31, 2019.
Twenty of these qualified employees were part-time employees (students at Auburn University) and none of their compensation after July 31, 2019 counts towards the credit. The part-time employees’ qualified wages came to $3,000 per employee.
The other five employees were full-time employees. For those five, qualified wages calculate to $6,000 per employee.
At the 40% credit rate, this comes to a $36,000 tax credit (20 * $3,000 * 40% + 5 * $6,000 * 40%).
List of Designated Natural Disasters and Disaster Zones
Here is a chart of eligible natural disasters from 2017 through 2019. Note that at the time of writing this article the natural disaster-related employee retention credit has not been extended into 2020.
The natural disaster related employee tax credit is designed to provide relief for businesses that continue to pay employees after the business has been made in-operable because of a presidentially declared natural disaster. Because the availability of the credit is not well known, many businesses failed to claim the credit on their 2017, 2018, and 2019 income tax returns.
Note that a 2017 tax return may be amended to include an employee retention credit as late as 3 years after the due date of the 2017 return. For instance, a calendar year C-Corporation has until April 15, 2021, to claim an employee retention credit related to Hurricane Harvey. For this reason, 2017 is (at the time of writing this article) considered an “open tax year” with respect to the ability to amend the tax return for that year.
We can help you with all 3 steps to claiming the natural disaster related employee retention credit:
- We work with you to determine eligibility for the credit for each open tax year.
- We calculate the credit so that you can determine if it is worthwhile to pursue.
- We prepare initial or amended tax returns for you to claim the credit.
Contact us to get started with a free, no-obligation consultation through the contact information included below.
Meet the Author
Michael specializes in meeting the tax compliance, projection, and planning needs of businesses, entrepreneurs, and business owners. He is Tax Partner in PW Associates, a firm that provides CFO and outsourced tax and accounting services. Michael has regional and small CPA firm experience and ran a sole practitioner tax practice for over 25 years.
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