The Disaster Tax Relief and Airport and Airway Extension Act of 2017 was signed into law on Sept. 29, 2017. This law created tax credits for businesses impacted by Hurricanes Harvey, Irma or Maria. Most of the counties in Florida were affected by Hurricane Irma, and if a business is located in a designated disaster zone, the tax credit is available.
The credit, called “employee retention credit,” is crafted to help employers who were affected by the storms. If an employer's business was shut down due to either Harvey, Irma or Maria, and the employer continued to pay salaries and wages to “eligible” employees, then the employer is eligible for a credit equal to 40% of the amount paid out as wages, up to $6,000 of compensation per employee.
To be eligible for the credit, the employer must have been operating an active business on a specific date. For Hurricane Irma, that date is Sept. 4, 2017. The relief period for Irma is defined as Sept. 4, 2017 to Dec. 31, 2017. Any qualified wages paid during this period are eligible for the credit.
On Sept. 4, 2017, Irma was still chugging along in the Atlantic. She was a mighty Category 5 but hadn't yet shown the world how bad she could be. She would punish the island of Barbuda on Sept. 6, turn the lights off in Puerto Rico on Sept. 7, and make it to Cudjoe Key as a Category 4 on Sept. 10. By the time Irma left Florida as a tropical storm, she had caused the death of 75 Floridians and left 1.5 million without power.
Businesses that closed active operations to prepare for the storm, but still paid employees, are eligible to take the credit on wages paid starting on Sept. 4. Therefore, if you closed your business to prepare for the storm, you can take the credit on wages paid to your employees for that time.
The wages paid to employees must be “qualified” wages. Qualified is defined, for purposes of the credit, as wages paid to an “eligible” employee. An employee is eligible if his or her principal place of employment on the hurricane date was in the designated disaster zone. Wages are “qualified” if they are paid to employees, whether they provide no services, perform services at a different place of employment, or perform services at the principal place of employment before significant operations have resumed.
The credit cannot be taken more than once. For example, an employee who is eligible for a credit under Hurricane Harvey cannot also receive a credit under Hurricane Irma or Maria. Or, if wages are eligible for the work opportunity credit, they will be ineligible for the hurricane credit.
Here's an example that illustrates how the credit works.
Marjorie P.A. is a professional service firm in downtown Naples. The business employees four people who meet the definition of “eligible employee.” On Friday, Sept. 8, the business closes normal operations to allow employees to prepare for the storm. Hurricane Irma hits on Sept. 10 and the business loses power. Without power, Marjorie P.A. cannot reopen the office. Power is restored on Friday, Sept. 22, and the business reopens on Monday, Sept. 25. Employees have received their regular salaries for this period. All of the salaries paid are eligible for the credit. None of the employees are eligible for the work opportunity credit.
Marjorie's business was closed for 11 days and paid $14,400 in wages to employees. Three of the employees received approximately $2,000 each, and one employee received $8,400. The employee retention credit would be $4,800 ($12,000 x 40%). All of the $2,000 paid to the three lower paid employees is eligible for the credit but the higher paid employee's compensation is limited to $6,000.
The credit is claimed by completing Form 5884-A and attaching it to the 2017 federal tax return. Entities where income is distributed to owners, such as partnerships or S corporations, will pass the credit to owners to offset tax on either an individual or corporation income tax return.
Any active business that qualifies should have a tax credit this year. Before you finalize your tax return, make sure you get the credit you deserve.
Pamela Schuneman, C.P.A., is a practicing tax accountant in Sarasota. She has 34 years of experience helping her clients navigate the vast federal tax system and has worked with businesses as varied as Fortune 500 companies to small sole-proprietors. Contact her at [email protected]