Employee Retention Tax Credit

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Did You Pay Employees While Your Business Was Inoperable Due to Hurricane Harvey? If so, You May Be Eligible for the Employee Retention Tax Credit

The nation’s 2018 tax season is underway. The Internal Revenue Service (“IRS”) began accepting return on January 29, 2018 and the tax deadline is April 17, 2018. In preparing to file tax returns, businesses owners should consider whether their business is eligible for a tax credit under the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (“Disaster Tax Relief Act”), which became law on September 29, 2017.

During Hurricane Harvey many businesses were damaged or destroyed, while others were forced to close temporarily for safety and security reasons. Some businesses remained closed, or operated with limited hours, for days, weeks, and in some instances months after the storm. The Disaster Tax Relief Act was enacted to provide temporary tax relief to taxpayers affected by Hurricane Harvey, including a tax credit (“Employee Retention Tax Credit”) for business owners who continued to pay their affected employees (many of whom would have been in dire financial need without the continued paycheck) although their businesses were inoperable during or following the storm. Taxpayers with their principal place of business in the following Texas counties may be eligible for the credit: Aransas, Austin, Bastrop, Bee, Bexar, Brazoria, Burleson, Caldwell, Calhoun, Chambers, Colorado, Comal, Dallas, De Witt, Fayette, Fort Bend, Galveston, Goliad, Gonzales, Grimes, Guadalupe, Hardin, Harris, Jackson, Jasper, Jefferson, Jim Wells, Karnes, Kleberg, Lavaca, Lee, Liberty, Madison, Matagorda, Milam, Montgomery, Newton, Nueces, Orange, Polk, Refugio, Sabine, San Augustine, San Jacinto, San Patricio, Tarrant, Travis, Tyler, Victoria, Walker, Waller, Washington, and Wharton.

To be eligible for the tax credit, a taxpayer must satisfy the following conditions:

  • Her business must be located in one of the foregoing counties;
  • Her business must have paid wages to employees while the business was inoperable because of Hurricane Harvey; and
  • The principal place of employment for the employee(s) for which credit is claimed must be in one of the foregoing counties.

However, the credit is subject to the following limitations:

  • The credit is not valid for family members.
  • The Work Opportunity Tax Credit (“WOTC”) cannot be claimed on the same employee(s) for which the employee retention credit is claimed under the Disaster Tax Relief Act.
  • Controlled groups of corporations will be treated as a single employer; that is, related businesses cannot claim the credit multiple times for the same employee(s).

The amount of the credit a taxpayer may be eligible to receive is 40 percent of each employee’s wages, not to exceed $6,000.00 per employee. As such, a taxpayer may receive a tax credit up to $2,400.00 for wages paid to each eligible employee while her business was inoperable because of Hurricane Harvey. For each day the business was unable to operate as a result of the hurricane before January 1, 2018, the employer can get a credit for wages paid to an employee – even if the employee returned to work or worked at a different location. The following is an example of how the credit is applied:

  1. Example: A calendar year employer has two employees, A and B. Both were hired on January 1, 2017 and worked 160 hours per month. Employee A was paid $3,000.00 per month and is a veteran. As a veteran, Employee A 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. Employee B was paid $1,500.00 per month.
  2. The employer’s facility is located in Harris County, which is within the Hurricane Harvey disaster zone, and was rendered inoperable by the disaster on August 25, 2017 and the employer was not able to resume significant operations until January 1, 2018. For the 2017 tax year, the employer is entitled to claim both the WOTC and the Employee Retention Tax Credit for Employee A and the Employee Retention Tax Credit for Employee B as explained below.
  3. The employer cannot claim the Employee Retention Tax Credit to the extent the WOTC is available to the employer. Employee A worked 400 hours and earned $24,000 by September 30, 2017. Therefore, the employer may claim the maximum WOTC of $9,600 ($24,000 x 40%) for services rendered during the period January 1, 2017 through September 30, 2017. The employer may also claim the maximum Employee Retention Tax Credit of $2,400 ($6,000 x 40%) for wages paid to Employee A during the period from October 1, 2017 through November 30, 2017.
  4. As to Employee B, the employer may also claim the maximum Employee Retention Tax Credit of $2,400 ($6,000 x 40%) for wages paid to Employee B during the period from September 1, 2017 through December 24, 2017.

If your business was affected by Hurricane Harvey, you should consider consulting with a tax advisor to determine whether the Employee Retention Tax Credit (or other tax relief under the Disaster Tax Relief Act) is available to you or your business.

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