- Small and medium businesses may not be aware of a law that provides federal income tax credits to businesses of all sizes (including those with fewer than 100 employees) if they continued to pay their employees during periods when they experienced some type of negative business impact due to certain natural disasters that occurred in 2018 or 2019.
- Time is quickly running out to file this credit, called the Employee Retention Credit (ERC), on original tax returns. The ERC can be up to 40% of qualified wages for each employee during inoperability ($6,000 in maximum wages, or $2,400 maximum credit per employee).
- This dollar-for-dollar reduction in federal income tax could make a huge impact on both small to mid-sized businesses in affected areas. The credit can be carried back one year and forward 20 years.
What is a disaster tax credit?
A relatively unused tax credit may be waiting for businesses to take advantage of this year. Businesses in 19 states, more than one-third of the country, could be eligible for the ERC, which was designed to help businesses recover the cost of retaining employees during a natural disaster.
The 2019 Taxpayer Certainty and Disaster Relief Act, signed into law on December 20, 2019, temporarily renewed approximately two dozen credits, including disaster tax relief credits. It also includes an employee retention tax credit for employers who were adversely impacted by a qualifying natural disaster in 2018 or 2019.
Local businesses recovering from a national disaster may be able to seek up to a 40% credit for wages paid to employees during that time. Equifax tax credits and incentives teams are working with employers nationwide to help evaluate the employee retention credit for employers affected by qualified disasters in 2018 and/or 2019. This credit could earn qualified employers up to $2,400 per qualifying employee.
For example, a restaurant chain with locations in two other states had 12 locations affected in 2019. According to disaster credit work completed by Equifax, the company received more than $700,000 in employee retention credits.
The ERC is available to nearly any business, except nonprofits and income tax-exempt organizations. In fact, it likely makes sense for small business owners who need an extra boost to the bottom line anywhere they can find it.
Navigating disaster credits can be tricky, and there are several steps to consider when deciding whether to pursue the ERC. Below are some questions that small business owners can ask to help determine whether or not to try and take advantage of disaster credits.
How do I know if my business is eligible for the ERC?
If your business operation has a location in a disaster zone in one of the areas below and was adversely impacted by the natural disaster, then you might be eligible.
- Alabama severe storms and tornadoes (2018)
- Alabama severe storms, straight-line winds and tornadoes (2019)
- American Samoa Tropical Storm Gita (2018)
- Arkansas severe storms and flooding (2019)
- California wildfires (2018)
- California wildfires and high winds (2018)
- Florida Hurricane Michael (2018)
- Georgia Hurricane Michael (2018)
- Hawaii Kilauea volcanic eruption and earthquakes (2018)
- Hawaii severe storms, flooding, landslides and mudslides (2018)
- Indiana severe storms and flooding (2018)
- Iowa severe storms and flooding (2019)
- Mississippi severe storms, straight-line winds, tornadoes and flooding (2019)
- Missouri severe storms, tornadoes and flooding (2019)
- Nebraska severe winter storm, straight-line winds and flooding (2019)
- North Carolina Hurricane Florence (2018)
- North Carolina tornado and severe storms (2018)
- Northern Mariana Islands Super Typhoon Yutu (2018)
- Northern Mariana Islands Typhoon Mangkhut (2018)
- Ohio severe storms, straight-line winds, tornadoes, flooding, landslides and mudslide (2019)
- Oklahoma severe storms, straight-line winds, tornadoes and flooding (2019)
- South Carolina Hurricane Florence (2018)
- South Dakota severe storms, tornadoes and flooding (2019)
- South Dakota severe winter storm, snowstorm and flooding (2019)
- Texas severe storms and flooding (2018)
- Texas severe storms and flooding (2019)
- Texas Tropical Storm Imelda (2019)
- Wisconsin severe storms, tornadoes, straight-line winds, flooding and landslides (2018)
What does 'inoperable' mean exactly?
"Inoperable" does not mean that the business had to shut down, close its doors or suspend operations for any given period of time. A business can qualify for the income tax credit if they experienced any of several different factors that impacted their normal operations. For example, a business that realizes an increase in employee absence; a decrease in sales or deliveries; a decrease in the number of customers who physically visit the business; an interruption, suspension, or cancellation to your supply chain; a reduction in production, manufacturing, etc.; or a business forced to close outright could qualify for this income tax credit.
There are no specific metrics, percentages, or worksheets required to prove that your business was inoperable. Rather, if your business had a location within one of these areas during one of the qualifying government-declared disasters listed above and was rendered inoperable for any period of time, your business could qualify.
For organizations with fewer than 100 employees, calculating the credit is easier, and owners should be able to claim the credit for all of the employees at the respective location.
How much could I expect to receive?
If your business meets these requirements and is within the disaster zones, you could be eligible to receive up to $2,400 for each eligible employee for wages paid or incurred during the time the employer's business was located in a qualifying disaster zone.
Employers can seek a 40% credit for wages paid to employees (up to a maximum wage base of $6,000). This covers the period the business location became inoperable due to the disaster(s) up until the date the location resumed operations, or for 150 days from the disaster, whichever comes first.
How do I claim disaster credits for my business?
Business owners should consult with a tax professional or HR/payroll service to help make the most of your potential tax credit opportunity. To help prepare a claim, teams at Equifax working on tax credits for our customers require location data that matches one of the disasters on the IRS list, payroll information for the disaster period, and business information on the following:
- How long did the disaster impact your operations?
- How long do you expect operations will be impacted for those locations that are still inoperable?
- Finally, did you pay your employees during that time frame?
Employers who would like to apply for the credit on their own could review and complete IRS Form 5884-A to claim the ERC. There are specific lines within Form 5884-A that align with the qualified disaster declarations. The IRS website has additional information about how to document tax credits and submit the claim part of a business tax return.
In many cases, applying for disaster credits can have a significant impact on small business owners. The Tax Foundation estimates that over 90% of small businesses are actually pass-through entities, meaning that they are not subject to the corporation income tax; rather, their income is reported on the owner's (or partners') individual tax returns. This could mean those small businesses claiming the disaster tax credit receive a dollar-for-dollar reduction in the amount of income tax that the owners or partners would otherwise have to personally pay on their individual tax return.
For those small business owners, though, it means they must be extremely vigilant about documentation. As noted above and indicated in the IRS instructions for Form 5884-A, there are a lot of details required when attempting to claim the disaster credit. Small businesses need to prove how they qualify for the credit and, how long they have qualified. They must also provide payroll information for each employee whose wages they will be claiming and exactly how they performed the calculations for each employee. In other words, the kinds of things an auditor might look to review when evaluating a tax return. It's one of the reasons many small business owners seek tax professionals to help prepare their ERC claims.
For organizations that fit the descriptions and may be eligible, the deadline for claiming credits on an original return is fast approaching – compiling and filing need to be completed soon.