On December 20, 2019, President Trump signed the Further Consolidated Appropriations Act, 2020 (P.L. 116-94 (H.R. 1865)) (Act), which includes a variety of important tax provisions such as disaster tax relief and extensions of certain employment-related tax credits, including the Work Opportunity Tax Credit (WOTC).

Employee retention credits for certain 2018 and 2019 major disasters

Employers impacted by certain major disasters in 2018 and 2019 may be entitled to take an employee retention credit (DZ Credit) of up to $2,400 per employee if:

• Their trade or business was active at the time of the disaster, located in a qualified disaster zone and rendered inoperable as a result of the disaster
• They continued to pay to or incur wages for eligible employees (i.e., employed at the location immediately before the disaster)

Employers must claim the general business credit in the tax year qualified wages were paid to the employee. This credit equals 40% of wages (maximum of $6,000 per employee) paid to or incurred for an eligible employee:

• Beginning on the date on which the trade or business first became inoperable as a result of the disaster at the employee's principal place of employment immediately before the disaster and
• Ending on the earlier of:
• The date on which the trade or business resumed significant operations at the employee's principal place of employment or
• 150 days after the last day of the disaster incident period

The new DZ Credit is similar to the employee retention credits created by the Disaster Tax Relief and Airport and Airway Extension Act of 2017 and the Bipartisan Budget Act of 2018 in the aftermath of hurricanes Harvey, Irma, and Maria, and the 2017 California wildfires. It covers disaster zones, as determined by the President from January 1, 2018 to February 18, 2020, to warrant individual or individual and public assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Employers in the following states and U.S. territories may be eligible for the new DZ Credit: Alabama, Alaska, Arkansas, California, Florida, Georgia, Hawaii, Indiana, Iowa, Mississippi, Missouri, Nebraska, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Texas, Wisconsin, American Samoa, and the Northern Mariana Islands.

Extension of certain employment-related tax extenders that were set to expire on December 31, 2019

The WOTC, which was set to expire for wages paid to or incurred for individuals who began work after December 31, 2019, is extended through December 31, 2020. The WOTC provides a general business credit of up to $9,600 to employers that hire and retain individuals from certain targeted groups (e.g., long-term unemployed, veterans).

The employer-provided paid family and medical leave (PFML) credit, which was set to expire for wages paid in tax years beginning after December 31, 2019, is extended to include wages paid in tax years beginning on or before December 31, 2020. The PFML credit provides a general business credit of up to 25% of wages paid to qualifying employees taking leave for a reason covered under the federal Family and Medical Leave Act (FMLA). Employers must have a written policy in place giving all qualifying employees a minimum of 50% wage replacement for at least two weeks (pro-rated for part-time employees) in order to qualify for the PFML credit. Qualifying employees include employees who meet both of the following requirements:

• Have been employed by the employer for one year or more
• Had, for the preceding year, compensation that did not exceed 60% of the IRC Section 414(q)(1)(B)(i) threshold

The compensation threshold is $72,000 ($120,000 x 60%) for wages paid in 2018 and $75,000 ($125,000 x 60%) for wages paid in 2019. Paid leave provided under a short-term disability policy may qualify for the PFML credit if it meets the minimum requirements. See Notice 2018-71 for more details on the PFML credit.

Retroactive extension of expired tax extenders

The Act retroactively extends the Federal Empowerment Zone (FedEZ) credit that expired on December 31, 2017, to December 31, 2020. The FedEZ credit, which is up to $3,000 per employee per year, is available to businesses located in designated empowerment zones that hire and retain employees who live and work in the empowerment zone. Empowerment zones are generally distressed urban and rural areas that are designated by the federal government for revitalization through tax incentives and other assistance. The FedEZ credit is available to employers for both new hires and existing employees.

The Act also retroactively extends the Indian Employment Credit (IEC) that expired on December 31, 2017, to December 31, 2020. The IEC, which is up to $4,000 per employee per year, provides an incentive to businesses to hire certain individuals who live on or near an Indian reservation. A qualified employee for purposes of the IEC is an enrolled member of an Indian tribe, or his or her spouse, who performs substantially all of his or her services for the employer within an Indian reservation and also lives on or near that reservation. The IEC is available to employers for both new hires and existing employees.

Implications

The Act provides an important tax credit opportunity for employers that were impacted by major disasters in 2018 and 2019. Employers with locations in Alabama, Alaska, Arkansas, California, Florida, Georgia, Hawaii, Indiana, Iowa, Mississippi, Missouri, Nebraska, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Texas, Wisconsin, American Samoa, and the Northern Mariana Islands should determine if they are located in a qualified disaster zone and impacted by the hurricanes, wildfires, severe storms, and other disaster incidents that took place in the last two years. To determine qualified wages paid to or incurred for employees in these locations, employers should conduct a thorough analysis on a location-by-location basis to determine when their location(s) first became inoperable and resumed significant operations. Employers may be required to file an amended return in order to claim credits associated with disaster incidents that took place in 2018.

In addition to disaster relief, retroactive extensions of the FedEZ and IEC credits present an opportunity for employers to look back at their hiring and payroll data in 2018 to capture these credits. An amended return may be required to claim the credit for wages paid in 2018. Employers should continue to screen new applicants to determine eligibility for these credits as well as the WOTC.

Finally, with regard to the PFML credit, employers should analyze the eligibility requirements to determine if wages paid under their parental and/or short-term disability policies are eligible for the credit. While the credit has been extended for wages paid in tax years beginning on or before December 31, 2020, the credit is only available for wages paid to employees on or after the later of the qualifying policy's adoption date or the policy's effective date. Therefore, employers that do not currently have a qualifying paid family and medical leave policy, but are considering amending their policy or creating a new policy altogether, should account for this limitation in determining the credit's potential benefits.

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