This Insights article was contributed by Chris Massey, CPA (NC License Number 39147), a tax manager at Adam Shay CPA, PLLC.
 
It has been a wild ride the past few years for Wilmingtonians and North Carolinians alike considering the significant hurricanes and now a global pandemic impacting our community.  Typically, with natural disasters and other extraordinary events comes varying degrees of financial relief via new tax legislation. Recently, there have been several new tax laws introduced in order to provide some relief to businesses that have been adversely affected by these events. For businesses in Southeastern NC, this is primarily Hurricane Florence and COVID-19. This article is intended to cover one of these new opportunities, known as the employee retention tax credit.
 
The employee retention tax credit is generally available to local businesses impacted by either Hurricane Florence (and other federally-declared disasters), COVID-19, or both. However, in each case the tax credit has different rules. For example, wages paid by businesses following Hurricane Florence may receive a §38 tax credit – a credit against income taxes – whereas businesses that were impacted by COVID-19 may receive a credit against certain payroll taxes.  The latter credit is only available if the taxpayer did not receive a PPP loan, or received it and returned the funds. To further juxtapose these differences, we summarize each credit below.

Hurricane Florence Employee Retention Tax Credit

In December 2019, the Consolidated Appropriations Act, 2020 passed into law allowing an income tax credit for qualified wages paid or incurred following Hurricane Florence. Generally, the credit is calculated as 40% of wages up to $6,000, or $2,400 max for each qualified employee (even if the employee performed services) during the “incident period” set forth as follows.
 
The incident period starts from the date the business became inoperable and ends the date the business resumed “significant operations” but only up to 150 days following the incident. “Significant operations” is not defined by the Act and depends on the facts and circumstances of each situation.  In fact, it is typically easier to provide examples of when significant operations have not resumed, such as:
 

• Reduced sales or customer visits.
• Increased employee absence.
• Reduced production or employee attendance.

Due to the timing of when the Act passed, capitalizing on this opportunity requires amending the business’ 2018 tax returns and owner’s personal 2018 tax returns. Note that this tax credit only offsets regular income tax and not self-employment tax.

COVID-19-related Employee Retention Tax Credit

On March 25th of this year, the CARES Act was passed allowing for a refundable payroll tax credit for wages paid while an employer’s operations have been fully or partially suspended as a result of an appropriate government order due to COVID-19, or during the quarter in which the employer has a greater than 50% reduction in quarterly gross receipts.

As mentioned earlier, a business that has received (or receives) a PPP loan does not qualify for the COVID-19 employee retention tax credit. This is true even if the PPP loan is ultimately not forgiven, in part or whole. However, if the funds were returned by May 18th, 2020 then the business may still qualify.

For those that do qualify, the credit is computed as 50% of the wages paid after March 20, 2020 to each qualified employee up to $10,000 each (or up to $5,000 of tax credits for each qualified employee).

Employers may claim this credit on their federal quarterly employment tax returns (Forms 941, see below). 


 
Employers may also request a refund of the tax credits if they exceed the payroll taxes due by filing Form 7200 with the IRS.
 
There is also proposed legislation which would expand the COVID-19 related payroll tax credits. If passed, it would increase the tax credit to 65% of wages up to $10,000 (up from 50%) and instead of $10,000 total wages would be $10,000 of wages per quarter (max $30,000 wages per employee).

A table summarizing the major differences is included below:
 

			Hurricane Florence	COVID-19	Expanded COVID-19 (Proposed)
Tax Year			2018/2019	2020	2020
% of Wages			40%	50%	65%
Max Wages per Employee			$6,000	$10,000	$30,000
Max Credit per Employee			$2,400	$5,000	$19,500
Income Tax Credit			X
Federal Payroll Tax Credit				X	X
Advance Payment				X	X

 
Everyone’s situation is different and requires specific analysis in order to make the best decision. To discuss your situation and what may make economic sense for you, contact us at Adam Shay CPA, PLLC.
 

Caroline Montgomery, CPA (NC License Number 39017), MSA, is tax manager and partner of Adam Shay CPA, PLLC. The most rewarding part of what she does is helping business owners and individuals achieve their goals, all while working with a dynamic team that is growing quickly. The firm focuses on a proactive approach by encouraging clients to minimize taxes via income tax planning and projections, or by focusing on other areas of their business as part of the firm's Virtual CFO services. The firm also offers tax preparation, fraud and forensic accounting and tax issue resolution services. She moved to Wilmington in 2014 and started at the firm in 2015. Caroline graduated with her her undergraduate and graduate degree in 2010 from East Carolina University. She is actively involved with NourishNC as their Treasurer and enjoys volunteering with various organizations throughout New Hanover County. In her free time, Caroline enjoys spending time with her husband, Mike, and dog, Mason, as well as travelling and going to the beach.