For Employers in Puerto Rico Impacted by Last Year's Catastrophic Hurricanes: You May Now Be Eligible to Claim a Special Tax Credit

tax credits

Hundreds of businesses in hurricane-affected areas of the United States — from Texas to Florida and Georgia — have already asked ADP to help them identify and capture employee retention credits for which they are eligible.

Almost a year after Hurricanes Irma and Maria devastated Puerto Rico, an unincorporated territory of the United States, the island continues to face significant recovery challenges. However, as the government works to fully restore the electric grid, roads, and other infrastructure, more help is on the way for employers in Puerto Rico starting in early June – in the form of an Employee Retention Credit (ERC) that will be paid out as a direct-cash grant.

Unfortunately, receiving the Puerto Rico ERC isn't automatic. To claim the ERC, employers must meet certain requirements, provide a substantial amount of complex documentation, accurately calculate the amount for which you are eligible, and correctly apply for the ERC online. Navigating this process takes time and expertise that many employers may not have – but how many businesses can afford to leave money on the table?

First, Some Background

After successive hurricanes hit Texas, Florida, Georgia, Puerto Rico, and the U.S. Virgin Islands, the U.S. Congress acted quickly to provide tax relief for impacted employees and businesses by passing the Disaster Tax Relief and Airport and Airway Extension Act of 2017. Signed into law on September 29, it included an income tax credit for employers who continued to pay their employees in the designated disaster areas during a "period of inoperability" caused by one or more of the hurricanes.

What Makes This Tax Credit Different?

In all affected areas, except Puerto Rico (which has its own tax system), the ERC has been available to eligible employers in the form of a traditional federal income tax credit. However, the Departamento de Hacienda (Treasury in Puerto Rico) recently reached an implementation agreement with the U.S. Treasury, which funds ERCs with federal money. The implementation agreement permits Puerto Rico to use its own online system to administer ERC claims and authorize a direct cash payment option for eligible employers located in Puerto Rico. Specifically, Puerto Rico ERC applications must be submitted exclusively online (no paper applications are permitted), and applicable ERC amounts will be deposited directly into eligible employers' bank accounts, unlike eligible employers in the United States who instead must claim ERCs on their income tax returns. Once launched, Puerto Rico's online system will remain open through November 30, 2018 to accept and process ERC applications.

Who Is Eligible for the Credit?

To be eligible, an employer must have operated an active business in the declared disaster zone as of the date of the applicable hurricane, must have been rendered inoperable on any day after the date of the hurricane as a result of damage from the hurricane, and must have continued to pay eligible employees (i.e., employees whose principal place of employment on the date of the hurricane was in the disaster area) during the period of inoperability. For Hurricane Maria, the effective date is September 16, 2017, and any employer operating in Puerto Rico is potentially eligible. For employers located in specific municipalities impacted by Hurricane Irma, the effective date is September 4, 2017. The period of eligibility ends no later than December 31, 2017.

How Much Is the Credit?

The amount of credit depends on the size of the company. For large employers (defined as employers with taxable income in excess of $10 million), the maximum credit is 26 percent of the first $6,000 of eligible wages, or up to $1,560 per employee. For employers with taxable income of $10 million or less, the maximum credit is 32 percent of the first $6,000 of eligible wages, or up to $1,920 per employee.

What Adds to the Complexity of the Tax Credit Application?

Calculating the credit requires the collection and verification of a significant amount of information. It involves a thorough review of payroll files, identifying eligible locations and employees, determining what wages qualify and were paid during periods of business inoperability, determining when the business resumed significant operations, and applying the wage limit to calculate the applicable credit amounts.

Understanding terms such as "eligible employees," "periods of inoperability," and "qualifying wages" are indispensable to submitting an accurate application. These terms also add to the complex administrative burden of an employer's internal staff.

Why You Should Work with ADP®

Hundreds of businesses in hurricane-affected areas of the United States – from Texas to Florida and Georgia – have already asked ADP to help them identify and capture ERCs for which they are eligible. Because of ADP's experience with the U.S. version of the ERC, as well as similar U.S. hurricane employee retention credits available following previous storms, ADP has a high level of experience in helping employers determine periods of inoperability, qualified wages, and who are eligible employees.

Bottom line? There's a complex administrative burden to all this that many businesses simply do not have the time or expertise to take on themselves. Working with ADP helps employers identify and claim the tax credits for which they are eligible, with substantially less time and effort than it would take had they tried to do it themselves.

Best yet, at the end of the day, employers do not have to worry that they've left this valuable tax credit on the table.

The information provided in this document is for information purposes only and not for the purpose of providing legal, accounting, or tax advice. The information and services ADP provides should not be deemed a substitute for the advice of any such professional. Such information is by nature subject to revision and may not be the most current information available.
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