08 Nov New Tax Law Credit for Your Business?
You compete for employee talent in many ways–perhaps your company may be eligible for the medical and family leave policy.
The good news on this front is that your federal government may have given you a tax credit (yes, that lovely dollar-for-dollar offset to your taxes) for what you wanted to do anyway.
The Tax Cuts and Jobs Act (TCJA) establishes a new federal income tax credit for employers that provide qualifying paid family and medical leave benefits to their employees.
This new tax credit is available for two employer tax years only—those beginning between January 1, 2018, and December 31, 2019. If your business operates on a calendar year for tax purposes, you can put your business in a position today to claim the tax credit for both the 2018 and 2019 tax years. But you will need to hurry.
If eligible, you can claim a credit equal to 12.5 percent of wages paid to “qualifying employees” (defined later) who are on family and medical leave, as long as the leave payments are at least 50 percent of the normal wages paid to those employees.
You can increase the credit beyond the 12.5 percent. For each 1 percent increase in medical leave payments over the 50 percent threshold, the credit rate increases by 0.25 percent, up to a maximum credit rate of 25 percent.
A qualifying employee is one who has been employed by your company for at least one year and whose compensation last year was less than $72,000.
For purposes of qualifying for the credit, “family and medical leave” is defined as leave taken by a qualified employee for any of the following reasons:
- The birth of the employee’s son or daughter, in order to care for the son or daughter.
- The placement of a son or daughter with the employee for adoption or foster care.
- A serious health condition of the employee’s spouse, son, daughter, or parent.
- A serious health condition that makes the employee unable to perform the functions of his or her position.
- Any qualifying exigency arising out of the fact that the employee’s spouse, son, daughter, or parent is a member of the Armed Forces (including the National Guard and Reserves) who is on covered active duty or has been notified of an impending call or an order to covered active duty.
- A serious injury or illness of a covered service member who is the employee’s spouse, son, daughter, parent, or next of kin.
Employer-provided vacation leave, personal leave, or medical or sick leave (other than qualifying leave as defined above) is not considered leave eligible for the credit. Also, leave that is paid by a state or local government or that is required by state or local law does not create leave eligible for the credit.
The maximum length of paid family and medical leave taken by a specific employee who can qualify for the credit is 12 weeks per tax year of the employer.
When Must Your Company’s Family and Medical Leave Policy Be Established?
Good question. The general rule is that to claim the credit for your company’s first tax year that begins after December 31, 2017, your written family and medical leave policy must be in place before the paid family and medical leave for which the credit will be claimed.
But under a favorable transition rule for the first tax year beginning after December 31, 2017, your company’s written leave policy (or an amendment to an existing leave policy) will be considered in place as of the effective date of the policy (or amendment) rather than the later adoption date.
So if you make the effective date of the policy January 1, 2018, your company can claim the credit for qualifying family and medical leave payments made on or after that date. This transition rule is available if
- the policy or amendment is adopted on or before December 31, 2018, and
- you bring your leave practices into compliance with the terms of the retroactive policy (or amendment) for the entire period covered by the policy (or amendment), including making any retroactive leave payments by no later than the last day of the tax year.
Example. Your company uses the calendar year for tax purposes. Back in January, Wanda Workshard took two weeks of unpaid family and medical leave for the period beginning on January 15, 2018.
On November 15, 2018, your company adopts a written policy that satisfies the family and medical leave policy requirements explained earlier and makes that policy effective retroactively as of January 1, 2018.
On or before December 31, 2018, the company pays Wanda for two weeks of leave at 50 percent of her normal pay, as specified by the new policy.
Assuming all the other requirements for the family and medical leave credit are met, your company can claim the credit for the 2018 leave payments made to Wanda.
Mark S. Fineberg, CPA