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FAQs for Hurricane Victims - Employee Retention Credit

FAQs for Victims of Hurricanes Katrina, Rita and Wilma, Victims of the May 4, 2007, Kansas Storms and Tornadoes, and Victims of the Midwestern Disasters of 2008

(03/09) Q: An employer reimburses its employees’ temporary living expenses in an area impacted by a Midwestern disaster of 2008 for which the federal government provided individual assistance (as defined in Table 1 of Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas). The payments qualify as qualified disaster relief payments and are excludable from the employees’ gross incomes under IRC section 139. Can the employer claim the employee retention credit for the reimbursements?

A: No. Generally, qualified wages for the employee retention credit are payments that qualify as wages for purposes of the Federal Unemployment Tax Act. Disaster relief payments are not wages for purposes of the FUTA.

(03/09) Q: An employer owns several restaurants in several Midwestern disaster areas for which the federal government provided individual assistance (as defined in Table 1 of Publication 4492-B). All of the restaurants were rendered inoperable by the disaster. The restaurants resumed significant operations and reopened at various times during 2008 and 2009. Does the “significant operations” test apply separately to each restaurant or to the combined restaurant business?

A: The “significant operations” test applies to each “principal place of employment.” Thus, it applies separately to each restaurant. See Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas, for additional information.

Similar relief was also provided to employers located in the GO Zone in response to Hurricane Katrina in 2005. For additional information, see Publication 4492. Similar relief was also provided in response to the May 4, 2007, Kansas Storms and Tornadoes. For additional information, see Publication 4492-A.

(03/09) Q: An employer owned a retail establishment located in an area impacted by a Midwestern disaster that occurred in June 2008. The establishment was rendered inoperable by disaster. The employer continued to pay wages to its employees. On November 1, 2008, the employer decided not to rehabilitate the building in which the business was located, permanently laid off the employees as of November 30, 2008, and continued to pay the employees through November 2008. Can the employer claim the retention credit for any of the payments?

A: Yes, if the employer is an eligible employer who conducted an active trade or business in a Midwestern disaster area identified in Table 1 of Publication 4492-B, the employer can claim the credit with respect to all the payments, limited to $6,000 paid to each employee.

An eligible employer for purposes of the Midwestern disasters is any employer who meets all of the following criteria:

  1. Employed an average of not more than 200 employees on business days during the tax year before the applicable disaster date.
  2. Conducted an active trade or business on the applicable disaster date in a Midwestern disaster area defined in Table 1 of Publication 4492-B.
  3. Whose trade or business was inoperable on any day after the applicable disaster date and before January 1, 2009, because of the damage caused by the severe storms, tornadoes, or flooding.

See Publication 4492 for information on the employee retention credit that was made available to employers located in the GO Zone in response to Hurricane Katrina in 2005. See Publication 4492-A for information on the employee retention credit that was made available to employers impacted by the May 4, 2007, Kansas Storms and Tornadoes.

(03/09) Q: A business operating in each of the 50 states and maintains at least one office in each state. One of these offices was located in a Midwestern area that gave rise to a declaration of a major disaster by the President in June 2008. The office was rendered inoperable by the disaster. The business operations continued despite the disruptions to the office. Some of the employees assigned to the office were able to continue their duties from outside the office. The employer continued to pay all of the employees. The office reopened in 2009. Is the retention credit available to the employer?

A: Yes. The credit is based on wages paid to an employee whose principal place of employment on the applicable disaster start date was in the Midwestern disaster area, and the business was rendered inoperable because of the disaster any day after the applicable disaster date and before January 1, 2008. If the employer is an eligible employer as defined above, the employer can claim the credit with respect to the wages paid to an employee in the Midwestern disaster area, whether or not the employee continued to perform any services. The credit is limited to $6,000 per employee.

Similar relief was also provided to employers located in the GO Zone in response to Hurricane Katrina in 2005. For additional information, see Publication 4492. Similar relief was also provided in response to the May 4, 2007, Kansas Storms and Tornadoes. For additional information, see Publication 4492-A.

(03/09) Q: Qualified wages are defined in part as those paid on or before the date on which the trade or business has resumed significant operations at the employee’s principal place of employment in a Midwestern disaster area. When does a business resume “significant operations”?

A: Whether a business has resumed significant operations is a facts and circumstances determination that takes into account the specific nature of the business. Consequently, there is no single answer for all trades or businesses. In making the determination, an employer should use a reasonable and good faith interpretation of what “significant” means in the context of his or her business. Generally, however, the term would not mean that the level of operations has met or exceeded the pre-hurricane level of operations.

Similar relief was also provided to employers located in the GO Zone in response to Hurricane Katrina in 2005. For additional information, see Publication 4492. Similar relief was also provided in response to the May 4, 2007, Kansas Storms and Tornadoes. For additional information, see Publication 4492-A.

(03/09) Q: To meet the inoperable requirement, must the building in which the employer conducted an active trade or business be damaged, or can the inoperable requirement be met for other reasons?

A: The statute requires that the business be inoperable “as a result of damage sustained by reason of” the Midwestern Disasters. The damage need not be to the employer’s place of business. For this purpose, a business is inoperable if, for example, because of the disaster, the business is physically inaccessible to employees, raw materials, utilities, or customers.

Similar relief was also provided to employers located in the GO Zone in response to Hurricane Katrina in 2005. For additional information, see Publication 4492. Similar relief was also provided in response to the May 4, 2007, Kansas Storms and Tornadoes. For additional information, see Publication 4492-A.

(03/09) Q: A business located in a Midwestern disaster area was rendered inoperable by the disaster. The employer decided to permanently move the business to a new location in the Midwestern disaster area. The business opened at the new location on December 5, 2008. Is the opening of the business in a new location in the Midwestern disaster area treated as the resumption of significant operations at the employee’s principal place of employment?

A: No. The opening at the new location is not treated as the resumption of operations at the employee’s principal place of employment. Thus, the employee’s wage payments made through December 31, 2008, are eligible for the credit, because the business never resumed operations after the applicable disaster date at the employee’s work place. This is so whether the employee worked at another location after the employee’s principal place of employment was rendered inoperable, whether the employee resumed work at the new business location when it opened, or whether the employee permanently transferred to another location.

Similar relief was also provided to employers located in the GO Zone in response to Hurricane Katrina in 2005. For additional information, see Publication 4492. Similar relief was also provided in response to the May 4, 2007, Kansas Storms and Tornadoes. For additional information, see Publication 4492-A.

(03/09) Q: A calendar year employer hired an employee on January 1, 2008, at a salary of $1,000 a month. The employee was certified by the state employment security agency (same as the state workforce agency) as a member of a targeted group for the WOTC. The employer’s sole business location in a Midwestern disaster area was rendered inoperable by the disaster. Significant operations did not resume before January 1, 2009. Is the employer (who would otherwise be considered an eligible employer) entitled to claim both the WOTC and the employee retention credit with respect to the employee on its 2008 return?

A: No. The employer cannot claim both the WOTC and the employee retention credit with respect to the same employee for the same period. In this case, the employer can claim the WOTC for $6,000 in wages paid for services rendered during the period January 1, 2008, through June 30, 2008. The employer can claim the employee retention credit for wages paid during the period beginning on applicable disaster date, and ending on December 31, 2008.

Similar relief was also provided to employers located in the GO Zone in response to Hurricane Katrina in 2005. For additional information, see Publication 4492. Similar relief was also provided in response to the May 4, 2007, Kansas Storms and Tornadoes. For additional information, see Publication 4492-A.

(03/09) Q: An employer’s business location in Louisiana was rendered inoperable by Hurricane Katrina on August 28, 2005. The employer resumed significant operations at that location on September 15, 2005. The same business location was rendered inoperable by Hurricane Rita on September 23, 2005, and did not resume significant operations before January 1, 2006. Can the employer claim the employee retention credit with respect to wages paid to an employee during each period of inoperation?

A: Yes. While the employer cannot claim the employee retention credit for employers affected by Hurricane Katrina and for employers affected by Hurricane Rita for the same period with respect to wages paid to an employee, here, the wages were paid during different periods. Therefore, the employer can claim the credit for employers affected by Hurricane Katrina for wages paid to the employee during the period beginning on August 29, 2005, and ending on September 15, 2005. The employer can claim the credit for employers affected by Hurricane Rita for wages paid to the employee during the period beginning on September 24, 2005, and ending on December 31, 2005. However, the total amount of wages the employer can take into account for the employee retention credit with respect to an employee is $6,000.

See Publication 4492 for additional information specific to Hurricanes Katrina, Wilma and Rita. See Publication 4492-A for employee retention credit relief provided in response to the May 4, 2007, Kansas Storms and Tornadoes. See Publication 4492-B for employee retention credit relief provided to certain of the Midwestern disaster areas.

(03/09) Q: An employer is in the construction business. On June 1, 2008, a group of its employees was working at a job site in Adair County, Missouri. The job site was damaged by as a result of the Midwestern area disaster that struck Adair County, Missouri on June 1, 2008. As a result of the disaster, the employees were no longer able to perform their duties at the employer’s job site in Adair County. For purposes of the employee retention credit, is the employer an eligible employer? Are the employees eligible employees?

A: An eligible employer for purposes of the Midwestern disasters is any employer who meets all of the following criteria:

  1. Employed an average of not more than 200 employees on business days during the tax year before the applicable disaster date.
  2. Conducted an active trade or business on the applicable disaster date in a Midwestern disaster area defined in Table 1 of Publication 4492-B.
  3. Whose trade or business was inoperable on any day after the applicable disaster date and before January 1, 2009, because of the damage caused by the severe storms, tornadoes, or flooding.

Here, if the requirements set forth above are met; therefore, the employer is an eligible employer because it was conducting an active business in Adair County, Missouri on June 1, 2008, the applicable disaster start date, and the business was rendered inoperable by the disaster. The employees are eligible employees because their principal place of employment on the June 1, 2008, was Adair, Missouri. See Table 1 of Publication 4492-B for a listing of the Midwestern disasters eligible for this relief and the applicable disaster start dates.

Similar relief was also provided to employers located in the GO Zone in response to Hurricane Katrina in 2005. For additional information, see Publication 4492. Similar relief was also provided in response to the May 4, 2007, Kansas Storms and Tornadoes. For additional information, see Publication 4492-A.

(03/09) Q: Are wages paid to an employee whose principal place of employment is not in one of the Midwestern area counties listed in Table 1 of Publication 4492-B eligible for the employee retention credit?

A: No. If an employee’s principal place of employment is located outside an eligible Midwestern disaster area, then wages paid to the employee are not eligible for the credit.

(03/09) Q: The employee retention credit does not offset alternative minimum tax (AMT). The tax law enacted for NY (9/11) specifically allowed the credits to offset all tax including AMT. The IRS did not make an allowance for AMT regarding the Katrina employee retention credit; will it do so with respect to the Midwestern disasters?

A: The employee retention credit may not be available to middle income S corporation and LLC owners who are subject to the alternative minimum tax because of the limitation in section 38(c)(1). Section 38(c)(3) provides a special rule for those claiming the New York Liberty Zone credit. A similar special rule is not available to taxpayers in the Midwestern disaster areas claiming the employee retention credit.

Even so, if the taxpayer is not able to claim the retention credit for 2008 because his tentative minimum tax is too high, he can nevertheless carry the credit forward 20 years. Thus, the credit will not necessarily be lost, although it may not be currently available. Also, we note that the retention credit was not added to the list under section 196 of business credits for which a deduction is available if they ultimately cannot be used as a credit at the end of the carryover period.

(03/09) Q: If a company is closed for a time as a result of a Midwestern disaster and requires the employees to use their vacation time and/or sick time up, can the amounts paid to the employees for their vacation/sick time while the company was closed qualify for the employee retention credit?

A: Yes. Amounts paid to the employees for the vacation and sick times qualify for the employee retention credit. See Publication 4492-B for additional information.

Similar relief was also provided to employers located in the GO Zone in response to Hurricane Katrina in 2005. For additional information, see Publication 4492. Similar relief was also provided in response to the May 4, 2007, Kansas Storms and Tornadoes. For additional information, see Publication 4492-A.


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Page Last Reviewed or Updated: 29-Sep-2014