Natural disasters create ripples of loss to communities that far exceed the physical damage to property. Businesses feel the financial impact almost instantaneously — even if their offices are unharmed — because their customers may be unwilling or unable to visit. Employees of those businesses can be left picking up the tab as a result of decreased business revenue during a time when many employees are least able to afford it. For those most affected by natural disasters, help can't come soon enough.
Congress routinely works to enact relief packages to help impacted businesses and individuals. Unfortunately, today's political climate makes it difficult to act quickly, with many of these bills taking months or years to be signed into law. One common provision in these relief packages is a tax credit commonly referred to as the Disaster Employee Retention Credit. Unfortunately, the Disaster ERC provision has expired, and the official list of certified disasters has not been approved for 2021 or 2022. As a result, numerous businesses across the country devastated by hurricanes, floods, fires and tornadoes struggle to keep their doors open.
While we can't control the pace of the legislative process, there are critical steps that business owners and their tax professionals can take immediately following a disaster to (1) tentatively determine whether and to what extent the Disaster ERC might be available and (2) position the business to file a claim for the credits when the legislation is enacted.
What is the Disaster ERC?
Congress created the first Disaster ERC in 2005 as a response to Hurricane Katrina. The Katrina Emergency Tax Relief Act of 2005 created an income tax credit for businesses that retained their employees in the wake of the storm's devastation. Congress designed the Disaster ERC from the beginning to help prevent mass unemployment by incentivizing businesses to remain open — and retain their employees — during the difficult time of recovery. The success of its inaugural iteration made the 2005 Disaster ERC the model for subsequent legislation identifying qualifying disasters and disaster zones.
After 2005, Congress consistently passed Disaster ERC legislation covering each year until recently. This legislation historically received bipartisan support, which allowed Congress to pass the relief packages before the end of the affected year. Recently, that was true for 2017, 2019 and 2020. The Disaster ERC for 2018 took more than a year to become law, and the legislation addressing the 2021 natural disasters stalled in the last Congress. Accordingly, the 118th Congress will be responsible for legislation addressing hardship caused by disasters in 2021, 2022, 2023 and 2024. Without congressional priority and bipartisan support, many businesses impacted by 2021 and 2022 disasters are and will be forced to make unenviable decisions in terms of employee retention and business continuity.
Preparing for passage
Congress's consistency in passing Disaster ERC legislation provides a high level of hope and a realistic expectation that 2021 and 2022 legislation will soon be proposed and enacted. In the meantime, tax professionals can help businesses (1) determine whether and to what extent they might qualify for Disaster ERCs and (2) position the business to file a claim for the credits when the legislation is enacted.
After a hurricane, flood or other natural disaster, the last thing business owners are thinking about is a tax credit that doesn't even exist. For this reason, tax professionals should be proactive in their outreach to help businesses document and maintain the information that will be needed to claim Disaster ERCs. This information includes payroll data as well as evidence — photographic, narrative or otherwise — showing the true impact of the disaster on the business. Because businesses deal with disasters differently, special care should be given to identifying and documenting all affected areas, which might include one or more of the following:
- Damage to essential facilities;
- Supply chain disruptions;
- Impact to customers that affects business operations; and
- Employee access to business premises.
It's vital to take a personalized approach to each business in order to understand their unique circumstances, help them determine whether they are eligible for Disaster ERCs, and accurately calculate their potential credits.
Even as Congress works to draft and pass the Disaster ERC legislation for 2021, tax professionals can help affected businesses by becoming familiar with Disaster ERCs. Given the complexity of Disaster ERC legislation, tax professionals often work with tax credit consulting firms that focus on helping businesses determine whether they qualify for Disaster ERCs and process the complex business datasets to calculate potential credit availability. Tax professionals, in turn, use the resulting data to prepare and file claims for Disaster ERCs on behalf of affected businesses. Helping these businesses should not end here because the IRS has an opportunity to audit these claims. Accordingly, it's important for tax professionals to select a credit consulting firm that stands behind its work and provides support throughout the pendency of an IRS challenge.
Working together, tax professionals and credit consultants have an opportunity to provide an important service to businesses during a particularly vulnerable time.
