Key Tax Credits Modified & Extended Through the 2021 Consolidated Appropriations Act
The 2021 Consolidated Appropriations Act (Act) was signed into law on December 27, 2020. The Act includes changes and extensions for several federal tax credit provisions, creating opportunities for employers struggling to retain employees throughout the COVID-19 pandemic and in the aftermath of several natural disasters that occurred in 2020.
Extensions of the Work Opportunity Tax Credit (WOTC), Federal Empowerment Zone Employment Credit (FedEZ), and Indian Employment Credit (IEC) allow employers to use credits to offset hiring and payroll costs. The Act extends the WOTC for five years through December 31, 2025. The WOTC provides a general business credit of up to $9,600 per qualified hire and is available to employers who hire and retain individuals from certain targeted groups who have consistently faced significant barriers to employment.
The FedEZ also is extended five years through December 31, 2025. The FedEZ provides a credit of up to $3,000 per employee per year for services performed while the employee is a qualified zone employee. Qualified employees both live and work in qualified empowerment zones, which encourages employers to hire and retain employees in distressed urban and rural areas that are designated by the federal government for revitalization.
The IEC is extended one year through December 31, 2021. The IEC provides a tax credit of up to $4,000 per employee per year to incentivize employers to hire enrolled members of Indian tribes (or their spouses) who live on or near an Indian reservation and perform substantially all of their services for the employer within an Indian reservation.
Finally, the credit associated with the Family Medical Leave Act (FMLA) is extended for five years to include wages paid in tax years beginning on or before December 31, 2025. The FMLA credit provides a tax credit for employers who provide paid family and medical leave to their employees. Eligible employers may claim the credit, which is equal to a percentage of wages they pay to qualifying employees while they are on family and medical leave. Employers must have a written policy in place giving all qualifying employees a minimum of 50 percent wage replacement for at least two weeks to qualify for the credit. A qualifying employee is any employee under the Fair Labor Standards Act who has been employed by the employer for one year or more and who, for the preceding year, had compensation of not more than a certain amount.
Disaster Zone Tax Credits
In addition to the challenges employers faced due to the COVID-19 pandemic, many were affected by unrelated natural disasters such as hurricanes and wildfires throughout 2020. The Act includes a disaster zone (DZ) credit that provides relief in the form of an income tax credit of up to $2,400 per employee for employers who are located in disaster zones, rendered inoperable by those disasters, and continued to pay employees until significant operations resumed.
The DZ credit is equal to 40 percent of wages, not to exceed $6,000 per employee, paid to or incurred for an eligible employee beginning on the date the disaster first rendered the trade or business inoperable at the employee’s principal place of employment and ending on the date that significant operations resumed at the employee’s principal place of employment or 150 days after the last day of the disaster incident period, whichever is earlier. Qualified wages do not include wages that were paid with forgiven Paycheck Protection Program loan funds or wages used for purposes of the Employee Retention Credit (ERC), Research Credit, IEC, FMLA, WOTC, or FedEZ.
Employers located in specified disaster zones in Alabama, California, Florida, Iowa, Louisiana, Mississippi, Oregon, Puerto Rico, South Carolina, Tennessee, and Utah should assess any effect suffered due to a natural disaster in 2020, as they may qualify for the DZ credit. To determine qualified wages paid to or incurred for employees, employers should analyze when an affected location first became inoperable and when significant operations resumed.
Qualified tax-exempt organizations affected by 2020 disasters also may claim the DZ credit in the form of a nonrefundable payroll tax credit.
Employee Retention Credit
The Act also extends the ERC for six months through June 30, 2021, and includes prospective modifications effective January 1, 2021, through June 30, 2021, that render the credit more valuable and accessible for eligible employers. For more details on extensions and modifications to the ERC, see our recent BKD Thoughtware® article.
To learn more about these credits and how to take advantage of their benefits, contact your BKD Trusted Advisor™ or submit the Contact Us form below.