In a recent news release, the IRS announced further guidance on a new business tax credit created by the Tax Cuts and Jobs Act. Eligible employers who provide paid family and medical leave to their employees may qualify for a credit in tax years 2018 and 2019.
Under the new guidance, eligible employers can retroactively establish a qualifying paid family and medical leave program or amend an existing program to claim a credit for qualifying leave previously provided during 2018.
Credit eligibility requirements
The written policy must be “in place” before the leave is taken to qualify for the credit. A policy is considered in place on the later of its adoption date or effective date. But the guidance provides a transition rule for 2018. To establish a retroactive policy, the plan must be adopted or amended by December 31, 2018, and the employer must bring its leave practices into compliance with the terms of the retroactive policy for the entire period covered, which includes making any retroactive leave payments before the end of the tax year.
For example, let’s say an employer adopts a written policy on October 15, 2018, retroactive to January 1, 2018. If the employer retroactively pays an employee who took unpaid family and medical leave in February at the appropriate rate, it can claim the credit for that pay.
Paid leave provided under the employer’s short-term disability program can be characterized as family and medical leave if it otherwise meets the requirements to be such leave. It can qualify as covered leave whether self-insured or provided through a short-term disability insurance policy.
Requirements for the leave
The leave must be available to all qualifying employees who have worked at the company for at least one year and whose compensation for the preceding year doesn’t exceed 60% of the “amount applicable” for that year. For 2017, the amount applicable is $120,000, so a qualifying employee in 2018 may have earned no more than $72,000 in 2017.
The notice also explains how to determine an employee’s normal wages to ensure the employee is, as required, paid at least 50% of those wages while on leave. Overtime (other than regularly scheduled overtime) and discretionary bonuses aren’t included in wages. Any leave paid by a state or local government, or required by state or local law should not be used in the calculation of the credit.
For more information on the requirements of an eligible Family and Medical Leave policy and the new guidance, please contact a member of your DGC engagement team or Steve Minson, CPA, MST at 781-937-5120 / firstname.lastname@example.org.