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Employee Retention Credit

The Puerto Rico Department of Treasury (“PRTD”) recently announced that a new platform has been created and is now available for all Eligible Employers, as defined below, to request the Federal Benefits for the Retention of Employees after Hurricanes Irma and Maria (“Employee Retention Credit”). In Puerto Rico, the credit will be viewed as a refundable incentive to Eligible Employers. In addition, the PRDT released a guide for the credit, which includes details on the credit and examples.

The amount of the credit is based on a percentage of Eligible Wages paid during the Eligible Period, as discussed below. The Eligible Period begins on the date on which the place of business became inoperable due to one of the aforementioned hurricanes and ends at the earliest of, (1) when the business started Significant Operations or (2) December 31, 2017.

The credit will not be considered taxable income for the employer and will not affect the amount that the employer can claim as a deduction on its return for the compensation paid. In the case of a controlled group of corporations or a group of related entities, each member will calculate the credit individually.

  

Eligible Employer

The Eligible Employer is any taxpayer (individuals, partnerships, corporations, etc.), who conducted a commercial or business activity on September 4, 2017 (Hurricane Irma) [1] or September 16, 2017 (Hurricane Maria) that became inoperable as a result of damage caused by the applicable hurricane, that continued to pay salaries to its employees during the period in which it could not operate. However, not-for-profit organizations will not be considered Eligible Employers.

 

Eligible Employee

An Eligible Employee is any employee of an Eligible Employer on September 4, 2017 or September 16, depending on the hurricane under which the credit is being requested, where its principal was located in a “disaster zone” and which became inoperative after the hurricane and receives salary or wages reported on a Form 499R-2/W-2PR. Neither employees hired after this date (but still during the Eligible Period), nor independent contractors will be considered Eligible Employees.

 

Eligible Employee will also exclude the self-employed individual, family members hired by a self-employed individual or those employed by the “owner” of a corporation or partnership. For this purpose, “family members” include: son, daughter, step-son, step-daughter or their descendants; brother, sister; father, mother or their ancestors; step-father, step-mother; nephew, niece; uncle, aunt; brother/sister- in law; and father/mother in law. Likewise, an “owner” is any shareholder or partner who holds at least 51% of the ownership interest.

 

Eligible Wages

Eligible Wages is compensation accumulated or paid by an Eligible Employer to an Eligible Employee during the period the locale became inoperable due to any of the hurricanes and ending on the date “Significant Operations” started or December 31, 2017, whichever happened first. It include: salary, wages, commissions, bonuses and the fair market value of any compensation paid in any mean other than cash. However, disaster relief paid by the employer and payments made for professional services are excluded. Compensation paid will be considered Eligible Wages even if the employee did not perform any services during part or all the Eligible Period. Nevertheless, any supplementary payments received under the Social Security Act must be reduced from the salary paid to the employee. Eligible Wages may not exceed $6,000 per employee.

 

Compensation paid to an Eligible Employee by a third party, including employee leasing companies, professional employer organizations or certified professional employer organizations, to an Eligible Employee will be considered Eligible Wages if the Eligible Employer’s Employer Identification Number is reported on the Eligible Employee’s Form 499R-2/W-2PR.

 

 Significant Operations

Each Eligible Employer must make a good effort interpretation of when Significant Operations started. However, this does not mean that the operations must be at the same level or exceeding those occurring before the hurricanes. If an employer has more than one locale, each of them will be treated separately for credit purposes and in order to determine when “significant operations” resumed.

The PRTD has given a benchmark of “80% or more of activities. The factors taken in consideration for the benchmark will depend on the specific business of the Eligible Employer. For example, a retail business may use sales, while a manufacturer utilizes purchase of raw material, and an accounting firm uses billable hours.

In addition, the PRTD named several factors that may be looked at to determine if a business was inoperative. It stated that the locale must comply with at least one of the following:

  • Business operated in an unstable manner;
  • Operations were reduced due to the lack of electric power or drinking water service;
  • Operations were reduced due to the instability or lack of telecommunications service;
  • The business suffered damage to its structure, due to the hurricane;
  • The business was not physically accessible to its employees or customers because of the
  • of the hurricane; or
  • The business could not receive raw material or inventory in order to operate.

 

How to calculate the credit?

The credit amount will depend on the Net Income subject to income tax for the 2017 tax year.

  • Category 1 Eligible Employer
    • Net income subject to tax of more than $10,000,000.00.
    • Credit equals 26% of the first $6,000.00 of Eligible Wages per Eligible Employee.
      • Maximum credit benefit: $1,560.00 per Eligible Employee.
  • Category 2 Eligible Employer
    • Net income subject to tax of $10,000,000.00 or less.
    • Credit equals 32% of the first $6,000.00 of Eligible Wages per Eligible Employee.
      • Maximum credit benefit: $1,920.00 per qualified employee

How to claim the credit?

The credit may only be claimed electronically via https://planillatrimestralpatronal.hacienda.gobierno.pr,  until December 31, 2018. The Eligible Employer must have the following information available:

  • Merchant Registry Number of the base locale
  • Date in which the business/locale became inoperative
  • Date on which the business/locale resumed Significant Operations
  • Eligible Employee information
    • Full name
    • Social security
    • Amount of Eligible Wages
  • Employer’s Bank Account

An Eligible Employer must have filed electronically all of the following forms applicable for the tax year 2017:

  • Forms 499R-2/W-2PR
  • Employer’s Quarterly Return of Income Tax Withheld (Form 499 R-1B)
  • Employer’s Quarterly Federal Tax Return[2]

In addition, the Eligible Employer must be registered on SURI and must have filed every Quarterly Declaration of Unemployment and Disability Insurance Tax required for the tax year 2017.

Nevertheless, if an Eligible Employer has not filed any of the above-mentioned forms, it must file them before requesting the credit.

The credit will be paid through direct deposit to the bank account selected by the Employer. The credit shall be paid within a period of two weeks, as long as the Federal Treasury has made the proper transfers and the funds are available to make the payment.

 

[1] Only available for those employers with locales in one of these municipalities: Canóvanas, Cataño, Culebra, Dorado, Fajardo, Loíza, Luquillo, Toa Baja, Vega Baja or Vieques. Even though other municipalities were declared “disaster zones”, it would appear only the once initially named are available for the credit.

[2] Puerto Rico employers are not required to file said form electronically, as employers in the United States are required to. We have expressed this concern to the PRTD and are expecting an official response soon.

About the Author

Carrion Sanchez LLC
Carrion Sanchez LLC
author

Carrión Sánchez, LLC is a highly dynamic legal firm specialized in tax and corporate matters for high-net-worth individuals and businesses within and without Puerto Rico. Contact Us at [email protected]

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