EMPLOYEE RETENTION CREDIT

The Employee Retention Credit provides a federal tax credit to employers that continued to pay their employees during the periods on which their businesses were not able to operate as a result of the recent landfall of hurricanes in Puerto Rico.

Employee Retention Credit

This credit is known as the Employee Retention Credit and is available to any business that operates within the disaster zones declared by the federal government due to the passing of hurricanes Irma and Maria through Puerto Rico.   The credit is equal to either 26% or 32%, depending on the employer’s category, of the salaries payed to eligible employees to up to $6,000 per employee. The period covers the date on which the business stopped operations to the moment it resumed significant operations or until December 31, 2017, whichever occurred first.

• Hurricane Irma: Any employer that had an active business on September 4, 2017 within the disaster zone, and was not able to operate after September 4, 2017 and before January 1, 2018, as a result of damages caused by Hurricane Irma.
  • The municipalities included within this disaster zone are: Canóvanas, Cataño, Culebra, Dorado, Fajardo, Loíza, Luquillo, Toa Baja, Vega Baja or Vieques
• Hurricane María: Any employer that had an active business on September 16, 2017 within the disaster zone, and was not able to operate after September 16, 2017 and before January 1, 2018, as a result of damages caused by Hurricane María. This applies to all municipalities of Puerto Rico.

Amount of the Benefit

1. Employers Category No. 1: Those employers whose net income subject to taxes of more than $10 million for the 2017 tax year will have the right to a benefit of 26% for the first $6,000 of Qualified Salaries payed to employees during the eligible period. Thus, the maximum benefit granted to employers will be of $1,560 ($6,000 X 26%) for each eligible employee.
2. Employers Category No. 2: Those employers whose net income subject to taxes of $10 million or less for the 2017 tax year will have the right to a benefit of 32% for the first $6,000 of Qualified Salaries payed to employees during the eligible period. Thus, the maximum benefit granted to employers will be of $1,920 ($6,000 X 32%) for each eligible employee.

Eligible Employer

In order to be able to obtain the benefit, employers must comply with the following criteria:

1. As of September 16, 2017 conducted an active trade or business in Puerto Rico.
2. The business was not able to operate any day after such date and before January 1, 2018 due to damages caused by hurricanes Irma and María.
3. Continued paying salaries to the employees during the period it was not able to operate.

Requisites:

1. Had electronically filed all employer quarterly tax returns for 2017.
2. Has the Merchant Registration Certificate duly issued by the Treasury Department.
3. Has filed all quarterly Unemployment and Disability declarations at the Department of Labor and Human Resources.

In case an employer was not able to file the quarterly tax returns for 2017 he can do so belatedly in order to qualify for the benefit.

Eligible Employees

The Law defines eligible employees for which the employer may claim the benefit as follow:

• Employees whose main place of employment was located at the business location that became inoperable due to damages caused by the aforementioned hurricanes, and receives a 499 R-2/W-2 PR Form.  Neither employees hired after September 16, 2017 nor independent contractors qualify as eligible employees.
• The following relatives do not qualify as eligible employees: children, stepchildren, siblings or stepbrothers/sisters, father, mother, forefathers, stepmothers/fathers, nephews, uncles, sons/daughters-in-law, fathers/mothers-in-law, brothers/sisters-in-law, the owner of the corporation or entity. Any person who owns more than 50% of the shares of the entity is considered an owner.

Eligible Wages/Salaries

Eligible salaries include wages paid to eligible employees after September 16, 2017 even if he did not carry out any service, or he did so at a different location (This means outside de disaster zone.); or carries out services at the business location during the period before the business renews its significant operations at the main location.  Salaries include commissions, bonuses, and cash payments by any means not payed in cash, vacation or sick leaves subject to unemployment insurance contributions.

Inoperative Businesses

Any business became inoperative if it was not able to carry out its operations after hurricanes Irma and María’s landfall on the Island. A business is considered inoperative if it complies with one or more of the following elements and such elements do not allow the business to resume significant operations:

• Unstable conditions to operate
• Operations were reduced due to lack of electricity or water
• Operations were reduced due to the instability or lack of telecommunications
• The physical infrastructure of the business was damaged by the hurricanes
• The business was not approachable either by the employees or by its clients
• The business was not able to receive raw materials or inventory to be able to operate

Significant Operations

Resumption of significant operations is determined by the eligible employer according to the specific nature of the business.  Each eligible employer must make a reasonable interpretation and in good faith on when to resume significant operations.  However, the term significant operations does not mean the business has reached the same level of operations it had before the passing of the hurricanes; it means that it reached at least 80% or more of the activities carried out by the business before the hurricanes. In order to determine whether the business reached 80% or more of the previous activities, one or more variables will be taken into consideration, and according to the basic elements that are needed for the business to operate.

Procedure to Apply for the Benefit

The Benefit can only be requested electronically through the digital platform designed for such purposes by the TD as part of the application each employer uses to file the Employer’s Quarterly Income Tax Withholding Return (Form 499 R-1B).

The platform will only be available until Monday, December 31, 2018.  The TD will neither accept nor process any requests filed on paper.  Employers can access the platform through the TD’s web page: www.hacienda.pr.gov., Employer’s Tab Section.

Before applying for the Benefit, employers must make sure that the information they are including is accurate, updated and coincides with the information included in the following forms:

1. Quarterly Declarations for Unemployment Insurance filed at the Department of Labor and Human Resources for the quarters ended September 30, 2017 and December 31, 2017
2. Withholding Vouchers (Form 499R-2/W-2PR) for 2017 electronically filed at the TD.

The TD will use this information to determine the employer’s eligibility, verify the information presented in the application and calculate the amount of the Benefit.

Once the employer electronically fills out and submits the application, the TD will process it and the Benefit will be paid by means of direct deposit to the bank account stated by the employer in the Application.

WHAT TO DO

In order to claim the credit, employers must keep adequate records of the information. They will have to prepare a detailed breakdown of the following:

• Each office or location that was affected.
• Employees placed at the facilities.
• Date on which the office or location became inoperative.
• Date on which the office or location renewed significant operations.

IMPORTANT

The information included in this document is only a summary.  Please contact TCG for detailed information or if you need help in requesting the Credit.

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