What to Know About D-ERC
In recent times, natural disasters have increasingly impacted businesses and communities across the United States. Hurricanes Milton and Helene, for instance, have recently caused significant damage in Florida, Georgia, South Carolina, and North Carolina, all of which have been declared disaster areas. To support businesses during such challenging times, the federal government offers the Disaster Employee Retention Credit (D-ERC) program. This educational article delves into the history, purpose, eligibility requirements, and benefits of the D-ERC program, providing a comprehensive guide for employers affected by these recent hurricanes.
History of the D-ERC
The Disaster Employee Retention Credit was introduced as part of the Disaster Tax Relief and Airport and Airway Extension Act of 2017. The program was designed to help businesses recover from the financial impact of federally declared disasters. By offering tax credits to employers who retain their employees during and after a disaster, the D-ERC aims to mitigate the economic hardships faced by businesses and encourage workforce stability in affected areas.
Purpose of the D-ERC Program
The primary goal of the D-ERC program is to incentivize employers to keep their employees on the payroll during periods of significant operational disruption caused by natural disasters. By providing financial relief through tax credits, the program helps businesses maintain continuity, reduce layoffs, and support the local economy’s recovery efforts.
Employer Eligibility Requirements for D-ERC
To be eligible for the D-ERC, an employer must meet the following criteria:
- Location: The business must be located in a federally declared disaster area.
- Operational Impact: The employer must have experienced significant operational disruption due to the disaster. This can include physical damage to the business premises or inability to operate due to mandatory evacuations or loss of utilities.
- Employee Retention: The employer must have retained employees during the period of disaster-related shutdown or significant decline in operations.
What is the Maximum Allowable Credit?
The maximum allowable credit under the D-ERC program is $2,400 per eligible employee. This amount is calculated based on 40% of the first $6,000 of qualified wages paid to each employee during the period the business was affected by the disaster.
Calculating the Credits is Straightforward:
- Qualified Wages: Identify the wages paid to each eligible employee during the period of disaster impact. Qualified wages include regular wages, bonuses, and other compensation.
- Credit Percentage: Apply the 40% credit percentage to the first $6,000 of qualified wages per employee.
For example, if an eligible employee earned $5,000 during the disaster period, the credit would be 40% of $5,000, resulting in a $2,000 credit for that employee. If an employee earned $7,000, the credit would be 40% of the capped amount of $6,000, resulting in a $2,400 credit.
Filing Process for D-ERC Participation
Employers can claim the D-ERC by following these steps:
- Documentation: Maintain thorough records of the disaster’s impact on operations, employee wages, and the disaster declaration.
- Form 5884-D: Complete IRS Form 5884-D, “Employee Retention Credit for Employers Affected by Qualified Disasters,” to claim the credit.
- Filing: File Form 5884-D separately from other returns, after submitting the organizations employment tax return for the applicable period.
- Reduction of Tax Deposits: Qualified tax-exempt organizations can reduce their required employment tax deposits by the amount of the anticipated credit, which can provide cash flow relief.
Refundable Credits
One significant advantage of the D-ERC program is that the credits are refundable. This means that if the credit amount exceeds the employer’s total tax liability, the excess will be refunded to the employer. This provision ensures that businesses receive the full financial benefit of the program, even if their tax liability is low.
Conclusion
The Disaster Employee Retention Credit (D-ERC) program provides crucial support for businesses affected by natural disasters, such as the recent hurricanes in Florida, Georgia, South Carolina, and North Carolina. By understanding the eligibility requirements, credit calculation, and filing process, employers can effectively utilize this program to improve their cash flow and retain their workforce during challenging times. Rockerbox is committed to assisting businesses in navigating these complex tax credits, ensuring they maximize their benefits and support their employees through recovery and beyond. If your business has been impacted by a disaster, don’t hesitate to explore the D-ERC program and leverage the available financial relief to rebuild and thrive.