Hurricane Katrina: Employee Retention Credit

Under Katrina Emergency Tax Relief Act of 2005 Section 202 and JCX-69-05 (9/22/05), p. 13, a business may be able to claim a credit on its 2005 return for wages paid to employees if Hurricane Katrina rendered it inoperable any day from Aug. 29, 2005 to Dec. 31, 2005. The credit is worth up to $2,400 per employee (40% of the first $6,000 paid to an employee during that time).

To qualify for the credit, a business must:

• Have been located in a Federal Emergency Management Agency (FEMA)-designated individual assistance area; see Exhibit 1.

• Have been rendered inoperable from Aug. 29, 2005 to Dec. 31, 2005, as a result of Hurricane Katrina damage.

• Employ 200 people or less on average during the tax year.

The credit applies to wages paid from Aug. 29, 2005 to Dec. 31, 2005:

• To employees who worked for the business mainly at its location in a FEMA-designated individual assistance area.

• From the date that business location first became inoperable until the date it resumed significant operations.

• Regardless of whether or where the employee worked for the business while that business location was inoperable.

Limits on Use

In calculating the Employee Retention Credit, businesses cannot count wages already used to determine  the Work Opportunity Tax Credit; see Gurene, Tax Clinic, Hurricane Katrina: Work Opportunity Credit.

Caveat: Other limits on the credit may apply; some may affect the credit amount and other aspects of the businesss Federal income tax return.

From Ruth Wimer, Washington, DC