With the national unemployment rate dropping to the lowest levels in more than a decade, many dealerships are looking for new ways to attract and retain talented employees. The Tax Cuts and Jobs Act (TCJA) may offer such an opportunity through the introduction of a new tax credit. By voluntarily offering paid family and medical leave to employees, this tax break could provide benefits that, in turn, could make it easier to hire and retain employees in a competitive hiring market.
The details of the employer credit for paid family and medical leave are spelled out in Section 45S of the Internal Revenue Code. To qualify for the credit, your dealership must offer paid family and medical leave that is stated in a written policy. The benefits for full-time employees must be at least two weeks a year and part-time employees receive them for a prorated period.
You may be eligible to take the credit based on up to 12 weeks of paid leave. After this period, there is not credit available for amounts paid beyond 12 weeks, although there is no restriction on total weeks allotted by the IRS.
To qualify for the benefits, employees must have been employed by your dealership for at least one year, and they must meet the compensation qualifications. The limit on compensation is 60% or less of the highly compensated employee (HCE) dollar amount in the prior year. For 2017, the HCE amount was $120,000. Thus, for an employee to qualify, he or she must not have been paid more than $72,000 last year. This amount is subject to change from year to year, so it is essential to discuss with your CPA.
A wide range of activities or events qualifies as family and medical leave, including:
The employer credit for paid family and medical leave is equal to 12.5% of the wages paid for leave if these payments constitute at least 50% of the employee's regular wages. However, if these payments exceed 50% of regular wages, the credit amount increases to a maximum of 25%.
Specifically, the credit is increased by 0.25 percentage points for each percentage point by which the amount of wages paid for leave exceeds 50% of regular wages (up to the 25% limit).
So how much could your dealership save by taking advantage of this tax credit? Suppose you grant a total of 50 weeks of paid family and medical leave to 10 qualifying employees this year and pay each of these employees 50% of their normal wages. If these employees earn an average of $800 a week, your tax credit would equal $12,500.
The employer credit for paid family and medical leave is scheduled to sunset at the end of 2019, although this timeline is always subject to extend. Currently, it's available only for wages paid in tax years beginning after December 31, 2017, and before January 1, 2020.
Talk to one of our dealer-specific tax advisors if you have questions about how your dealership might qualify for this tax credit and to learn additional details.
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