For taxable years starting after December 31, 2017 and before January 1, 2020, the Tax Cuts and Jobs Act of 2017 adds a new Section 45S to the Internal Revenue Code that provides a tax credit for businesses offering paid family and medical leave (“F&M Leave”). The IRS recently issued FAQs that begin to answer questions about F&M Leave and how the tax credit will work, but many open questions remain.
The Tax Credit
In order to claim the tax credit, employers must have a written policy that provides for leave during which employees are compensated at not less than 50% of the employee’s regular pay. The policy must provide for at least two weeks of annual leave for all full-time employees that:
- Have worked for the employer for at least one full year; and
- Earned up to 60% of the highly compensated employee threshold under Section 414(q) of the Internal Revenue Code for the prior year (60% of $120,000, or $72,000, for leave taken in 2018). Leave offered to employees who make in excess of this threshold will not be included for purposes of determining the credit.
Leave must also be provided on a pro-rated basis for all part-time employees that meet the requirements.
The amount of the credit is generally determined by multiplying a percentage that ranges from 12.5% to 25% (based on the percentage of regular pay employees on F&M Leave are eligible to receive — see the table below) by the total amount paid to employees on F&M Leave during the year, capped at a maximum of twelve weeks of F&M Leave per employee per year. The higher the percentage of pay under the F&M Leave policy, the higher the tax credit percentage and thus the potential savings through this credit.
What Qualifies as F&M Leave?
The paid leave must be for the sole purpose of family and medical leave. To the extent the leave is combined with vacation, personal or sick leave, the credit will not apply. City and state-mandated paid F&M Leave programs, like those currently in place in California and New York, do not qualify for the credit.
On April 9, 2018, the IRS posted FAQs on the tax credit and what qualifies as “family and medical leave.” The FAQs define F&M Leave as leave for one or more of the following reasons:
- Birth of a child or care of a child;
- Placement of a child for adoption or foster care;
- Care of a spouse, child or parent with a serious health condition;
- A serious health condition;
- A qualified exigency due to a spouse, child or parent either being on active duty or having been notified of a call to active duty in the Armed Forces; and
- Care of a service member who is a spouse, child, parent or next of kin.
Employers should keep in mind that they must reduce their tax deductions for employee salary and wages by the amount of any claimed credit. Further, according to the IRS guidelines, any paid F&M Leave wages that are taken into account for another credit (such as the Indian employment credit under Section 45A of the Code) may not be used for this credit.
Next Steps for Employers
Employers should review their existing F&M Leave programs to consider whether they might be eligible for the tax credit. (There is no requirement to adopt a new policy to claim the credit if an existing policy qualifies.) Employers may also want to consider whether to adopt new policies, or expand or modify existing policies, to take advantage of the credit. However, as noted above, under the current law, the credit will apply for 2018 and 2019 only. It has been reported that the Senator who introduced the provision described it as a pilot program that could be expanded, though Congress would have to act or the credit will sunset at the end of 2019.
Employers also should be on the lookout for additional guidance from the IRS. The April 2018 FAQs indicate that the IRS expects to provide additional information on topics such as when the written policy must be in place and the impact of state and local leave requirements.