What Do Employers Need to Know Before Claiming Tax Credits Under the American Rescue Plan Act?

Under the American Rescue Plan Act, employers with fewer than 500 employees are eligible to receive tax credits when they provide paid leave to employees who miss work for reasons related to COVID-19. In this article, Virginia business tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, explains what employers need to know before claiming tax credits under the American Rescue Plan Act.

5 Important Facts about Employer Tax Credits Under the American Rescue Plan Act

Here are five important facts for employers about the paid leave tax credits available under the American Rescue Plan Act:

1. The Tax Credit Applies When Employees Take Qualified Leave

The tax credit for employers under the American Rescue Plan Act is available when companies pay wages to employees who take qualified leave. Qualified leave includes leave taken based on a COVID-19 diagnosis, COVID-19 vaccination, self-quarantine advice or government isolation order, a school closing, child care provider unavailability, and certain other reasons related to the pandemic.

2. Employers Must Substantiate Their Eligibility

Employers must be able to substantiate their claims for tax credits under the American Rescue Plan Act. To this end, the Internal Revenue Service (IRS) advises that employers should require their employees to submit written leave requests that includes both: (i) “a statement of the COVID-19 related reason the employee is requesting leave and written support for that reason;” and, (ii) “a statement that the employee is unable to work, including by means of telework, for that reason.”

3. The American Rescue Plan Act Provides Refundable Tax Credits

The American Rescue Plan Act provides refundable tax credits to eligible employers. However, the IRS is allowing employers to reduce their federal employment tax withholdings and deposits in anticipation of receiving these credits, and it is also allowing employers to request advance payments when their credits exceed their anticipated employment tax liability. Before reducing their withholdings and deposits or requesting advance payments, employers should be very careful to ensure that they qualify.

4. Tax Credits Received Under the American Rescue Plan Act Must Be Reported as Income

Employers must include tax credits received under the American Rescue Plan Act as gross income on their federal returns.

5. Falsely Claiming Tax Credits Under the American Rescue Plan Act Can Lead to Steep Penalties

The IRS has been paying close attention to individuals and businesses claiming pandemic-related benefits. Employers that falsely claim tax credits under the American Rescue Plan Act (and even those that are unable to substantiate valid claims for tax credits) will be at risk for substantial penalties. As a result, employers should implement adequate measures to ensure compliance, and they should take remedial measures if they have concerns about facing penalties in the event of an IRS audit or investigation.

Request a Consultation with Virginia Business Tax Attorney Kevin E. Thorn

If you have questions about your business’s rights and responsibilities under the American Rescue Plan Act, we encourage you to get in touch. To request a consultation with Virginia business tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 703-752-3752, email ket@thornlawgroup.com or contact us confidentially online today.