Tax Credits for Businesses Affected by Natural Disasters

November 2, 2021
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"Unprecedented times" is a phrase that has defined the last two years. Amidst the rapidly growing concerns of the coronavirus pandemic in 2020, natural disasters greatly impacted the lives of many around the United States. We saw businesses forced to close, lay-off employees, move locations, and/or struggle to maintain operations due to many of these disasters. If your business was affected by a natural disaster during 2020, you could qualify for the disaster zone employee retention tax credit. This credit provides a maximum tax credit of $2,400 per eligible employee.

What is the Disaster Zone Credit?

This disaster tax credit is a general business credit that originated under the Further Consolidated Appropriations Act, 2020 to provide relief for 2018 and 2019 qualified disasters. Under the Consolidated Appropriations Act, 2021, this credit was extended for qualified disasters that occurred in 2020 as well. The credit is specifically related to natural disasters not connected to COVID-19 and is different from the initial employee retention credit provided by the CARES Act.

This natural disaster credit is for 40% of qualified wages paid to eligible employees, up to $6,000 (each employee), creating a max credit per eligible employee of $2,400. Qualified wages include wages paid or incurred while the employer's business was inoperable because of a qualified natural disaster and located within the declared disaster area. Wages paid to employees, regardless of if they performed any services or if services were performed at a different location temporarily, are considered qualified wages. Wages paid to employer-related individuals, and wages used for a coronavirus-related employee retention credit are excluded from use as qualifying wages for this credit.

There are two prerequisites to qualify for this credit. First, an employer must have eligible employees whose primary work location was in the qualified natural disaster zone on the date of the designated disaster. Second, an employer must also demonstrate that the eligible location was made temporarily inoperable due to the disaster.

Qualified Disaster Zones

Only disaster zones declared by the President of the United States are considered qualified disaster zones. Some qualified disaster zones that numerous readers may qualify for include the following:

  • Tennessee Severe Storms, Tornadoes, Straight-Line Winds, and Flooding on March 3, 2020. Qualified counties include Davidson, Putnam, and Wilson.
  • Tennessee Severe Storms, Tornadoes, Straight-Line Winds, and Flooding on April 12 and 13, 2020. Qualified counties include Bradley and Hamilton.
  • Alabama Hurricane Sally from September 14 through 16, 2020. Qualified counties include Baldwin, Escambia, and Mobile.
  • Alabama Hurricane Zeta on October 28 and 29, 2020. Qualified counties include Clarke, Dallas, Marengo, Mobile, Perry, Washington, and Wilcox.
  • South Carolina Severe Storms, Tornadoes, and Straight-Line Winds on April 12 and 13, 2020. Qualified counties include Aiken, Barnwell, Berkeley, Colleton, Hampton, Marlboro, Oconee, Orangeburg, and Pickens.
  • Mississippi Severe Storms, Tornadoes, Straight-Line Winds, and Flooding on April 12, 2020. Qualified counties include Clarke, Covington, Grenada, Jasper, Jefferson Davis, Jones, Lawrence, Panola, and Walthall.
  • Mississippi Hurricane Zeta on October 28 and 29, 2020. Qualified counties include George, Greene, Hancock, Harrison, Jackson, and Stone.

Other natural disasters that qualify for this tax credit are specifically listed on the instructions to federal form 5884-A or they can be found here: https://www.fema.gov/disasters/year. The lists include the disaster that occurred, the incident dates, and the counties that qualify to claim the related disaster.

Inoperable Trade or Business

"Inoperable" is rather open-ended in this circumstance. It does not require direct damage to the primary work location, nor does it require that the business shut its doors for a time. There is not a quantitative measure from normal production that must be met to qualify, but there must be a noticeable decline in normal operation. This can include, but is not limited to:

  • An inaccessible work location
  • Increased employee absences
  • Reduced production
  • Reduced sales
  • Increased supply chain delays
  • Power outages that halted production for a significant amount of time

If you think you may qualify for the disaster zone tax credit, we have numerous tax professionals that are ready to help you navigate this significant tax credit. Please contact HHM CPAs should you need any assistance.

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