New Credit for Small Business Employers That Pay Active Duty Differential Wages

The recently-enacted Heroes Act creates a new tax credit for eligible small business employers that pay differential wages to qualifying employees who are performing service in the uniformed services while on active duty for a period of more than 30 days. The credit is equal to 20% of up to $20,000 of differential pay to each qualifying employee during the tax year, but only for payments after June 17, 2008 and before 2010.

A qualified employee is one who has been an employee for the 91-day period immediately proceeding the period for which any differential wage payment is made.

An eligible small business employer is one that:
(1) Employed on average less than 50 employees on business days during the tax year; and
(2) Under a written plan, provides eligible differential wage payments to each of its qualified employees.

Other Rules:

• Taxpayers under common control are aggregated when determining if a taxpayer is an eligible small business employer.

• The credit can't be claimed by a taxpayer that has failed to comply with the employment and reemployment rights of members of the uniformed services.

• No deduction may be taken for that part of compensation which is equal to the credit, and the amount of any other credit for compensation paid to an employee must be reduced by the differential wage payment credit allowed with respect to such employee.

• The differential wage payment credit is part of the general business credit and thus is subject to the rules for business credits.

• The credit is not allowable against a taxpayer's alternative minimum tax liability.

If you think you may qualify for this new credit and have questions on how it might affect your business, please give us a call.

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