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"Active Duty Employees of Uniformed Services" Credit

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The Credit for Employer Differential Wage is 20% of up to $20,000 of differential wage payments (e.g. $4,000 tax credit per qualified active duty employee) paid to each qualified employee during the tax year. The credit for Employer Differential Wage Payments is part of the general business credit. Section 111 of the HEART Act adds IRC § 45P to the Code. IRC § 45P provides a credit to eligible small business employers that make eligible differential wage payments to qualified employees who are on active duty in the uniformed services for more than 30 days.​​

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Below outlines a summary of the eligible  wage expenses and criteria for claiming the credit.

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Eligible Differential Wage Payments

Eligible differential wage payments are the total differential wage payments paid to the employee for the tax year, up to $20,000. The definition of eligible differential wage payments for purposes of the IRC § 45P credit is the same definition enacted in new IRC § 3401(h).

 

U.S. Code § 3401(h) Differential wage payments to active duty members of the uniformed services provides the term “differential wage payment” means any payment which—

• (A) is made by an employer to an individual with respect to any period during which the individual is performing service in the uniformed services (as defined in chapter 43 of title 38, United States Code) while on active duty for a period of more than 30 days, and ​

  • U.S. Code § 4303 (13) defines the term “service in the uniformed services” means the performance of duty on a voluntary or involuntary basis in a uniformed service under competent authority and includes

    • active duty,

    • active duty for training,

    • initial active duty for training,

    • inactive duty training,

    • full-time National Guard duty,

  • a period for which a person is absent from a position of employment for the purpose of an examination to determine the fitness of the person to perform any such duty, a period for which a System member of the National Urban Search and Rescue Response System is absent from a position of employment due to an appointment into Federal service under section 327 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, and a period for which a person is absent from employment for the purpose of performing funeral honors duty as authorized by section 12503 of title 10 or section 115 of title 32.

• (B) represents all or a portion of the wages the individual would have received from the employer if the individual were performing service for the employer.

• The amount of eligible differential wage payments that may be taken into account for the taxable year is limited to $20,000 per qualified employee, resulting in a maximum credit for a taxable year of $4,000 per qualified employee.

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To be considered a differential wage payment, the payment MUST meet both of the following requirements.

• The payment is made to a qualified employee for any period during which the employee is performing service in the uniformed services of the United States while on active duty for a period of more than 30 days.

• The payment represents all or a portion of the wages the employee would have received from the employer if the employee were performing services for the employer.

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Uniformed Services

Uniformed services means

• the Armed Forces;

• the Army National Guard and the Air National Guard when engaged in active duty for training, inactive duty training, or fulltime National Guard duty;

• the commissioned corps of the Public Health Service; and

• any other category of persons designated by the President in time of war or national emergency.

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Qualified Employee

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

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Qualified Employer

An eligible small business employer may take a credit against its income tax liability in an amount equal to 20% of the sum of the eligible differential wage payments made to qualified employees during the taxable year.

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An employer is an eligible small business employer if

• it employed an average of fewer than 50 employees on business days during the taxable year and

• provides differential wage payments under a written plan to every qualified employee.

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Coordination with Other Credits

IRC § 45P(c) provides a rule to coordinate the IRC § 45P credit with other credits under Chapter 1 of the Code (§§ 1 through 1400T) that are calculated taking into account employee compensation. Under this rule, the amount of any such other credit determined with respect to compensation of an employee must be reduced by the amount of the § 45P credit determined with respect to that employee.

 

​The amount of another credit under Chapter 1 of the Code determined with respect to compensation of an employee must be reduced by the amount of the § 45P credit determined with respect to that employee if:

• (1) compensation paid in the current taxable year is an expense used directly in determining the amount of the other credit,

• (2) military differential wage payments are a type of compensation that can be taken into account in determining the amount of the other credit, and

• (3) the military differential wage payments taken into account in determining the employer’s IRC § 45P credit are also taken into account in determining the other credit.

 

For example, the amount of any research credit or orphan drug credit otherwise allowable for compensation paid to any employee may be reduced by the credit for differential wage payments figured for that employee.

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Disallowance for Failure To Comply With Employment or Reemployment Rights of Members of the Reserve Components of the Armed Forces of the United States

No credit will be allowed to a taxpayer for:

• Any tax year in which the taxpayer is under a final order, judgment, or other process issued or required by a district court of the United States under section 4323 of title 38 of the United States Code with respect to a violation of chapter 43 of title 38; and

• the 2 succeeding tax years.

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IRS Links & Filing Requirements

• For details, see 26 USC 45P and IRS Notice 2010-15, 2010-6 I.R.B. 390

• See IRS Form 8932