United States

A new tax credit can help cut costs and attract employees

INSIGHT ARTICLE  | 

The automotive sector continues to struggle with identifying, attracting and retaining qualified employees to meet industry demands. As a result, many automotive suppliers are finding creative ways to differentiate themselves from their competitors, including offering flexible work arrangements, providing on-site exercise and health care facilities, and expanding other traditional benefits such as those guaranteed by the Family and Medical Leave Act.

The new general business credit (section 45S) creates an incentive for OEMs and their suppliers to provide qualified employees at least two weeks of paid family and medical leave, assuming other requirements are met.

Qualified employers must have a written policy in place for employees that provides at least two weeks of paid family and medical leave annually, and the paid leave must be no less than 50 percent of wages normally paid to the employee. To qualify, an employee must be employed for at least one year and must not receive compensation beyond defined limits.

The reasons to be on paid family and medical leave that qualify for the tax credit are broad and may include a diverse population of employees. The IRS specifically cites the following qualifying reasons:

  • Birth of an employee’s child and to care for the child
  • Placement of a child with the employee for adoption or foster care
  • To care for the employee’s spouse, child or parent who has a serious health condition
  • A serious health condition that makes the employee unable to perform the functions of his or her position
  • Any qualifying exigency, due to an employee’s spouse, child or parent being on covered active duty (or having been notified of an impending call or order to covered active duty) in the armed forces
  • To care for a service member who is the employee’s spouse, child, parent or next of kin

Any wages paid for leave taken outside of the above reasons will not qualify for the tax credit (and paid leave required by state or local law will be excluded from the tax credit calculation).

The credit is a percentage of the amount of wages paid to a qualified employee while on family and medical leave for up to 12 weeks per taxable year. The minimum percentage is 12.5 percent and is increased by 0.25 percent for each percentage point by which the amount paid to a qualifying employee exceeds 50 percent of the employee’s wages (with a maximum of 25 percent). Wage amounts deducted on the employer’s tax return must be reduced by the amount determined as a credit. In addition, wages included in other general business credits (such as credit for increasing research activities) must be excluded in determining this credit.

Time to review the employee benefit package?

This new tax credit helps subsidize the cost of paid family and medical leave, which more auto manufacturers and suppliers are including in updated benefit packages to entice potential employees.

Answers to frequently asked questions were recently issued by the IRS, and taxpayers are encouraged to consult with their tax advisors to ensure that all rules and requirements are met to claim the credit.


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