IRS Update: New employer credit for family and medical leave and opportunity zone tax incentive

December 11, 2018

The IRS announced eligible employers who provide paid family and medical leave to their employees may qualify for a new business credit for tax years 2018 and 2019.

In addition, eligible employers who set up qualifying paid family leave programs or amend existing programs by Dec. 31, 2018, will be eligible to claim the employer credit for paid family and medical leave, retroactive to the beginning of the employer’s 2018 tax year, for qualifying leave already provided.

In <a href="https://prod.edit.irs.gov/pub/irs-drop/n-18-71.pdf" data-entity-substitution="pup_linkit_media" data-entity-type="media" data-entity-uuid="9e2a6158-c1d5-4486-bef3-0f30ec8473f5">Notice 2018-71, posted today on IRS.gov, the IRS provided detailed guidance on the new credit in a question and answer format. The credit was enacted by the 2017 Tax Cuts and Jobs Act (TCJA).

The notice clarifies how to calculate the credit, including the application of special rules and limitations. Only paid family and medical leave provided to employees whose prior-year compensation was at or below a certain amount qualify for the credit.Generally, for tax year 2018, the employee’s 2017 compensation from the employer must have been $72,000 or less.

Additionally, qualified opportunity zones were created by the TCJA. These zones are designed to spur economic development and job creation in distressed communities throughout the country and U.S. possessions by providing tax benefits to investors who invest eligible capital into these communities. Taxpayers may defer tax on eligible capital gains by making an appropriate investment in a qualified opportunity fund (QOF) and meeting other requirements.

In the case of an eligible capital gain realized by a partnership, the rules allow either a partnership or its partners to elect deferral. Similar rules apply to other pass-through entities, such as S corporations and its shareholders, as well as estates and trusts and its beneficiaries.

To qualify for deferral:

  • Capital gains must be invested in a QOF within 180 days;
  • Taxpayer elects deferral on Form 8949 and files with its tax return; and
  • Investment in the QOF must be an equity interest, not a debt interest.

If a taxpayer holds its QOF investment at least five years, the taxpayer may exclude 10 percent of the original deferred gain. If a taxpayer holds its QOF investment for at least seven years, the taxpayer may exclude an additional five percent of the original deferred gain for a total exclusion of 15 percent of the original deferred gain. The original deferred gain--less the amount excluded due to the five- and seven-year holding periods--is recognized on the earlier of sale or exchange of the investment, or Dec. 31, 2026. If the taxpayer holds the investment in the QOF for at least 10 years, the taxpayer may elect to increase its basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged. This may eliminate all or a substantial amount of gain due to appreciation on the QOF investment.

Read more about qualified opportunity zones in the January/February issue of CPAFOCUS.

Get up to date on all TCJA developments by attending the OSCPA’s Two-Day Federal Tax Update, Jan. 17-Jan. 18, at the Sheraton Reed Center in Midwest City.