Determining Eligibility for the Employer Credit for Paid Family and Medical Leave

Section 45S of the Internal Revenue Code (“Code”), added to the Code by the Tax Cuts and Jobs Act of 2017, establishes a general business credit for an employer who provides paid family and medical leave to qualifying employees. The credit would partially offset the cost of the paid leave, however, it is available only for the 2018 and 2019 taxable years. To assist employers in determining whether they are eligible to claim the credit, the IRS provided guidance in Notice 2018-71, summarized below.

Calculating the Credit

The credit is generally equal to the applicable percentage of the wages paid to qualifying employees while on family and medical leave. The applicable percentage is 12.5% increased (but not above 25%) by 0.25 percentage points for each percentage point by which the rate of payment exceeds 50%. Notice 2018-71 provides further details on how to calculate and claim the credit.

Written Policy

As a prerequisite to claiming the credit, the employer must have a written policy that provides all “qualifying employees” with at least two weeks of paid family and medical leave (pro-rated for part-time employees) at a rate of at least 50% of the employee’s normal wages. The written policy may be in a single document or multiple documents.

For an employer’s first taxable year beginning after December 31, 2017, the written policy could be adopted with retroactive effect as long as retroactive leave payments were made by the last day of the taxable year. (December 31, 2018 for employers with a calendar year.) For subsequent taxable years, the written policy must be in place before the credit is taken. The policy is considered to be in place on the later of the policy’s adoption date or its effective date.

Therefore, if a calendar year employer determines in early 2019 that its current leave policy does not satisfy the IRS guidance, the employer can implement a new or updated policy and claim the credit on a prospective basis in 2019. The practical question is then whether to retain the policy when the credit expires at the end of the 2019 taxable year.

Family and Medical Leave

The types of leave eligible for the credit are leaves qualifying under the Family and Medical Leave Act (“FMLA”), typically for the birth or adoption of a child, the employee’s serious health condition, or caring for a spouse, child or parent with a serious health condition. The leave must be specifically designated for one or more FMLA purposes, may not be used for any other reason, and is not paid by a State or local government or required by State or local law. Thus:

  • PTO days that can be used for sickness, vacation, or personal reasons will not qualify (because the leave can be used for reasons other than FMLA purposes); and
  • To the extent paid leave is provided under State or local law, the federal credit cannot be claimed.

Short-term disability leave can qualify, whether it is insured or self-insured, as long as it meets all other requirements of family and medical leave under Code Section 45S.

Qualifying Employee

A “qualifying employee” is one who has been employed for one year or more and whose compensation is less than 60% of the amount under Code Section 414(q)(1)(B)(i) ($72,000 in 2018 and $75,000 in 2019.) No classification of employees may be excluded and a pro-rata amount of leave must be provided to part-time employees (working fewer than 30 hours per week.) Therefore, a paid leave policy benefiting only full-time employees will not qualify for the federal credit.

If an employer is using payments from a short-term disability (STD) insurance policy to satisfy the paid leave obligation, the employer should review the policy to determine if it has any pre-existing condition exclusions. If so, according to IRS Notice 2018-71, the employer will not be eligible for the credit for any employee because a qualifying employee with a pre-existing condition would not receive payments from the policy. This deficiency can be cured if the employer provides payments on a self-insured basis to any qualifying employee who is not eligible for payments under the STD policy due to a pre-existing condition.

Effective Date

The credit applies to wages paid in taxable years beginning after December 31, 2017 and before January 1, 2020.

The credit is useful in encouraging an employer to provide paid family and medical leave to employees. However, its usefulness is limited as the credit expires at the end of the 2019 taxable year. If an employer wishes to take advantage of the credit, it should carefully review its existing leave policy and STD policy and determine if modifications are necessary.

If you have any questions about the credit for paid family and medical leave, please contact Cynthia A. Moore at or any other member of the Dickinson Wright Tax or Employee Benefits group.

“Non-Performing Artists” Wait on IRS Final Regulations Under Section 199A

In early August, the Internal Revenue Service (IRS) issued proposed regulations under the Tax Cuts and Jobs Act (TCJA) that provide guidance to owners of pass-through businesses as to eligibility for a federal tax deduction of 20% of the income generated by the businesses under new Section 199A of the Internal Revenue Code (IRC). Although the stated purpose of the proposed regulations is to provide clarity on eligibility for and the means to compute the deduction, this guidance created ambiguity and confusion in several areas, including the applicability of the new deduction to persons who are involved in the entertainment industry but who do not perform on stage or in front of a microphone such as directors, producers, makeup artists, editors and the like.

One of the important limitations to the pass-through deduction in the TCJA is that owners of pass-through businesses that conduct a specified service trade or business (SSTB) and whose income exceed the so-called income limitation ($207,500 for single taxpayers and $415,000 for married taxpayers who file jointly) are not entitled to claim the 20% deduction. The TCJA provides that a SSTB includes a trade or business that involves the “performance of services in the field of performing arts”.

The proposed regulations indicate that persons who help create performing arts such as singers, actors, musicians and entertainers do provide services in the field of performing arts but that those whose skills are not unique to the creation of performing arts are not engaged in providing services in the field of performing arts:

Proposed § 1.199A-5(b)(2)(vi) is informed by the definition of ‘performing arts’ under section 448 and provides that the term ‘performance of services in the field of the performing arts’ means the performance of services by individuals who participate in the creation of performing arts, such as actors, singers, musicians, entertainers, directors, and similar professionals performing services in their capacity as such. The performance of services in the field of performing arts does not include the provision of services that do not require skills unique to the creation of performing arts, such as the maintenance and operation of equipment or facilities for use in the performing arts. Similarly, the performance of services in the field of the performing arts does not include the provision of services by persons who broadcast or otherwise disseminate video or audio of performing arts to the public.

Preamble to §1.199A-5-A(2)(i)(e) to Proposed Regulations.

Regrettably, the actual Proposed Regulations do not provide further guidance beyond the information contained in the Preamble. Prop. Reg. §1.199A-5(b)(2)(vi). The only examples in the Proposed Regulations relate to a singer and the royalties received for singing the song and a joint venture formed by an actor who contributes her name and likeness to the partnership in return for an interest in the entity. Both examples were found to generate income from an SSTB.

Several commentators conclude that income generated by persons who do not actually perform on stage or in a studio should not be characterized as a SSTB and have criticized the IRS’s position in the Proposed Regulations that people who are involved in the area of performing arts but who are not performing artists- such as directors, producers, makeup artists, costume designers and set designers- are engaged in the performance of services in the performing arts and thus cannot take advantage of the deduction if their income exceeds the income threshold ($415,000 for joint taxpayers). In fact, one commentator suggests that “the expansion [beyond application to pure performing artists] will create uncertainty and litigation”.

In further support of the argument that the definition of SSTB in IRC Section 199A should be limited to performing artists only, a footnote in the recently released explanation of the TCJA (called the “blue book”) indicated that the list of services in IRC Section 199A that are SSTB is similar to those listed in IRC Section 448 and that the performance of services in the field of performing arts for purposes of IRC Section 448 “does not include the provision of services by persons who themselves are not performing artists”. Hopefully, the IRC Section 199A Final Regulations will be consistent with the blue book’s implicit indication that Congressional intent is that SSTB under IRC Section 199A should be consistent with the interpretation of a similar set of services under IRC Section 448.

As a result of this uncertainty, persons who are “non-performing” artists and who provide services in the entertainment industry as independent contractors must wait on final regulations from the IRS under IRC Section 199A to determine if they can claim the 20% deduction for owners of pass-through businesses under this TCJA provision.

If you have any questions, or for further information, please contact Ralph Z. Levy Jr. in the Nashville, Tennessee office at 615-620-1733.