By Scott Lewis, CPA, MSA
The employee retention credit (ERC), which is a refundable payroll tax credit for employers was established with the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. A comprehensive summary on the history and the Internal Revenue Service (IRS) guidance of the ERC can be found here. We wanted to emphasize two key qualifiers which may affect the potential eligibility of this payroll tax credit for 2021 by vehicle dealerships. In order to qualify for the ERC, eligible employers must satisfy one of the following provisions:
Significant Decline in Gross Receipts
For each calendar quarter in 2021, an eligible employer can qualify for the ERC if their gross receipts were less than 80% of their gross receipts for the same 2019 calendar quarter (or the same 2020 calendar quarter if the employer did not exist as of the beginning of the same 2019 calendar quarter). In addition to these eligibility requirements, an employer also has the option of determining eligibility based on gross receipts in the immediately preceding calendar quarter as compared with the corresponding quarter in 2019. This option is a quarter-by-quarter decision which allows the employer to make a different decision each quarter in 2021.
For the significant decline in gross receipts, aggregation rules need to be considered. From the establishment of the ERC under the CARES Act, aggregation rules require members of a controlled group to calculate the ERC as a single employer.
There are three categories of aggregated companies which fall under the special controlled group classification:
1. Parent-Subsidiary Controlled Groups: One entity owns 50% or more of all entities
2. Brother-Sister Controlled Groups: 5 or fewer people own at least 80% of each entity in the group with at least 50% voting power
3. Combined Groups of Corporations: A combination of brother-sister and parent-subsidiary companies.
Entities which exist within any of the above categories are subject to the aggregation rules. Therefore, all group members will be treated as a single employer when applying the ERC qualifiers of eligibility and qualified wages. Aggregation does not require that the businesses be related to one another; if ownership is controlled, all businesses are combined for purposes of the ERC determination. To be an eligible employer based on decline of gross receipts, the employer must consider the gross receipts of all members of the aggregated group. If the aggregated group does not experience a significant decline in gross receipts, then no member of the group may claim the ERC on that basis.
Full or Partial Suspension of Trade or Business Operations
The other qualifier is more subjective. An eligible employer must have experienced a full or partial suspension of business operations due to a governmental order. Many dealerships had been deemed essential businesses and remain open in some capacity. Whether or not the dealership is partially suspended, tests would need to be performed to determine whether these suspended activities make up more than a “nominal” portion of the business. Under IRS Notice 2021-20, Guidance on the Employee Retention Credit under Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act, in questions 11 and 18 of, the IRS references nominal to be less than 10% of either the total gross receipts of business operations or the total hours of service performed by all employees.
The notice includes an example where suppliers of an eligible employer cannot deliver critical goods due to a full or partial shutdown impacting the employer’s business operations. With the combination of the ongoing semiconductor chip shortage, and the recent COVID-19 manufacturer facility shutdowns, the supply chain in new vehicles has been critically affected. Most dealerships have minimal amounts of new vehicle inventory available to sell. In addition, parts and service departments have also been affected by these disruptions in the supply chains, with parts shortages leading to increased delays in completing repair orders. This would be considered a partial suspension.
Notice 2021-20 also provides other examples when a business is or is not considered fully or partially suspended. When more than a nominal component of a business has been impacted directly or indirectly due to a governmental shutdown order the employer may qualify for the ERC. As another example, dealerships may have had to implement appointment only or other restrictions in their showrooms due to physical distancing, which may have lowered their customer traffic count and subsequent sales. This would also be considered a partial suspension.
In 2021, for eligible employers, the amount of wages which qualify for the ERC is $10,000 per employee per quarter, and can be claimed against 70% of qualified wages paid. If qualifying factors are met, an employer could claim up to a maximum of $7,000 per quarter per employee as a refundable payroll tax credit.
As can be seen above, the rules and applicability of the rules surrounding the ERC are complex and will be unique to your situation. It is imperative that any calculation of a potential credit is first regulated by determining eligibility factors applicable to the employer.
If you have any questions on how this impacts you or your businesses, please click HERE to contact us.