The employee retention credit (ERC), a refundable payroll tax credit for employers, was established by enacting the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. This article emphasizes two key qualifiers that may affect the potential eligibility of auto dealerships to qualify for this payroll tax credit in 2021. 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 can determine eligibility based on gross receipts in the immediately preceding calendar quarter compared with the corresponding quarter in 2019. This option is a quarter-by-quarter decision that allows the employer to make a different decision 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 that fall under the special controlled group classification:
- Parent-Subsidiary Controlled Groups: One entity owns 50% or more of all entities
- Brother-Sister Controlled Groups: Five or fewer people own at least 80% of each entity in the group with at least 50% voting power
- Combined Groups of Corporations: A combination of brother-sister and parent-subsidiary companies
Entities 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 a 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 group member 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 were deemed essential businesses and remained 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, 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 could be considered a partial suspension.
Notice 2021-20 also provides other examples when a business is or is not considered wholly 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 that 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 a maximum of $7,000 per quarter per employee as a refundable payroll tax credit.
As can be seen above, the ERC rules and applicability are complex and 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 by speaking with your accountant.