WHAT IS THE EMPLOYEE RETENTION CREDIT
The employee retention credit is a credit against payroll taxes to assist businesses that had a decline in business due to a government shut-down related to COVID-19 or experienced a significant decrease in business when compared to the same quarter in 2019. The credit is up to $5,000 per employee for 2020. In 2021 President Biden signed a law that limited the credit in 2021 to $7,000 per employee for the 1st, 2nd and 3rd quarters, which limits the maximum credit to $21,000 per employee.
QUALIFYING BUSINESSES
In order to qualify, employers must meet certain eligibility requirements. If a business was fully or partially suspended due to a COVID-19 related government order, then an employer would be eligible for an Employee Retention Credit. Businesses can also qualify if their sales for 2020 were 50% or less of the same quarter in 2019. Once these sales reach 80% of the same quarter in 2019; however, the program ends and no credits are available. These percentages are increased in 2021 to 80% of sales compared to the same quarter in 2019. The percentage remains 80% if sales recover in 2021 compared to 2019.
An employer wanting to qualify for the ERC justifying that their business was fully or partially suspended due to a government related COVID-19 order should obtain and maintain the following for their files: 1) documentation of the specific government order on which they are relying or 2) documentation of the specific government order causing its supplier to suspend its operations and that prevented the supplier from delivering critical goods to the business. The IRS did issue guidance stating the government order must be from the federal government or the employers state or local government.
This particular justification is causing disagreement amongst professionals and vendors servicing the auto industry. It’s questionable whether or not a government order caused suppliers to the automobile industry to suspend operations preventing manufacturers from delivering vehicles to dealers. For example, was the supply chain issue most impactful in the auto industry, the chip shortage, caused by manufacturers canceling chip orders at the beginning of the pandemic, manufacturing issues abroad or by a government shutdown? Whether or not you and your advisors decide to interpret this and other questions in your favor will have a significant impact on your ability to get the credit and how much of a credit you receive. The amounts for interpreting the rules incorrectly are significant though, so dealers should make sure they are comfortable that the risks of non-compliance don’t outweigh the benefits of an increased credit. Especially, the way the past couple of years have turned out for the industry.
CALCULATING THE CREDIT
For 2020, eligible employers can claim a refundable tax credit against Social Security taxes paid on “qualified wages” paid in an eligible quarter between March 12 and December 31, 2020. The credit is capped at 50% of $10,000 in qualified wages paid per employee. Any amount of ERC that exceeds an eligible employer’s Social Security tax owed is directly refundable.
For 2021, eligible employers can claim a refundable tax credit against Social Security taxes paid on “qualified wages” paid in an eligible quarter between January 1 and September 30, 2021. The credit for 2021 is capped at 70% of $10,000 in qualified wages paid per employee per quarter, for up to 3 qualifying quarters.
For these calculations “qualified wages” include health insurance expenses, including those costs paid for furloughed employees. Be careful if you also received forgiveness on a PPP loan. The same payroll costs used for PPP forgiveness cannot be used to claim an ERC.
These rules are very complex and as stated before somewhat controversial regarding who qualifies and who does not. We are working with dealers to advise them if they qualify or not. If you need assistance, please contact us and we will assist you with the calculation.
