The Employee Retention Credit and What It Means for Buy Here – Pay Here Dealers
This article originally appeared in The Showroom.
The Paycheck Protection Program (PPP) dominated headlines for much of 2020, overshadowing the Employee Retention Credit (ERC), a powerful tax incentive available to eligible employers that maintain payroll during certain eligible periods. Recent legislation expanded ERC eligibility, significantly increasing the number of businesses that can claim the credit, including buy here – pay here (BHPH) dealers.
The ERC is a payroll tax credit available to eligible employers that are engaged in a trade or business that either (1) fully or partially suspended operations due to government orders relating to COVID-19 or (2) experienced a substantial decline in gross receipts during a calendar quarter. Currently, there are two applicable time periods for the ERC: March 12, 2020, through Dec. 31, 2020, (the 2020 ERC) and Jan. 1, 2021, through June 30, 2021 (the 2021 ERC). An employer that can establish an eligible quarter and determine the amount of qualified wages will be entitled to a credit equal to a percentage of such qualified wages. Here’s how the two time periods compare:
|2020 ERC||2021 ERC|
|Credit Amount||50% of qualified wages||70% of qualified wages|
|Maximum Qualified Wages||$10,000 per employee per year||$10,000 per employee per quarter|
|Maximum Credit Amount||$5,000 per employee per year||$7,000 per employee per quarter|
On March 1, 2021, the IRS issued Notice 2021-20, providing guidance regarding various aspects of claiming a retroactive ERC for 2020. The following are some key takeaways from the notice. However, the notice does not answer every question relative to the 2020 ERC nor does it provide guidance with respect to the ERC for 2021.
Interaction With PPP Loans
PPP borrowers were previously prohibited from claiming ERC benefits for 2020. This limitation was retroactively repealed by the Consolidated Appropriations Act, 2021. However, the same wages cannot be used for both ERC benefits and PPP loan forgiveness. There was significant uncertainty regarding how a PPP borrower calculates their ERC benefits in coordination with their PPP loan forgiveness application. Notice 2021-20 provides the first bit of guidance regarding the IRS’s positions on allocating wages between ERC and PPP loan forgiveness.
Notice 2021-20 states that wages reported on an eligible employer’s PPP loan forgiveness application up to (but not exceeding) the minimum amount of wages needed to support the amount of PPP loan forgiven cannot be used to claim ERC benefits. The notice further provides that other eligible expenses reported on the PPP loan forgiveness application can be considered in determining the minimum amount of wages needed to support the PPP loan forgiveness amount. This standard leads to the following considerations:
- Excess wages reported on the PPP loan forgiveness application can be used to claim ERC benefits despite such wages being reported on the application.
- Eligible expenses other than wages cannot be considered unless such expenses were reported on the PPP loan forgiveness application.
Despite the guidance provided by Notice 2021-20, employers must continue to carefully consider the interaction of ERC and PPP in order to maximize their overall benefit from the two programs.
The “More Than Nominal” Standard
Employers that do not have a significant decline in gross receipts can qualify for the ERC if they have a full or partial suspension of operations due to a government order – but only if such full or partial suspension is more than a nominal portion of their business operations. Notice 2021-20 provides that a portion of an employer’s business operations will be deemed to constitute more than a nominal portion of its business operations if such portion is 10% or more of the business operations. The 10% threshold is measured by gross receipts or hours of service in the same calendar quarter in 2019.
Partial Suspension of Business Operations
Determining eligibility via a partial suspension of business operations due to a government order is one of the most uncertain aspects of the ERC. There are many fact patterns that will lead to uncertain conclusions, and careful analysis is needed. When determining eligibility, BHPH operators should consider and analyze all local and government mandates that have caused a change or interruption in their business. For example, BHPH operators may experience a partial suspension in the following circumstances, but this list is not comprehensive or exhaustive:
- Government officials suspend ability of operators to sell cars
- Repossession of vehicles is stalled due to government orders
- Wage garnishments or judgments are disallowed due to government orders
- Government officials halt title work on vehicles from being processed
Again, it’s important to carefully consider the facts and circumstance of each particular situation in determining whether or not an employer has experienced a partial suspension for purposes of claiming ERC benefits. The eligibility requirements, interplay between various relief programs, and each business’s unique circumstances can make it difficult for companies to determine which programs they qualify for and how impactful it will be to their business. For that reason, it’s important for businesses to consult with professionals to ensure they are applying the ERC appropriately.
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