The Employee Retention Credit for Transportation Companies: Considerations Regarding Eligibility and Potential Risks
Originally a provision in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the employee retention credit (ERC) continues to spark conversation and debate nearly two and a half years after its passing. For some, this is like a broken record that you dread being replayed. For others, it might be a welcome refresher. Likely, there is a third group that avoids the subject entirely, like politics at a family reunion.
For those in the middle category, let us take a stroll down the ERC’s version of memory lane. This is one path that has had more than its fair share of construction. There have been numerous modifications to the original guidance that help analyze eligibility and calculate the credit itself, as evidenced by the following IRS disclaimer on the Internal Revenue Service’s FAQ page:
If this massive disclaimer hasn’t scared you off, here is ERC from a 10,000-foot view:
- It is a refundable tax credit against an employer’s share of employment taxes (see the credit calculation rules for 2020 versus 2021 as mentioned in a recent article for an adjacent industry).
- Qualified wages to calculate the credit are dependent upon a company’s classification as a small or large employer (the definition of which changed from 2020 to 2021). The credit is 50% of up to $10,000 qualified wages and health care costs for 2020 and 70% of qualified wages and health care costs per quarter for 2021 (limited to Q1-Q3).
- Eligible employers include private-sector companies and tax-exempt organizations that carried on a business during calendar year 2020 and had either:
- A full or partial government-ordered suspension of operations during any calendar quarter (a loaded statement that has rendered countless interpretations).
- A decline in gross receipts of an applicable percentage.
- 2020: Each quarter is compared to the same calendar quarter in 2019 to assess if there was a greater than 50% decline in gross receipts.
- 2021: Each quarter is compared to the same calendar quarter in 2019 to assess if there was a greater than 20% decline in gross receipts. Alternatively, unique to 2021, you can elect to compare the previous quarter’s gross receipts to the corresponding quarter in 2019 (in simpler terms – fourth quarter 2020 compared to fourth quarter 2019) to determine qualification.
Full or Partial Suspension
As previously mentioned, one of the most debated aspects of the ERC is what entails a “full or partial government-ordered suspension of operations.” While most trucking companies were exempt from government-mandated shutdowns due to their classification as “essential,” there are some key highlights from IRS Notice 2021-201 that provide further considerations:
- Qualification is not limited to businesses who were required to temporarily shut down. Essential businesses that were allowed to stay open, but had to modify their operations, may qualify for the credit. The notice states:
- If all, or all but a nominal portion, of an employer’s business operations may continue, but the operations are subject to modification due to a governmental order (for example, to satisfy distancing requirements), such a modification of operations is considered to be a partial suspension of business operations due to a governmental order if the modification required by the governmental order has more than a nominal effect on the business operations under the facts and circumstances.
- What level of impact or disruption do you need to have experienced to qualify? This question arises almost as frequently as the IRS modifies the rules surrounding ERC (almost), as nearly all businesses were impacted in some way. As previously noted, the IRS requires a more than “nominal effect,” which they define with a 10% threshold. While they do not specifically use the term “safe harbor,” it appears to be just that.
- Based on other references within the notice, it seems reasonable to review the portion(s) of your business that suffered a greater than 10% dip in employee hours and/or revenue to determine whether or not this safe harbor was met. That said, the notice does not exclude utilizing other measures.
- The IRS also noted that if your business was impacted, but you were able to continue comparable operations, you do not qualify.
- This will be one of the most hotly contested issues under examination. While the IRS has provided various levels of guidance, the lack of specificity as to what constitutes a government-ordered suspension of operations could make it difficult for the IRS to challenge a company’s position.
Supply Side Versus Customer Side
- The IRS notice states that a taxpayer may qualify if operations were suspended or limited because a supplier was subject to a government-ordered suspension.2
- Practically, we have seen few, if any, situations where trucking suppliers were shutdown. For illustration purposes, let’s say a carrier was not able to purchase tires or tractors because of a government suspension of the underlying manufacturers. A case could be made that their suppliers were “unable to make deliveries of critical goods or materials” which, in turn, caused the carrier to suspend its operations. While it is true that many tractor and trailer manufacturers had limited inventory during this time, it could be challenging to tie this to a governmental order (rather than economic reasons) and to then demonstrate that it had a more than nominal effect, as discussed above.
- In a parallel example where the taxpayer’s customer is shutdown or restricted due to a government order, the IRS states that this is not grounds for qualification.3
- This does not mean that companies that experienced a significant reduction in demand for their product or services are completely out of luck. This is where the significant decline in gross receipts comes into play, which is the other avenue in which a company can qualify for ERC.
- While many trucking companies flourished during the pandemic due to the rising demand for goods to be delivered directly to people’s homes, exceptions were present. Trucking companies that hauled goods for industries severely hit by the pandemic, such as the auto and hospitality industries, were not without their battle scars. For these companies, the revenue reduction path was the alternate route to an otherwise unattainable destination.
Potential Risks of Claiming Erroneously Calculated ERC Credits
The spectrum of interpretations as it relates to ERC eligibility is broad. Due to the potential dollars at stake, many taxpayers have approached these credits with a great deal of interest. Additionally, third-party consultants that are compensated on a contingent fee (i.e., a percentage of the credit) have marketed aggressive stances. Before moving forward, it is important to know that the Treasury Department has issued Temporary Regulations, § 31.3111-6T that provide the IRS authority to assess penalties and interests for erroneously claimed ERC credits which will be treated as an underpayment of tax.
To what extent this will be applied remains uncertain. In situations where companies feel they might have taken the ERC credit erroneously, the proactive approach to avoid potentially large penalties and interest may lie in amending Forms 941 or their equivalent.
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If you would like to discuss the employee retention credit and how it may impact your business, contact your KSM advisor or complete this form.
1An IRS Notice is not a binding authority. However, it does provide a strong indication as to the IRS’s position. While there may be certain facts and circumstances that could warrant deviating from the notice, taxpayers considering this should consult their tax advisor.
2See frequently asked question (FAQ) #12 within IRS Notice 2021-20.
3See frequently asked question (FAQ) #13 within IRS Notice 2021-20.
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