The Employee Retention Credit (ERC) is one of the most powerful tax incentive programs available to businesses that we have ever seen (or will likely ever see again). The ERC has provided billions of dollars of much needed relief to thousands of businesses across the country that were impacted by the pandemic. While auto dealerships have experienced record profits in recent years, there is no doubt that the automotive industry was negatively impacted by the pandemic and has faced unprecedented challenges. One common misconception is that many auto dealerships don’t qualify for the ERC because their revenues didn’t decrease or because they didn’t incur losses. This isn’t necessarily true.
How does a business qualify? There are two ways to qualify for ERC. Most entities will qualify for ERC based on a significant decline in gross receipts when comparing quarterly gross receipts in 2020 and 2021 to the same quarterly gross receipts in 2019. A significant decline in gross receipts occurs when 2020 quarterly gross receipts are less than 50% of the gross receipts (more than a 50% decline) for the same quarter of 2019; or when 2021 quarterly gross receipts are less than 80% of the gross receipts (more than a 20% decline) for the same quarter of 2019. The second way to qualify, and the way most auto dealerships will likely qualify, is if a business experienced a full or partial suspension (shutdown) of operations due to a governmental order or mandate. In New York State, sales showrooms were closed by the Governor from March to June 2020, thereby creating a partial suspension of operations, and qualifying most auto dealerships for ERC for that period. There are various issues that could have caused an auto dealership to have experienced a partial shutdown that qualifies the business for ERC in an eligible period. Some of these issues are:
- Decreased vehicle inventory
- Increased lead times for parts and accessories
- Inability to conduct test drives
- Restrictions on showroom capacity
- Restrictions on repossessions
In order to qualify for ERC with any of these issues, they must be tied back to a government order or mandate. More and more auto dealerships are qualifying for ERC due to its supply chain disruptions, both with vehicle inventory and with service and parts delays. It’s important to work with a reputable firm that has the expertise related to these issues, and has the ability to compile the necessary data to support an ERC claim.
If qualified for ERC in 2020, the credit is 50% of the first $10,000 of qualified wages paid to each employee during the eligible quarter, capped at $10,000 of qualified wages per employee for the entire year. If qualified for ERC in 2021, the credit is 70% of the first $10,000 of qualified wages paid to each employee during the eligible quarter, there is no annual qualifying wage cap in 2021. If fully qualified for all quarters under the program, a business could claim ERC of up to $26,000 per employee.
These credits won’t be available forever, as the statute of limitations to amend 2020 forms ends April 15, 2024, and the statute of limitations to amend 2021 forms ends April 15, 2025. The time to act is now. Does your auto dealership qualify for ERC? Let’s start a discussion. If you have any questions, or need further information, please contact your trusted TBC advisor.