Dealerships can benefit from a number of Covid-19-related provisions in two laws that have passed in the last six months.
Extended qualification period
One of the most beneficial rule changes is an extension of the period during which wages and health expenses qualify for the Employee Retention Credit (ERC). Originally, the tax credit applied only to qualified wages and health expenses from 2020. This had been extended for two more calendar quarters, through June 30, 2021, in the Consolidated Appropriations Act, which was signed into law in December 2020. And the American Rescue Plan Act (ARPA), signed by President Biden on March 11, extended the credit through December 31, 2021. Other changes in the ARPA apply to “recovery startup businesses.” Health insurance premiums paid by your dealership count toward qualified wages.
The ERC was initially capped at $5,000 per employee for the 2020 period (50% of wages capped at $10,000). The cap has now been increased to $7,000 per employee per quarter (70% of qualified wages capped at $10,000) for all four quarters of calendar year 2021. The Consolidated Appropriations Act effectively increased the maximum benefit from $5,000 per employee in 2020 to up to $28,000 per employee in 2021 ($7,000 multiplied by four calendar quarters).
Criteria for the credit
For 2020, your dealership may qualify for the ERC by showing that 1) the jobs of some employees were affected by government shutdown orders, and 2) the dealership had more than 100 full-time employees (FTEs) and paid these employees during times they weren’t working in calendar-year 2019. If your dealership had fewer than 100 FTEs, any wages paid would qualify.
Another scenario: Your dealership also would qualify if it had a decline in gross receipts of more than 50% in any quarter compared to the same quarter the year before.
The gross receipts reduction threshold has been reduced from 50% to 20% for the first two quarters of 2021. This means your dealership may be eligible for the ERC for tax year 2021 if you’ve had more than a 20% decline in gross receipts in one of these quarters compared to the same quarter in 2019.
If your dealership obtained a Paycheck Protection Program (PPP) loan, you may claim the ERC for tax year 2020 or 2021 as long as the wages used to support the payroll portion of loan forgiveness aren’t used to support the ERC. In other words, no double-dipping.
If you obtained your PPP loan in 2020, you may claim the cumulative effect of the ERC in the fourth quarter of 2020 by filing an IRS form. Also, while your dealership may not qualify for the 2020 ERC due to the 50% decline in gross receipts threshold, the reduction in this threshold to 20% for the first two quarters of this year will likely make it easier to qualify for the ERC in 2021. If your dealership operates in a state in which your showroom was shut down to the general public for a period of time, you may qualify for the ERC credit without meeting the gross receipts reduction percentage.
The changes to the ERC rules are detailed and complex. Speak with your tax advisor for specific guidance in your situation, including the effects of any recent changes with the ERC.