The COVID-19 pandemic has brought several economic challenges to all business sectors, including the automotive industry. That is why things like the Employee Retention Credit (ERC) are a welcome relief for employers affected by the fiscal hardships experienced during the 2020 and 2021 tax years. This tax refund program can help your car dealership offset the recent revenue downturns by recouping some of the money paid to and for your employees.
It is not too late for car dealers like yourself to claim the Employee Retention Credit tax refund you might be eligible for. Your business can qualify based on the 2020 and 2021 fiscal quarters criteria. A calculated percentage based on previous employee payroll will provide a refund total you can retroactively file for through 2025.
There is a lot of misinformation out there, and some sources may have you believing your car dealership does not qualify when it actually does. For example, did you know businesses can meet qualifications for the ERC refund even if they experienced only a partial shutdown during the pandemic?
A glance at the Employee Retention Credit rules established by the Internal Revenue Service (IRS) helps clarify this. These rules indicate that a significant consideration when determining ERC refund eligibility is the extent of the restrictions imposed on a business by local and state governments. Those entities that had their business capacity restricted from the start of government mandates through lifting those edicts could meet the criteria for an ERC tax refund.
We have compiled this detailed Quick Start Guide to help you better understand the Employee Retention Credit (ERC) and determine if your business meets the criteria for this special tax refund. You can learn more about the requirements, application, and other helpful information. After reading this, you should be better prepared to file and receive financial relief for your automotive dealership.
Things about ERC tax refunds you should come away with:
- 1ERC Dealership Basics: What Employee Retention Credit is and how it could apply to your automotive dealership.
- 2Eligibility Requirements: Discover what qualifying criteria your business must meet to file for a successful ERC tax refund.
- 3How to Calculate ERC: Gain a better understanding of calculating a return to get the most from your ERC claim.
- 4The Claiming Process and Practical Uses: Read about filing a claim and get tips on making the most of your ERC refund.
- 5Things to Watch For: Learn to avoid errors during the filing process to maximize the benefit from your ERC claim.
Table of Contents
What is ERC?
The Coronavirus Aid, Relief, and Economic Security Act (CARES) is a 2020 piece of legislation designed to aid with the economic hardships brought about by the COVID-19 pandemic. Part of the CARES Act was the Employee Retention Credit (ERC), a refundable tax credit offered to businesses that kept employees on the payroll through mandates and revenue losses. It allows your automotive dealership to claim a refundable tax credit equal to 50% of qualified gross wage salaries between March 12, 2020, and December 31, 2020.
Those filling for tax credits between January 1, 2021, and September 30, 2021, could receive 70% of gross wage salaries that qualify if the dealership was operating before February 15, 2020. Automotive dealerships beginning operations after February 15, 2020, can make claims on wage salaries through December 31, 2021.
Automotive dealerships like yours are the small to medium businesses the government intended to help through the ERC when the CARES Act passed in March 2020. The aid helps these entities to weather the economic storm and protect their workers during the COVID-19 crisis. It incentivized employers to keep people on payroll instead of terminating them, and the ERC has received updates since then.
The Infrastructure Investment and Jobs Act of 2021 limited ERC claims to wages paid before October 1, 2021. Lawmakers did make an exception for recovery startup businesses, allowing them to claim ERC until January 1, 2022.
ERC for Auto Dealers: How Does It Work?
Several alterations and updates to the ERC eligibility requirements and refund amounts have made the process confusing for business owners. Trying to determine if you qualify and how to make accurate claims for specific quarters can be complicated when filing for your dealership.
The IRS created specific steps to file an Employee Retention Tax Credit claim. These included checking for eligibility, calculating the amount of tax credits for each period, making deductions from the payroll tax deposit, and filling out an IRS Form 941-X. If you are unfamiliar with the IRS Form 941-X, it is similar to the Employer's Quarterly Federal Tax Return Form 941, with amendments. The form is due 30 days after the quarter ends in most cases.
Earlier Employee Retention Credit paperwork included IRS Form 7200. It helped employers when the tax credit was more than the deposit, allowing them to receive advance payment for the excess amount. That has changed now that the program for Form 7200 has ended.
While the Employee Retention Credit tax program has ended, your automotive dealership can still file for the credit during designated quarters for up to three years. That can apply to businesses that applied for and received the Paycheck Protection Program (PPP) loans.
The claim process for fiscal quarters ending on or after September 30, 2021, might get processed differently. You would have to clarify what requirements apply to your status. It will require documentation demonstrating how the COVID-19 pandemic and mandates harmed your dealership.
That can include evidence of capacity restrictions or loss of revenue while you still kept employees on the payroll. Detailed records showing pay periods and all qualifying wages paid out are crucial for a successful ERC claim.
Car Dealership Employee Retention Credit Requirements
Your business might qualify for retroactive Employee Retention Credit (ERC) if it can meet the criteria, such as:
1. Suffered a Partial or Complete Operation Shutdown
The first path for ERC qualification is when your automotive dealership had to cease operations in part or altogether due to government mandates relating to the COVID-19 regulations or some other type of pandemic-related mandates during the 2020 or 2021 fiscal quarters. Qualifying tests help determine if these operational shutdowns meet the more than nominal part of your business criteria.
For this purpose, the Internal Revenue Service defines nominal as fewer than 10% of your business's gross receipts of its operations or the total hours of service your employees perform.
Question 11 and Question 18 on the IRS Notice 2021-20 cover these. That Notice provides guidelines on the ERC under Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES).
IRS Notice 2021-20 includes an example scenario showing suppliers unable to provide needed goods because of a partial or complete shutdown, negatively affecting the operations of the qualified employer seeking an ERC refund.
How can that apply to your dealership? Semiconductor shortages created by COVID-19-related shutdowns have negatively impacted the supply chain, which hurts the production of new vehicles.
Another example of how this could apply to you is delayed vehicle repairs due to a shortage of replacement parts. While it is not a complete shutdown, these delays can be a partial shutdown because the workflow is interrupted due to shutdowns further up the supply chain.
2. Experienced a Notable Reduction in Gross Receipts
A second qualifying path for the Employee Retention Credit involves a substantial decrease in your dealership's gross receipts for qualifying quarters compared to similar quarters in the previous years of 2019, 2020, or 2021.
The qualifying criteria here is a reduction exceeding 50% for the 2020 fiscal quarters compared to those same quarters in 2019. For 2021 quarters, it drops to a 20% gross receipts reduction compared to the same 2019 quarters.
An example here may help. Let's say your dealership had gross receipts of $200,000 in the 3rd quarter of 2019, and the 3rd quarter of 2020 dropped to $100,000 while the 3rd quarter of 2021 reached $160,000. The 50% drop in 2020 and the 20% drop in 2021 would qualify as notable declines in gross receipts that meet the IRS criteria.
How Number of Employees Effects Qualification
The number of people you paid wages to part and full-time employees in any quarter of 2020 or 2021 will affect your claim. For 2020, fewer than 100 employees qualify, while 500 or fewer will meet the criteria for 2021. You can count those gross payroll wage numbers towards the ERC.
The IRS has established specific qualifying conditions to help owners like yourself qualify for the Employee Retention Credit during the pandemic due to partial or complete shutdowns. These conditions include:
A. Negative Impacts Due to Social Distancing Requirements
Government-mandated rules for social distancing may have impacted your business negatively, which could qualify you for ERC. Maintaining proper space in lines, reduced seating in offices and waiting areas, and limited access to showrooms come to mind. These social distancing requirements would impact a customer's ability to purchase products or services.
B. Government Mandates Limited Customer Contact
Another possible way to qualify for Employee Retention Credit might be due to a local or state mandate limiting or denying you the ability to meet with customers. That could have prevented things like scheduled vehicle maintenance or other services.
C. COVID-19 Regulations Forced Office and Shop Closures
Another negative impact resulting from pandemic mandates that could qualify you for ERC would be regulations that would have forced your dealership to close its office, shops, or showroom.
If your automotive dealership experienced any of these scenarios, it may qualify. That would entitle you to receive a percentage of qualified wage payments to employees as a tax refund.
How to Calculate
Calculating ERC for your automotive dealership begins by determining the total gross wages you paid in the fiscal quarters filed for. This information is critical for determining the correct credit amount you are eligible for.
There are three forms of compensation to consider when calculating your ERC. These include wages paid out, qualifying health insurance expenses, and FICA tax compensation. When calculating the Employee Retention Credit claim, remember that all payment methods used in the process went to employees working for your dealership between March 12, 2020, through September 30, 2021.
Remember that wages funded by your Paycheck Protection Program (PPP) loan will not be part of your ERC calculations. You might consider allocating your PPP loans to employee wages that do not qualify for ERC or toward other business expenses.
How to Claim
You do not have to worry about funding running out on the ERC because you are filing retroactively; the only thing affecting your tax refund will be the qualifying wages determined during your calculations. The only chance you have to miss out on the ERC is if you fail to claim the deadlines set between 2023 and 2025. The filing process has changed since the program started, but qualified dealerships can still file.
The Internal Revenue Service offers different methods for you to use when filing an ERC claim. Most businesses use the IRS Form 941-X when filing a claim using the paper method for all eligible fiscal quarters. You can only mail Form 941-X because the IRS does not accept online versions of this form.
To avoid complications with your claim or refund, you might consult an ERC tax refund specialist if your dealership got an SBA/PPP loan during the first or second draw. They can help with the IRS guidelines and get the maximum refund on your claim.
How to Use Your Tax Credit
Your top priority will likely be managing payroll costs using your Employee Retention Credit tax benefits. You should receive the maximum refund possible if you filed your claim using Form 941-X and followed the IRS qualifying criteria, including how other tax credits and loans will influence your ERC. There are several ways to use the ERC to your dealership's advantage, including:
1. Using Your ERC as Financial Support
One way your Employee Retention Credit can directly benefit your automotive dealership is by providing you with tax savings. It can help cover payroll costs, placing it against employee wages or health benefits you paid out during the fiscal quarter it covers.
2. Using It To Help Train Employees
One long-term strategy for using your dealership's credits would be to develop your employee's skills through advanced training. You may not see an instant return on your claim, but your staff will have better training for office management or vehicle service and repairs. These assets will pay dividends in the future through efficiency and increased service.
3. Increase Employee Loyalty and Motivation
Your auto dealership's ERC can be used by offering bonuses to your staff or creating incentive payments for making deadlines or quotas. It is a great way to show those that work for you that they are appreciated. That is one of the best ways to build loyalty and motivate employees.
4. Use Your ERC To Cover Other Expenses
You do not have to limit your Employee Retention Credit to covering payroll wages or health care premiums. There are other ways the ERC can further develop your automotive dealership. Use it to offset costs for upgrading your accounting services, marketing and advertisements, update your website to increase online traffic, or buy new diagnostic equipment for the shop.
5. Use However You See Fit
The bottom line is you should not feel limited to using the ERC for one specific purpose. It can help you offset payroll expenditures, but you can also put it to work growing the services your dealership offers or expanding the abilities of those who work for the dealership.
6 Mistakes You Want to Avoid
Getting anywhere from $26,000 to $33,000 for every person you employed during the 2020 and 2021 tax years will make some owners rush the process. That can lead to mistakes that prevent a maximum refund or a delay due to filing errors. These are some of the common mistakes we see dealerships making that you should avoid when you file:
1. Waiting Too Long for an AERC Consultation or Assuming You Do Not Qualify
The CARES Act and ERC legislation have experienced modifications, adding complexity to the claims process. Filing errors can disqualify you, so avoid problems by working with an ERC refund specialist that can perform a proper analysis and file on your dealership's behalf.
Some business owners assume the ERC is over and do not try to file retroactively. There is still time to claim your ERC, and you should have a second look if you thought your business did not qualify previously.
2. Not Being Precise With Your ERC Calculations
You can not estimate or guess when making Employee Retention Credit calculations; you must use precise figures. Things are more precise than taking your total number of employees for the qualified fiscal quarter and multiplying that by a number you think the dealership qualifies for ($26,000 per employee, for example).
That is why it is best to consult someone specializing in handling Employee Retention Credit claims. They can work through all the criteria to apply all eligible wages and maximize returns for each employee you kept on the payroll through the pandemic. It is not a program you put in an application for; the ERC is something an automotive dealership qualifies for.
3. Not Providing Proper Documentation for the Claim
You will need detailed records showing employee payroll wages, healthcare expenses the dealership paid for, and other related costs. These documents should include invoices, payroll paperwork, and receipts.
You can also include documentation showing mandatory restrictions and shutdowns. We also suggest keeping detailed records of all ERC materials to reference at later dates.
4. Using Wages That Do Not Qualify
Remember to work from the most recent updates when reporting employee wages for ERC claims. The program has changed several times since its launch, so you do not want to miss qualified wages or use non-qualifying payroll or employees. There are only certain financial quarters that meet ERC requirements as well.
5. Assuming You Are Not Eligible Because You Remained Open During the Pandemic
Your automotive dealership may still qualify for Employee Retention Credit tax refunds if it was open but experienced a sizeable decline in gross receipts during similar quarters in the 2019 fiscal year. The catch here will be how much of a drop compared to 2019 gross receipts levels.
Several US dealerships were required to close their showrooms for short periods or reduce seating to comply with social distancing protocols by as much as 75%. Other vehicle venues had to limit the hours they were open for business.
These mandated restrictions created conditions that can help you qualify for the Employee Retention Credit. You might meet the criteria for the quarters when the local or state governments enforced the mandates that resulted in a reduction of gross receipts. That applies even if you were able to generate income during those periods.
6. Not Using an ERC Specialist to File
You may have noticed increasing numbers of businesses and people touting their expertise in handling Employee Retention Credit claims over the last year. A quick Google search verifies this.
These may look like upstarts, but they might be a branch of the ERC tax mills that take up to 30% of your tax refund to use their services. That could negate a sizeable chunk of your claim to pay for commissions. What is worse is that many of them lack the knowledge that can get you a maximum refund in the first place.
We have taken the time to research all of the ERC firms out there and compiled a list of the top three. You can see the pros and cons of each service below in the charts. We recommend using one of these providers to stay within compliance and get the maximum refund without the heavy fees.
Summary
Maintaining detailed records is crucial to maximizing your ERC claim, including paystubs, W-2s, and other payroll documents and files. You will also want to preserve any local, county, or state COVID-19-related mandates and restrictions that required reductions in operations, loss in gross receipts, or forced you to shut down entirely for a time.
Familiarizing yourself with the most up-to-date guidelines and qualifying criteria for the Employee Retention Credit will help you get the total credit compensation your dealership is qualified to receive. Maximizing your ERC will allow you to recover and grow more quickly than other dealerships that do not file their ERC claims.
If your automotive dealership had its operations limited or halted due to mandates or experienced a notable drop in gross receipts compared to similar quarters in 2019, file for the ERC.
If you have not filed yet, consider the three firms below in the charts.
Each firm has great customer service, proven track record, verified client review, and specializes in ERC. ERC Specialists takes the #1 position but they are only slightly better than the other two options.
We are confident in recommending these providers perform an ERC analysis for you, but always remember to do your research on a company if you consider hiring them.
4.3 of 5 stars
The company specializes in ERC tax refunds and has long experience obtaining the maximum amounts for clients. The team at ERC Specialists has a deep understanding of the ERC program's workings as well as the field of payroll taxation. Their application is fast and simple, and it removes the guessing factor from applying for ERC tax refunds.
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Cons
Note: ERC specialists uses a back office partner firm called LINQQS. When you click the link to start an ERC evaluation, you will see a LINQQS qualification form.
4.3 of 5 stars
Omega Accounting Solutions is the best ERC company on the list. They offer bridge loans, which make up for their potentially year-long processing time for customer refunds. They've already helped more than 2,000 clients and have excellent reviews online
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4.1 of 5 stars
Besides offering their customers a fast and simple way to claim ERC tax money, ERC Today's team charges no fees to find out if you qualify for a refund in the first place. They work fast to get your paperwork to the IRS. The client portal is safe to use, and there is dedicated customer support available. Those are just some of the reasons this company receives uniformly high marks from its many clients.
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Cons