Nearly a year into the Covid-19 pandemic, marine and RV businesses are still looking for ways to stay afloat by reducing federal taxes and increasing cash flow. Businesses that experience at least a partial shutdown or a drop in gross receipts as a result of the pandemic are uniquely positioned to take advantage of subsidies available to taxpayers who pay wages. These credits include the Employee Retention Credit and a credit for voluntarily paying wages due to Covid-related absences.
The ERC was introduced as part of the CARES Act to incentivize employers to retain employees by offering a refundable tax credit for certain employment taxes for 2020. Recently, the ERC was expanded and extended as part of the Consolidated Appropriations Act. Notably, the act extends the ERC through June 30 and removes the Paycheck Protection Program loan restriction. Companies that obtained PPP loans in 2020 may now retroactively apply for the ERC in 2020, as long as wages that were used to support PPP loan forgiveness are not used as ERC qualified wages.
Even before the CARES Act, the Families First Coronavirus Response Act mandated sick and family medical leave for certain employers who paid wages for certain amounts on Covid-related absences from work, and provided a tax credit for doing so. The mandate to pay such amounts expired December 31; however, the credit was extended until March 31. It now applies to amounts voluntarily paid as long as the requirements under the mandated provisions are met.
Does your business qualify for the ERC? Employers are eligible for the ERC if they experienced either of the following two things:
• A full or partial suspension of their operations. The suspension must be attributable to a government order limiting travel, commerce or group meetings as a result of Covid-19.
• A significant decline in gross receipts during any calendar quarter. This decline could be defined as the gross receipts of a particular calendar quarter in 2020 being less than 50 percent of those gross receipts for the same calendar quarter in 2019; or the gross receipts of a particular calendar quarter in 2021 being less than 80 percent of those gross receipts for the same calendar quarter in 2019.
Note that the ERC is only available during the first two calendar quarters of 2021 and will expire June 30.
One example of an eligible recipient would see a significant decline in gross receipts commencing on the first calendar quarter of 2021 because gross receipts were reduced by greater than 20 percent with respect to the same calendar quarter in 2019 (a 25 percent reduction). The gross receipts of the second quarter in 2021 were reduced by less than 20 percent. Therefore, the employer is only entitled to the ERC for the first quarter of 2021.
Once an employer determines eligibility, the ERC qualified wages depend on the employer size, which is determined on a controlled group basis, as explained below.
For 2021, employers that averaged more than 500 full-time employees in 2019: Wages include amounts paid to employees who are not providing services because operations were suspended or because there was a significant decline in gross receipts. For 2020, this employer size applied to more than 100 full-time employees.
Employers that average 500 or fewer employees: Wages include amounts paid to employees during the period in which operations were suspended, or the period of the decline in gross receipts, even if employees are providing services. For 2020, this employer size applied to more than 100 full-time employees.
For all employers in 2020, wages paid after March 12 and on or before Dec. 31: Credit is limited to 50 percent of up to $10,000 of wages per employee, per year. The maximum credit allowable is $5,000 per employee, per year.
In 2021, wages paid Jan. 1 through June 30: Credit is limited to 70 percent of up to $10,000 of wages per employee, per calendar quarter. The maximum credit allowable is $7,000 per employee, per calendar quarter ($14,000 total annually for 2021).
Other limitations that may affect the amount of your credit include the Research and Development Tax Credit, the Worker Opportunity Tax Credit and the credit for mandated or voluntary paid leave. With the inherent complexities around the ERC, you need to speak to your tax adviser about the opportunities for your business.
In today’s complex tax environment, proactive tax planning should be part of your company’s overall strategy. Planning opportunities such as R&D tax credits for innovation, IC-DISC corporations for exports, and state and local hiring credits for adding jobs are often overlooked. Avoid leaving money on the table by following these four steps:
First, determine whether you are an eligible employer for the ERC.
Second, verify that there are 2020 wages eligible for the ERC to claim by filing amended quarterly employment tax returns.
Third, determine whether you qualify for the ERC in 2021 and claim the credit by reducing regular payroll tax deposits to get an immediate cash-flow benefit.
Fourth, review the payment of voluntary sick or family medical leave benefits to be sure any eligible credit is claimed.
Working closely with a trusted tax adviser will help you to create a plan that supports your marine and RV business goals, and that creates opportunities to drive growth. n
Michael C. Laur, Jaime Garcia de Paredes and Ronald G. Wainwright are managers and leaders at Cherry Bekaert’s Specialty Tax Group, with expertise in income tax deductions and more for multinational, public and closely held companies.
This article was originally published in the March 2021 issue.