The ERTC (Employee Retention Tax Credit) can cause a lot of confusion to small business owners. There are several layers to figuring out how and if you qualify. The good news is, since auto repair is considered an essential service, some of those qualifying layers can be immediately disregarded. Essential services were allowed (and necessary) to remain open during the pandemic, so right away, you would not qualify under the stipulation that you were forced to shut down due to COVID. This leaves revenue loss as the only way a repair shop could qualify for this credit. Or does it?
The revenue decrease stipulation is pretty straightforward. If your sales were down 50% or more in a quarter of 2020 as compared to the corresponding quarter in 2019, then you would qualify for this credit. (Not just any three-month period, it has to be a calendar quarter: Jan-Mar, Apr-June, etc.) For 2021, it’s the same idea – you’d be comparing a quarter in 2021 with the corresponding quarter in 2019. However, you only had to show a 20% revenue decrease.
This is a great credit if you qualify. You could potentially get in the hundreds of thousands back depending on your number of employees and which quarters you qualify for. The max you could get back is about $7,000 per quarter per employee.
Some businesses can still qualify another way for this credit, even if there is no revenue decrease at all. If you had a partial or full shut down of your business, you may be eligible. But what auto repair shop would qualify this way if you were deemed an essential service and never had to shut down? The argument now is supply chain disruptions. If you had issues getting parts, maybe you could qualify now? This gets a little tougher because there is not a quantitative amount like in the revenue decrease stipulation.
We’ve had clients ask if we will help them apply for the credit claiming supply-chain interruptions – and the answer is no. We as a firm do not offer that service. The IRS has been pretty clear on the rules for this, but just vague enough that third-party companies are jumping on the chance to come sell this service to shop owners. These companies are offering these services on a percentage basis. They’ll offer to review your sales and what’s going on in your business to see if they can qualify you for this credit for 1 – 6 quarters. And miraculously, everyone we’ve talked to so far has qualified. There is no sort of checklist to go down through or proof to see if you qualify, it’s largely based on the honor system. These companies offering these services have it in their best interest to get you the most back – because they charge you a percentage of what you get. This is a big business; there is a lot of money to be made here by those companies.
That is the first word of warning that we give to clients. Do you think someone could go down in an objective manner and say whether or not you actually qualify, knowing that if you don’t qualify, they make no money, but if you do, they stand to potentially make tens of thousands of dollars? This is an immediate conflict of interest, and you need to ask yourself if they’re being completely honest with you.
When we started to do the research and read through the tax law and documents that the IRS has released to get clarification, we ultimately decided we are not comfortable with providing this service. We are known to be pretty aggressive in most of our tax stances, but after reading fully into this, we could not tell our clients that we would get them this money and that they would have nothing to worry about. For most shop owners, there is something to worry about. Though the risks are likely relatively low, at the very least, your chance of being auditing drastically increases.
Our job is to explain, as an independent source, the positives and negatives of this program – the risk verses reward – so that you as a shop owner can make an educated decision on your own.
From the IRS website, the question and example they use for supply chain interruptions:
If a governmental order causes the suppliers to an essential business to suspend their operations, is the essential business considered to have a suspension of operations?
An employer with an essential business may be considered to have a full or partial suspension of operations if the business’s suppliers are unable to make deliveries of critical goods or materials due to a governmental order that causes the supplier to suspend its operations.
Example: Employer A operates an auto parts manufacturing business that is considered an essential trade or business in the jurisdiction where it operates. Employer A’s supplier of raw materials is required to shut down its operations due to a governmental order. Employer A is unable to procure these raw materials from an alternate supplier. As a consequence of the suspension of Employer A’s supplier, Employer A is not able to perform its operations. Under these facts and circumstances, Employer A would be considered an Eligible Employer because its operations have been suspended as a result of the governmental order that suspended operations of its supplier.
The highlighted section above is key. “Unable to procure these raw materials from another supplier.” So, say your regular tire vendor had to shut down. We all know there are other suppliers that repair shops can get their tires from. You would still have been able to get these materials, just maybe not from the same source. Maybe not the same brand, maybe not as good of quality, but you were not forced to sit around and do nothing. You still had options. The IRS’ example of supply chain interruptions is not supply chain slow down, it’s the complete inability to access these materials.
So, if you can’t show that you were completely unable to access certain parts/materials, your only other option is showing the 20% (for 2021) or 50% (for 2020) decrease in sales. It is pretty clear from the IRS, which is why we are not comfortable “reading between the lines.” Just because you couldn’t get a part doesn’t mean you qualify for supply chain disruption.
Ultimately, you need to think about your own risk threshold that you have. We can not answer that for anyone whether you’re a client of ours or not. Make sure you understand what you’re signing up for, and the motivations behind the company offering to help you. Overall, our job as an accounting firm is to give you the information you need to make an educated decision on your own.