Accessing COVID Relief: Using Retention Credits to Fund Summer Shutdown Pay

Many companies opt to temporarily suspend or reduce operations during slower summer months. However, retaining staff through these annual shutdowns can be financially challenging. Fortunately, generous employee retention tax credits available due to COVID-19 potentially enable access to government funds to offset shutdown payroll costs for employers meeting certain criteria. This Credit helps employers who did not layoff employees during the COVID-19 pandemic,

This in-depth guide examines how employers can strategically leverage retention credits to supplement summer shutdown pay. We will cover qualifying rules, required documentation, credit computation, claim processes, pitfalls to avoid, and key planning considerations around this seasonal opportunity.

Assessing the Benefits of Summer Shutdowns

Temporarily closing shop over slower summer periods allows for gaining certain advantages:

  • Reduce operating costs during slower demand cycles
  • Perform maintenance, upgrades remodeling, or inventory activities more effectively while closed
  • Provide employees the opportunity to refresh during a vacation or staycation period
  • Assess operations and strategic planning in the relative downtime

However, retaining staff through unpaid shutdowns can pose financial and workforce challenges. This is where COVID-19-related credits can now assist.

Overview of Employee Retention Tax Credit

The employee retention credit (ERC) is a payroll tax credit that helps employers keep employees during pandemic conditions. Originally part of the CARES Act, key provisions include:

  • Refundable credit claimed on payroll tax returns based on keeping employees
  • 70% credit on up to $10,000 of eligible wages per employee per quarter in 2021
  • Eligibility if gross receipts declined 20%+ from the same quarter in 2019 OR full/partial shutdowns occurred due to governmental COVID-19 orders
  • Provides up to $28,000 per employee for 2021 if conditions are met in all quarters

By subsidizing labor costs, ERC supports retaining employees through disruptions like summer shutdowns.

Qualifying Rules for Credit on Summer Shutdown Pay

Employers must satisfy the following to claim ERC on wages paid to workers during summer shutdown periods:

  • Must have one or more defined business quarters that align with a summer shutdown period
  • Experienced an eligible COVID-19 impact during the defined quarter with the shutdown:
    • 20%+ decline in gross receipts compared to the same quarter in 2019 OR
    • A full or partial suspension of operations due to governmental order
  • Shutdown must occur during the defined eligible quarter
  • Wages paid to employees during the shutdown quarter qualify

Securing eligible quarter status provides the gateway to credits for seasonal shutdown pay.

Documenting Eligibility

Meticulous documentation is required to qualify and claim ERC for summer shutdown wages:

  • Financial statements confirming a 20%+ decline in gross receipts for the specific quarter with the shutdown compared to 2019
  • Applicable governmental orders mandating COVID-19-related business closures or operational reductions
  • Records substantiating the defined business quarter aligned with summer shutdown dates
  • Documentation of wages paid to employees during the eligible summer shutdown quarter
  • Description of how shutdown operations compared to normal operations

Thorough documentation provides critical substantiation to withstand IRS scrutiny.

Determining Credit Amount

Once eligibility is established, employers can calculate ERC amounts based on summer shutdown pay:

  • Identify employees paid wages during the summer shutdown aligned with an ERC qualifying quarter
  • Confirm wages paid to each applicable employee during the defined shutdown period
  • For employers with over 100 employees, the credit only applies to non-working employees
  • For employers under 100 employees, all wages qualify regardless of hours worked
  • Cap wages at $10,000 per employee for the shutdown quarter

The total wages paid within these parameters equals the qualified wages for calculating the 70% refundable ERC.

Claiming Process Overview

General steps to claim ERC for summer shutdown may include:

  • Document the defined business quarter aligned with the shutdown and met one COVID-19 eligibility requirement
  • Calculate wages paid to employees during the eligible summer shutdown period
  • Report qualified wages for the quarter on IRS Form 941 payroll tax returns
  • Claim ERC amounts to offset employer portion of Social Security taxes
  • File Form 7200 to receive an advance refund for any excess ERC over taxes due
  • Retain detailed documentation supporting eligibility and ERC computations

Careful execution and recordkeeping enable securing these shutdown pay credits.

Avoiding Pitfalls

Seeking ERC on summer shutdown wages warrants caution around:

  • Failing to identify/document an eligible COVID-19-impacted quarter aligned with the shutdown dates
  • Lacking financial statements or orders to prove required declines or closures
  • Claiming ineligible wages, like amounts exceeding limits or for non-affected periods
  • Insufficient documentation of wages paid during the defined business quarter
  • Inability to substantiate how shutdown operations varied from normal activities
  • Miscalculating or overstating ERC amounts claimed

Robust controls and processes mitigate compliance risks.

Maximizing Shutdown Pay Credits

Employers can amplify relief by:

  • Proactively determining months that align lower demand cycles with an ERC qualifying quarter
  • Monitoring financials to detect potential 20%+ gross receipts declines versus 2019 levels
  • Tracking applicable governmental COVID-19 orders that mandated closures
  • Structuring shutdown dates purposefully to fall within eligible quarters
  • Quantifying and claiming credits for all qualified shutdown pay costs
  • Instituting processes to properly compute, document, and claim ERC amounts

Significant liquidity is attainable with strategic planning and execution.

Why Coordinating Shutdowns and ERC Makes Sense

Coupling seasonal slowdown periods with retention credits can optimize benefits:

  • Take advantage of slower periods to refresh and enhance operations while closed
  • Offset shutdown payroll costs through generous COVID-19 tax relief
  • Retain valued employees and control hiring/retraining costs
  • Timing shutdowns to coincide with eligible quarters maximizes credits

However, compliance intricacies require thorough coordination.

Insights from Tax Credit Experts

The complexities of leveraging retention credits for shutdown pay warrant guidance from experts like:

  • Payroll professionals to identify affected periods and eligible wages
  • COVID-19 tax credit consultants to pinpoint qualifying quarters
  • Accountants to produce financial statements evidencing declines
  • Tax attorneys to advise on documenting valid eligibility
  • Enrolled agents to amend returns and handle IRS examinations

Their insights facilitate the smooth coordination of credits with shutdown pay initiatives.

Conclusion

Temporarily closing during slower months can offer advantages but also challenges in paying employees. By providing seasonal liquidity, retention credits can now transform summer shutdowns from a cost into an opportunity, if strategically timed and executed. With professional support navigating the intricacies, employers can tap into these credits to retain staff and refresh operations, exiting slow periods stronger than ever.

FAQs

Q: When can ERC be claimed for summer shutdowns?

A: If the shutdown occurs during a quarter that also meets one ERC eligibility requirement like a 20%+ decline in gross receipts.

Q: What documentation is required?

A: Financial statements proving revenue decline, government orders on closures, wages paid during the eligible quarter, and descriptions of how shutdown operations differed.

Q: What wages qualify for credit during summer shutdowns?

A: For large employers, wages are paid to non-working employees. For small employers, all wages are paid during the shutdown.

Q: Is there a maximum ERC amount for shutdown wages?

A: Yes, the credit is capped at $10,000 in total per employee wages for the defined quarter.

Q: How is ERC claimed on summer shutdown wages?

A: Shutdown wages for the eligible quarter are reported on Form 941. The computed ERC amount is used to offset quarterly payroll tax liabilities.

Resources

IRS ERC Eligibility FAQs: https://www.irs.gov/newsroom/employee-retention-credit-faqs

IRS Instructions for Form 941: https://www.irs.gov/pub/irs-pdf/i941.pdf

U.S. Chamber Guide to Substantiating ERC Claims: https://www.uschamber.com/co/run/human-resources/employee-retention-tax-credit-documentation

AICPA Guidance on COVID-19 Tax Credits: https://www.aicpa.org/content/dam/aicpa/interestareas/tax/resources/covid19-tax-relief-resource-center/employee-retention-credit-overview.pdf

Leveraging ERC to fund summer shutdown pay requires robust documentation and coordination. Consult a qualified tax professional for guidance.

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