The world of packaging has come out of the pandemic strong and is helping America get back on its feet. In an effort to accelerate American businesses out of recovery mode and back into growth mode, Congress made legislative changes to significantly cut taxes for businesses who kept employees throughout the pandemic through federal incentives.
The Employee Retention Credit (ERC) is particularly applicable to the packaging industry as it can completely eliminate a business’ payroll tax and generate a cash refund, if the company had business disruptions, including supply chain issues.
These disruptions oftentimes stem from government orders that have either forced packaging companies to halt operations or had an effect on suppliers and their ability to fulfill necessary orders.
Employee Retention Credit Background
The Employee Retention Credit, which was put in place as a part of the Coronavirus Aid, Relief, Economic Security Act (the CARES Act), offers U.S. businesses a refundable credit that they can claim on qualified wages, which include health insurance costs, paid to employees.
Packaging businesses can claim the credit for all of 2020 even if the business claimed PPP. The American Rescue Plan took the credit a step further, allowing taxpayers to claim the incentive for all of 2021 as well.
In order to qualify for the credit, businesses must be able to establish that they were either fully or partially suspended due to orders from an appropriate government authority in any calendar quarter or that they experienced a significant decline in gross receipts. It’s important to note that business that were not suspended can still qualify if their suppliers and vendors were fully or partially suspended and it is having a material effect.
How AICC Members Qualify
While most businesses across the country were closed in 2020, and thus can qualify for that year, packaging businesses have continued to face supply chain issues and those disruptions could qualify AICC members for significant tax savings in 2021. We are seeing businesses regularly claim six to seven figures in cash and credits for Q1 alone.
As an example, if a packaging company’s paper supplier is only able to supply 80 percent of what is ordered due to governmental orders, and thus reduces the output of the packaging company, that would be deemed a qualifying disruption. Even if the company itself is deemed essential, is profitable, and is operating at full capacity, it may still be considered a partial suspension due to the supplier’s issues.
Ideally, the agency would want to have seen that the taxpayer company made a reasonable attempt to find an alternative option when their primary supplier was unable to fulfill their orders. Even further, the impact from suppliers being unavailable (or any other work disruptions) need to have more than a nominal effect on the company’s business operations.
While the IRS has attempted to put forward guidance clarifying the incentive, there is still a significant amount of ambiguity surrounding the Employee Retention Credit. Many businesses are trying to claim the credit themselves or using a financial advisor that is simply asking them to earmark which employees they want to claim the credit on. That may be ill advised as proper documentation and substantiation of disruptions, supply chain issues, government orders, at an employee-by-employee level would be prudent.
About the Author
Michael Galdieri, alliantgroup Associate Director, NY Office, NY, NJ, PA, Michael offers a vast knowledge of government-sponsored programs, with concentrated expertise in the business application of the R&D Tax Credit, IC-DISC, SUT, DPD, energy credits, and tax controversy services. Michael has over 15 years of experience in working with Start-ups to fortune 500’s. He has also partnered closely with CPA firms to uncover significant tax savings for their clients. Michael has helped deliver tax credits to hundreds of American businesses in a vast array of industries including, packaging, software, contract manufacturing, systems integration, architecture, engineering, construction, and more. Michael can be reached by phone at 844-898-3280 or email at [email protected]