IS THERE AN EMPLOYEE RETENTION CREDIT FOR CONSTRUCTION INDUSTRY?

During the rapid spread of the COVID-19 pandemic throughout the United States, the nation's economy suffered significant setbacks, resulting in temporary closures and permanent shutdowns of numerous businesses. Nonetheless, the federal government intervened to alleviate this crisis by enacting the CARES Act, a groundbreaking legislation that injected billions of dollars into the economy through initiatives such as the Employee Retention Credit (ERC) and the Paycheck Protection Program (PPP).

The ERC emerged as a crucial lifeline for eligible employers, offering a refundable payroll tax credit of up to $26,000 per W-2 employee, incentivizing them to retain their workforce during the unprecedented pandemic. Initially, due to the dire circumstances brought on by the outbreak, businesses turned to PPP loans, neglecting the potential benefits of the ERC. However, subsequent legislation made it possible for businesses that had received PPP loans to also qualify for the ERC, expanding the pool of eligible companies.

Amidst the various industries, the construction sector emerged as a notable participant in the ERC program, capitalizing on the opportunity to receive substantial refundable payroll tax credits by maintaining their employees on payroll during the pandemic. Numerous construction companies have successfully secured hundreds of thousands to millions of dollars through this program. Despite this, some construction firms remain unaware of their eligibility, assuming that they do not qualify due to factors such as continuous operations or stable revenue streams.

However, several factors exist that can indeed render a construction business eligible for the ERC, including:

1. Implementation of social distancing mandates, resulting in reduced workforce on job sites.
2. Enforced curfews leading to shorter operating hours, ultimately prolonging project timelines.
3. Disruptions in the supply chain, causing shortages of vital materials from suppliers.
4. Government orders necessitating the slowdown or suspension of projects due to regulatory mandates.
5. Eligibility for employers in the construction industry can also be established by demonstrating a decline in gross receipts for their business.

For Tax Year 2021, encompassing Quarters 1, 2, and 3:

Employers qualify if their gross receipts for the specific calendar quarter are more than 20% lower than the gross receipts in the corresponding quarter of 2019.

For Tax Year 2020, covering Quarters 1 through 4:

Employers are eligible if their gross receipts for the particular calendar quarter are more than 50% lower than the gross receipts in the corresponding quarter of 2019.

UNDERSTANDING THE EMPLOYEE RETENTION CREDIT

The Employee Retention Credit (ERC) serves as a vital lifeline, devised by Congress to support businesses grappling with the impact of COVID-19 and subsequent economic restrictions. One of its primary objectives was to mitigate employee layoffs and maintain workforce stability.

This program has proven instrumental in aiding employers to retain their employees, even amidst financial challenges. Initially introduced as part of the COVID Aid, Relief, and Economic Security (CARES) Act, it grants eligible employers a tax credit of up to 50% of qualified employee wages, subject to specific conditions, for the period spanning from March 12, 2020, to December 31, 2020. It is important to note that the maximum credit per eligible employer for this period is $10,000.

Subsequently, regulatory authorities increased the credit percentage to 70% for 2021, allowing for up to $10,000 per quarter. Any business with qualified wages is eligible to apply for this program, irrespective of its size, industry segment, or annual revenue. It is worth mentioning that businesses with fewer than 100 employees and those with 500 or more employees have different rules and considerations.

TOP 5 ADVANTAGES OF ERC FOR CONSTRUCTION COMPANIES

1. Broad Eligibility for Construction Companies:

There are two main criteria for ERC eligibility: 1) A significant decline in gross receipts (50% in 2020; 20% in 2021), or 2) Full or partial business suspension due to government orders. While many construction companies are familiar with the first criterion, they often overlook the second one. However, most construction companies qualify for the ERC due to disruptions caused by government mandates.

2. Increased Credit Potential:

In 2020, the maximum ERC credit per employee was $5,000. With the passage of the CAA (Consolidated Appropriations Act) in 2021, this maximum credit amount was raised to $7,000 per employee per quarter for the first three quarters (totaling a maximum credit of $21,000 in 2021). Initially, businesses had to choose between utilizing the ERC or the Paycheck Protection Program (PPP) under the CARES Act. Many businesses opted for PPP due to its simpler application process for a small business administration-backed loan. However, subsequent legislation expanded eligibility, allowing employers to take advantage of both programs simultaneously, presenting an even greater opportunity for construction companies.

3. Extended Availability:

The Infrastructure Investment and Jobs Act (IIJA) of 2021 extended the ERC beyond its initial expiration date, making it available for previous covered periods in 2020 and 2021. Therefore, construction companies can still submit their tax filings and claim the ERC for those periods.

4. Cash Refunds:

The ERC is not a mere deduction from payroll taxes but a credit calculated based on qualified wages paid to each employee every quarter. By filing a 941-X form, employers can retroactively apply the credit to payroll taxes already paid, effectively receiving a cash refund from the IRS.

5. Streamlined Process with Expert Guidance:

When working with a trusted advisor or ERC specialist, claiming the credit becomes a hassle-free process. These professionals can evaluate a company's eligibility, calculate qualified wages, and handle the preparation and filing of the credit on behalf of the construction company, ensuring a seamless experience.

5 MISCONCEPTIONS ABOUT ERC FOR CONSTRUCTION INDUSTRY

Misconception #1: Claiming PPP means I can't claim ERC.

Contrary to popular belief, Congress removed the restriction of choosing between PPP and ERC in the Consolidated Appropriations Act (CAA) of 2021. Now, construction companies are eligible to claim both programs simultaneously.

Misconception #2: My construction business doesn't qualify for ERC without a 50% decline in gross receipts.

The eligibility criteria have been revised under the CAA. A 20% reduction in gross receipts now qualifies a business for ERC. Additionally, even if your construction business faced a partial or complete suspension due to government orders, regardless of the impact on revenue, you may still be eligible for ERC.

Misconception #3: Since my construction company didn't shut down during the pandemic, ERC isn't applicable.

Even if your construction company remained operational, you can still qualify for ERC. Partial suspensions caused by various factors, such as limited capacity, supply chain disruptions, job site restrictions, reduced crew sizes, or selective location closures, make your business eligible for ERC. It's not solely dependent on a complete shutdown or revenue decline.

Misconception #4: Being an essential business means I can't claim ERC.

Being designated as an essential business doesn't automatically disqualify you from ERC. If your essential construction business was significantly impacted by governmental orders, such as supplier shutdowns affecting your operations, you may still be eligible. It's recommended to consult experts to evaluate the specific impacts on your business.

Misconception #5: My construction company experienced growth during quarantine, so ERC isn't relevant.

Despite your company's growth, claiming credits like ERC is encouraged by Congress to stimulate economic recovery. Even if your operations were modified or your vendors and clients were affected during the quarantine period, you may still qualify for ERC. Consider exploring this opportunity to support your business and contribute to the broader economy.

It's important to note that Congress expanded the ERC in 2021, making it more accessible to construction companies. This credit can help offset payroll taxes, facilitate hiring, or potentially result in a cash refund. Engaging with knowledgeable experts can assist you in assessing your eligibility and maximizing the benefits of the ERC program for your construction business.