When the CARES Act was passed, the most popular and sought after relief option was the Paycheck Protection Program (PPP). The lure of a potentially forgivable loan to pay for two months of payroll was too much for businesses to ignore. When PPP loans became available on April 3, nearly 2 million small businesses raced to apply.
Those who were approved became ineligible to utilize another CARES Act relief option – the Employee Retention Tax Credit (“ERTC”). For those companies that are not PPP loan recipients, however, the ERTC is a resource that should be given consideration. Additional guidance released by the IRS on May 4 clarifies that if a company repays a PPP loan by May 14 (originally May 7 but now extended one week) after reevaluating its economic need certification, that business will be considered an eligible employer and can qualify for the ERTC.
Similar to how the PPP process worked, the goal of the ERTC is to offer a company an incentive to continue to pay employees during the economic downturn. Only, instead of a forgivable loan, the benefit is in the form of a payroll tax credit. The challenge with the ERTC when it was introduced was a lack of guidance on how the credit worked and how construction businesses could be eligible. That changed on April 29, when the IRS released additional guidance on how the ERTC works.
Below is a summary of how this program could benefit a construction business.
What is the Employee Retention Tax Credit?
The ERTC is a refundable tax credit designed to keep employees on the payroll. Eligible employers, including construction companies, are allowed a credit against employment taxes equal to 50 percent of qualified wages (up to $10,000) for each employee. Wages and qualified health plan expenses paid between March 13, 2020 and December 31, 2020 are eligible for the credit.
Is a construction company considered an eligible employer?
A construction company is considered an eligible employer if it will satisfy either of the following two conditions:
- The company experienced a significant decline in business for any calendar quarter in 2020. A significant decline is defined as a business that has experienced a greater than 50 percent reduction in quarterly gross receipts when compared to the same quarter in 2019; or
- The company’s operations during any calendar quarter in 2020 were fully or partially suspended due to COVID-19.
In general, it is easy to determine if your construction company qualifies for the credit under the gross receipts test. However, there may be some companies that don’t quite meet this test, so they will need to look at the fully or partially suspended test to determine eligibility.
It is the fully or partially suspended test that requires some additional thought and analysis. For construction companies, this was an area that needed more clarity. On April 29, 2020 the IRS issued additional guidance in a frequently asked questions (FAQ) format, which we will discuss next.
If my construction company operates in multiple locations, and my business is shut down in some but not all jurisdictions, am I considered partially suspended?
There is a possibility that a business could be considered partially suspended based on the guidance issued in the IRS FAQ. Construction companies that have operations in multiple locations and are subject to state and local government orders limiting operations in some but not all jurisdictions will be considered to have a partial suspension of business.
Many construction companies operate in various states on multiple job sites. Government orders issued at the state and local levels contained conflicting outcomes for contractors. For example, Delaware deemed construction activities to be essential businesses and thereby allowed construction companies to continue to work, while Pennsylvania considered these activities to be non-essential unless the company received a waiver from the state to continue to work on projects that were deemed essential. Further analysis is required, but this scenario may provide an opportunity for a contractor to be eligible for the ERTC.
How do I calculate the credit?
There are two possible calculations for the ERTC based on the average number of full-time employees.
If your construction company had less than 100 average full-time employees in 2019, the credit is 50 percent of all wages paid to employees during an impacted quarter. The ERTC allows all wages to be counted towards the calculation, even if your employees have been providing services during the quarter.
If your company had more than 100 average full-time employees in 2019, the credit is limited to 50 percent of only wages paid to each employee who is not working or have reduced hours during an impacted quarter.
Note that the credit is limited to $10,000 of wages paid to each employee during the impacted quarter. If the company is also eligible for the credit in the following quarter, then the $10,000 wage limitation will carry over until it has reached its limit for each eligible employee’s wages.
What if my construction company is partially suspended for only part of a quarter?
If your business was partially shut down due to state and local governmental orders for only part of a quarter, you are still considered an eligible employer; however, when you calculate the amount of the credit, only wages paid during the part of the quarter the business was shut down will qualify.
For example, Governor Wolf announced that Pennsylvania construction sites could reopen starting May 1, 2020. If your construction company was shut down and considered non-essential in Pennsylvania from March 13 through April 30, you are considered an eligible employer for part of the first and second quarters. In the first quarter, wages paid from March 13 through March 31 are eligible for the credit and wages paid from April 1 through April 30 are eligible in the second quarter.
However, if your business qualified for the credit under the gross receipts test, then you will look at all wages paid during the quarter in determining the credit.
What additional relief options are available to construction companies that could complement the ERTC?
Construction companies, particularly those acting in subcontractor roles, expend material components of their overall costs on payroll. Utilizing the payroll tax deferral could be a great advantage for such companies. Under the CARES Act, businesses are allowed to defer the payment of the employer portion of Social Security taxes (6.2%) on wages earned from March 27 through December 31, 2020. In order to avoid any penalties, 50 percent of the deferred amount is due on December 31, 2021 and the remaining amount is due on December 31, 2022.
To the extent that a company receives a Paycheck Protection Plan loan, the deferral period will end on the date that the company is issued notification relating to loan forgiveness.
The Employee Retention Tax Credit and payroll tax deferral are only two of the programs available for contractors. We discussed the state and local relief options available to construction companies in a previous alert.
As more details of business relief efforts are made available, we will provide additional updates. We are also regularly updating our COVID-19 Resource Center, which you can access at any time here. In the meantime, if you have any questions about these or any other matters, please do not hesitate to contact your Kreischer Miller professional or any member of our team.
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Tiffany L. Eichhorn, Senior Accountant, Tax Strategies
Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.