There is little doubt that the pandemic and its associated regulations, shutdowns and economic downturn impacted your business in some fashion over the past two years.
When Congress passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act), it enabled contractors and other businesses to choose the Employee Retention Tax Credit (ERTC) program or the Paycheck Protection Program.
"At that time, you had to pick a path," Woods said. “Most people opted to deal with their banker and sign up for a Small Business Administration-backed loan than learn the details of eligibility for ERTC through the IRS because it was a lot easier, and they could get their money quicker.”
The SBA was overwhelmed with loan applications in the early days of PPP, and construction contractors as an industry segment received a total of over $65 billion. The loans were forgiven if the money was used to retain employees.
Conversely, the initial availability of ERTC was underutilized by many industries, including construction. Even as subsequent legislation expanded the eligibility requirements for employers so that they could now receive both the credit and PPP.
For example, for a business that took PPP for a period, but it ran out in the middle of May 2020, then for the rest of that quarter into June, the retention credit is still applicable.
"In essence, anybody who took up funds now became an eligible candidate for employee retention credit, which is why I think there's a little bit of delay in people understanding or knowing about it,” says Jay Woods, founder and president of Omega Accounting Services. “There are millions of unclaimed dollars available and nearly any company impacted by the pandemic is eligible to claim their credit.”
He encourages construction contractors and other small-business owners to take advantage of this opportunity before funds run out or the three-year claims window closes.
The ERTC is a federal credit taken on a business’ quarterly payroll taxes, not the business’ taxes, based on how many full-time employees (30+ hours) the company had for the eligibility period.
When first introduced as part of the CARES Act in 2020, the maximum credit allowable under the ERTC was $5,000 per employee. He says with its renewal and expansion under the Consolidated Appropriations Act (CCA), 2021, the maximum credit increased to $21,000 or $7,000 per employee for the first three quarters.
As example, Woods says he has some construction clients on the West Coast who have 180 to 200 employees that have received over $3 million in employee retention credits.
“It’s a very powerful credit,” he says.
Despite the potential benefits, awareness of the ERTC among small businesses is only at about 30% and likely even less among construction contractors.
As it turns out, nearly everyone is eligible. Under the ERTC, small to mid-sized businesses (100 employees is the limit for 2020 and 500 is the limit for 2021) are eligible to receive qualifying wage credits. For 2020, businesses must show a 50% decrease in revenue, and in 2021 it’s a 20% decrease quarter over quarter. Some contractors would qualify immediately due to a slowdown in business.
“If they didn't qualify from revenue reduction, the next test is they have to show a nominal impact or a nominal effect on their business of more than 10%,” says Woods. “Essentially, what we would call in that situation is you have to show that Covid shutdown orders impacted your business in a more than 10% way.”
For construction, he says this has been demonstrated frequently by time delays. A project that was estimated to be 90 days is stretched to 120 or more due to social distancing and crew limitations and supply chain issues.
“There were just all these effects where even if your revenue wasn't down, you were probably penalized in some way shape or form by the sort of backdraft of the lockdowns,” says Woods.
How to apply
“The retention credit is going to be a bit like a gold rush where, people are going to need to find someone to provide them the credit in time for the three years to elapse,” says Woods.
His recommendation is to hit up your CPA to on whether your business would qualify and where to start.
“It's important to find the right provider, someone who's actually gone through and done this over and over again, because it is a unique opportunity,” says Woods.
He says you should make sure you’re working with someone who has been filing claims for ERTC. Over the two years, the credit has changed four times since it was originally approved.
“The rules for 2020 and 2021 for qualification are a little bit different and so it is something where, because of the money at stake, it's important to be with someone who knows what they're doing,” he says.
Payroll information and some revenue documentation are required. In addition, if you must qualify the impact of a nominal effect, then there is further study that is required and a substantiation interview with the IRS.
“There's some source document collection, but it's not having to put together a 75-page book report,” says Woods.
To benefit from the credit, you or your accountant or financial adviser will have to file an amended 941 payroll tax form. Currently, IRS processing is taking about eight months, although in recent months that has shortened to as few as four to six months.
Is there more money out there?
If these ERT credits are a surprise to you, Woods suggest you rethink your advisory team, because tax credits in general are not a new thing.
“We're still finding every day that construction is a very underutilized market when it comes to incentive tax credits in general,” he says.
“There are plenty of credits that exist, pre-Covid, that even groups in the construction space could take advantage of,” says Woods. He cites the Employee Training Tax credit that offsets training costs on a state-by-state basis. In addition, the Work Opportunity Credit for people who live in certain areas of underprivileged states. Last is the Research and Development Tax Credit, which relates to time and money spent drawing up, estimating and executing plans.
“That’s just another substantial credit that is just really underutilized in that small to mid-size space,” he says. “I think that it should be top of the mind right now for the industry.”