The Consolidated Appropriations Act of 2020, enacted December 27, 2020, has provided additional COVID-19 relief to Western New York (WNY) construction companies. This article specifically focuses on the impact that this relief act has regarding claiming Employee Retention Credits (ERC’s), which is a form of relief that was established under the original CARES Act, enacted March 27, 2020. The ERC is a refundable tax credit on employment taxes associated with qualified wages an eligible employer pays to employees after March 12, 2020, and through December 31, 2021. Even though the ERC’s are available for 2020 and 2021, the criteria to be an eligible employer are significantly relaxed for the 2021 year. This article will focus on eligibility to claim ERC’s for each year separately.
Claiming ERCs in 2020
First, let’s take a look at the rules and eligibility requirements to claim ERCs in 2020. Qualified wages (including certain health plan expenses*) up to $10,000 paid per employee can be counted to claim a 50 percent credit for the entire year. So, the maximum credit for qualified wages paid is $5,000 per employee for 2020.
Companies are eligible for ERC’s in calendar year 2020 if:
1. The company experienced a significant decline in gross receipts (gross receipts in the 2020 calendar quarter are less than 50 percent of gross receipts for the same calendar quarter in 2019).
OR
2. The company was ordered to fully or partially suspend operations during the calendar quarter due to orders from an appropriate government authority due to COVID-19.
Overall, during 2020, many WNY construction companies remained active, some may not have experienced a significant decline in gross receipts (eligibility requirement #1). However, some WNY construction companies may qualify under eligibility requirement #2 due to the executive order that was issued by Governor Cuomo on March 27, 2020, stating that all non-essential construction in New York State must shut down except for emergency/essential construction.** This shutdown remained in effect through April 2020. Then, in May 2020, the “NY Forward” guide was issued, which was a plan to reopen New York in phases on a by-region basis, based upon each region meeting certain COVID-19 related facts and data criteria. On May 19, 2020, Governor Cuomo announced that the WNY region (consisting of Erie, Niagara, Chautauqua, Cattaraugus, and Allegany counties) achieved sufficient data and could begin Phase 1 of the reopening, which included resuming all construction activities, in compliance with ESD construction industry guidelines.
So, from the time period of March 27, 2020, through May 19, 2020, if your construction company was forced to stop working on non-essential construction projects wages paid during this time period may qualify for the ERC. However, you will need to pay close attention to the essential vs. non-essential construction rules associated with claiming these credits, when determining the qualification of a full or partial suspension of operations.** If you had a mix of construction projects that were deemed essential and some that were non-essential, the non-essential projects that were suspended have to be deemed “more than a nominal portion” of your business operations in order to qualify for claiming these credits. Recently, the IRS has issued guidance on what constitutes a “nominal portion” (see IRS Notice 2021-20 for further information).
If you have determined that the executive order did suspend more than a nominal portion of your non-essential construction projects, and you do qualify for claiming the credits under eligibility requirement #2, the total amount of the credits may be significant enough to pursue the time and effort to claim. It will require some analysis of your payroll records to determine the specific wages that qualify. For example (and for illustration purposes only), assume a modest construction company has 30 employees and paid $8,000 in wages (including health plan expenses) to each employee during the time period of March 27, 2020, through May 19, 2020 (the shutdown period):
- $8,000 (amount of qualifying wages paid per employee) X 50% (credit amount) =
- $4,000 (total credit amount per employee) X 30 employees =
- $120,000 total amount of ERCs for 2020!
Obviously, the example calculation above is for illustration purposes only, and a further detailed calculation is required. Keep in mind the credit is based on qualified wages paid during the specific time period of the shutdown which can vary based on the amount of full-time employees that worked for the company, and its affiliated entities, during 2019.
- If an employer averaged 100 or fewer full-time employees*** during 2019, qualified wages are those wages, including health plan expenses, (up to $10,000 per employee) paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether or not its employees are providing services. In other words, all wages paid during the full or partial shutdown can be counted towards the ERC, regardless if the employee was providing services at that time or not.
- If an employer averaged more than 100 full-time employees*** during 2019, qualified wages are generally those wages, including certain health plan expenses, (up to $10,000 per employee) paid to employees that are not providing services because operations were suspended or due to the decline in gross receipts. These employers can only count wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
Another very important consideration in claiming ERCs is with respect to Paycheck Protection Program (“PPP”) loans. Under the original CARES Act, companies who obtained a PPP loan were not eligible to claim ERCs on qualified wages paid to employees. However, as a result of the new relief package passed in December 2020, businesses that did obtain a PPP loan are now also eligible to claim ERCs on qualified wages paid to employees. There are many WNY construction companies that obtained PPP loans in 2020, so many of these companies may not be familiar with the ERC’s because they were previously not available to them. However, wages claimed as part of forgiveness of your PPP loan cannot also be used to claim ERCs, in other words, no “double dipping.” This creates some interesting strategic opportunities for those who have not yet applied for forgiveness of their PPP loan. For example, PPP loan borrowers may want to utilize other eligible non-payroll costs (up to 40% of the total PPP loan) as support for PPP loan forgiveness in order to “free up” payroll dollars for which can be used to claim ERCs. Also, PPP loan borrowers could claim ERCs on wages paid through May 19, 2020 (through the shutdown period) and apply the remaining payroll incurred after this date toward their 24-week covered period, and still satisfy their PPP loan forgiveness. While this doesn’t change the dates utilized for the covered period of your PPP loan, it does allow you to optimize ERCs claimed on wages paid before applying wages toward PPP loan forgiveness.
In order to claim the ERCs for 2020, eligible employers will need to amend their respective employer’s quarterly Federal (payroll) tax returns for 2020 (using Form 941-X) in order to report the total qualified wages and the related health plan expenses for each respective quarter.
Claiming ERCs in 2021
Next, let’s take a look at the rules and eligibility requirements to claim ERCs in 2021, as they are different than 2020. Qualified wages (including certain health plan expenses*) up to $10,000 paid per employee can be counted to claim a 70 percent credit for each calendar quarter through December 31, 2021 (which is the date the ERC program is set to expire). So, the maximum credit for qualified wages paid is $7,000 per employee for each of the 1st and 2nd quarters of 2021 ($14,000 per employee in total for 2021). The definition of qualified wages is the same for 2020 and 2021 (see above). However, for 2021, a large employer is defined as an employer with an average of more than 500 full-time employees (as opposed to 100 full-time employees which was required for 2020).
Companies are eligible for ERCs in calendar year 2021 if:
1. The company experienced a significant decline in gross receipts (gross receipts in the 2021 calendar quarter are less than 20% of gross receipts for the same calendar quarter in 2019).
OR
2. The company was ordered to fully or partially suspend operations during the calendar quarter due to orders from an appropriate government authority due to COVID-19.
Notice the significant changes in claiming ERCs in 2021 compared to 2020:
(1) For 2021, the maximum credit is 70 percent of eligible wages paid (up to $10,000 per employee) for each of the 1st and 2nd calendar quarters in 2021 through December 31, 2021 (for 2020, the maximum credit is 50 percent of eligible wages up to $10,000 per employee for the entire year) AND
(2) For 2021, the quarterly gross receipts decline threshold drops to 20 percent (for 2020, the quarterly gross receipts decline threshold is 50 percent).
So, while most WNY construction companies remained active during 2020, we are currently seeing the market tighten up with some construction companies experiencing a decline in their backlog. This may translate into a revenue decline of more than 20 percent for the first quarter of 2021. This would make them eligible to take the ERCs in 2021. So unlike 2020, companies may qualify to claim ERCs under the gross receipts test for 2021 (eligibility requirement #1).
Also, for 2021 only, there is an additional option to claim ERCs under eligibility requirement #1: the quarterly gross receipts decline can be determined when comparing the first quarter of 2021 to the first quarter of 2019, or companies are allowed to elect to compare the gross receipts of the fourth quarter of 2020 (the previous quarter) to the gross receipts of the fourth quarter of 2019, to determine if a greater than 20 percent decline in gross receipts occurred. This option is not available for 2020. Therefore, companies potentially know today if they qualify for claiming ERCs in 2021 by utilizing this option to compare the gross receipts of the fourth quarter of 2020 and 2019. The significance of using this option is that instead of filing for a refund through the quarterly Federal payroll tax return (Form 941), a company can simply stop paying Federal withholding taxes in order to recoup the credit. The Federal withholding taxes that would not be required to be deposited include the employer and employee Social Security tax, Medicare, and the employees’ Federal withholding tax. This could provide construction companies with a cash flow boost as they begin to mobilize and ramp up on projects heading into the spring.
Again, companies will need to consider the impact ERCs have on their PPP loans and the potential loan forgiveness. In addition to gathering information for their initial PPP loan forgiveness applications, some eligible companies have applied for or are currently in the process of applying for a second draw PPP loan (“PPP2” loan). However, like with their initial PPP loan, they must still keep in mind that wages claimed as part of forgiveness of a PPP2 loan cannot also be used to claim ERCs (no “double dipping”). Companies should consider the same strategies applied with the first PPP loan, such as the utilization of other eligible non-payroll costs (up to 40 percent of the total PPP loan) and optimization of payroll toward ERCs and PPP loan forgiveness to maximize both relief packages. Eligible companies have until March 31, 2021, to apply for a PPP2 loan.
There are other considerations related to claiming ERCs, in addition to the PPP loan forgiveness considerations mentioned above, such as other funding programs, income taxes, and other rules & restrictions, so please consult your CPA/tax advisor for further guidance.****
As you can see, there may be an opportunity for WNY construction companies to obtain additional funding by claiming ERCs for 2020 and 2021, which could provide a positive impact on their businesses and on the construction industry in our region as we continue to combat the COVID-19 pandemic.
If you need further guidance on this topic, we’re here to help. Please do not hesitate to reach out to our trusted experts to discuss your specific situation.
Footnotes:
*Health plan expenses may include union health & welfare benefits paid as unions are designated as “employee organizations” whose plans qualify as a group health plan.
**Refer to guidance on Executive Order 202.6 including definitions of essential and non-essential construction activities.
***The term “full-time employee” means an employee who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month (130 hours of service in a month is treated as the monthly equivalent of at least 30 hours of service per week). An employer that operates its business for the entire 2019 calendar year determines the number of its full-time employees by taking the sum of the number of full-time employees in each calendar month in 2019 and dividing that number by 12.
****An eligible employer’s ability to claim ERC’s is impacted by various other credit & relief provisions and other restrictions and vary based on the year of the credit. Please contact your tax advisor to learn more.
The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We, therefore, make no warranties, expressed or implied, on the services provided hereunder.
