The Employee Retention Tax Credit (ERC) is one of the best opportunities for construction industry companies impacted by the COVID-19 pandemic to recoup wages paid to employees. The ERC is designed to help hardworking businesses maintain employees. According to the MN Construction Employment Outlook, the construction industry workforce is projected to need over 140,000 additional construction workers by the year 2028. There may be an opportunity to claim the ERC in 2021. Here is what you need to know:
ERC – AN OPPORTUNITY FOR THE CONSTRUCTION INDUSTRY
How Much Can My Company Qualify For?
For qualifying businesses, the credit amount is up to $7,000 per employee per quarter. A company with 100 fully eligible employees could qualify for as much as $700,000 in tax credit each quarter. The ERC is a refundable credit, meaning companies can claim a refund in excess of their total tax. Forbes contributor, Dean Zerbe, estimates that billions of dollars of tax credits have not been claimed because employers do not think they qualify or do not know about the program.
TARGETED RELIEF FOR SMALL BUSINESSES
The ERC program is designed with small businesses in mind. The expanded law allows for employers with up to 500 full-time equivalents to take the credit. For ERC, a full-time employee equivalent (FTE) is anyone who works for more than 30 hours per week or 130 hours in a given month. If a portion of your workforce is part-time (less than 30 hours per week), employers with more than 500 employees may still qualify for a partial credit.
Gross Revenue Decrease
In many cases, construction industry revenue is not cyclical, and companies may have revenue fluctuations varying from month to month or quarter to quarter depending on projects. To qualify for the ERC, a company only needs to have a quarter-over-quarter drop in revenue in 2021 of 20% compared the same quarter in 2019. Once a taxpayer qualifies for the credit, they are eligible through the end of the quarter in which they no longer qualify meaning that a taxpayer that qualifies for first quarter based on the revenue drop will automatically qualify for second quarter.
CLAIMING THE EMPLOYEE RETENTION CREDIT
The credit is claimed on the quarterly payroll filing IRS Form 941 and applies to each quarter of 2021, as long as the taxpayer qualifies. Businesses that anticipate qualifying for the credit can reduce the amount of payroll taxes deposited to the IRS for that quarter.
What If I have already filed my Q1 and Q2 2021 payroll return Form 941?
It is not too late! You can amend your Form 941 filing and still get the credit.
What If I received a payroll protection program (PPP) loan? Can I still get the ERC?
Possibly. You must have enough eligible wages and cannot use the same wage dollar twice. Your Smith Schafer accountant can help with maximizing the ERC in combination with the PPP loan.
CLAIMING CREDITS & APPLYING FOR REFUNDS
Employers have three options for utilizing the eligible credits and/or claiming refunds:
- Claim the entire credit when filing the subsequent Form 941 (Employer’s Quarterly Federal Tax Return). Second quarter 2020 is due July 31, 2020.
- Short payroll tax deposits by the expected credit.
- File Form 7200 (Advance Payment of Employer Credits Due to COVID-19).
- Use the form when the expected credit exceeds payroll tax liability
- Can be filed more than one time each quarter
- Each form is cumulative for the quarter
- Form(s) to be reconciled on your quarterly Form 941
- Keep a copy of all Form 7200s filed
For employers that have eligible credits, we recommend shorting your payroll tax deposits first, followed by using Form 7200 to the extent that additional refundable credit is available. This will provide the most timely return of expenditures. The IRS is currently updating forms and systems to accommodate the new credits. No changes are expected for the Form 941 for first quarter 2020, this return is due on or before April 30, 2020. The second quarter form 941 is expected to have additional line(s) or worksheet(s) to reflect the advanced payments reported on Form 7200 and/or credit calculations.
EMPLOYMENT TAX RETURN FILED BY A THIRD PARTY
Third parties preparing employment tax returns on behalf of others are not entitled to keep the credits. The employer is entitled to the credits for wages paid to employees.
Third party filers such as ADP, Paychex, Paylocity, SmartHR and others are all working on solutions to reduce the tax liability amount remitted related to eligible credits. We recommend keeping in close contact with the third-party payroll provider. Please watch their communications carefully.
PAYCHECK PROTECTION PROGRAM LOAN RECOMMENDATIONS
PPP Loans have very strict rules as to what the funds can be spent on, to help you stay in compliance with the rules we recommend the following:
- Separate Bank Account: We recommend clients set up a separate (new) bank account for the PPP funds, so they can easily be traced to use for appropriate purposes. Ideally, you would pay the qualifying items out of this account. However, if this is not possible, we recommend continuing to pay those expenses from other accounts and keep a detailed record of what is reimbursed to other accounts for a clear tracing of these funds.
- What Can the Funds be Used for: Generally, the funds can be used in the eight weeks following the loan, for payroll costs, rent, utilities and interest (not principal) on loans. More specifically, these costs include:
- Payroll: wages, tips, and other similar compensation, employer portion of SUTA, employer portion of health insurance, dental insurance, and health savings account contributions. Payroll does not include employer portion of FICA, which is Social Security and Medicare.
- Rent: rent payments on leases dated before February 15, 2020.
- Mortgage Interest: payments of interest on mortgage obligations incurred before February 15, 2020.
- Utility Payments: payments of utilities based on contracts that were in effect before February 15, 2020.
ADDITIONAL GUIDANCE IS NEEDED RELATED TO THE FOLLOWING ITEMS
Because the CARES Act specified the funds could be used for expenses paid and incurred within the eight weeks following the loan date, there are a number of things to be clarified, including:
- Payroll costs paid in the eight-week period, but related to the pay period before the loan proceeds were received.
- Rent payments for the month of the loan and the final month included in the 8-week period.
- Example: If the loan disbursement occurs on April 10th, does the rent for the month of April count or does the rent for the month of June count?
- Mortgage Interest: is this the amount based on the due date of the payments or based on the date the interest was incurred?
- Utility Payments: which utilities will count for this? Will cell phones and internet count?
The Interim Final Rule question (r.) asks on what the proceeds can be spent. In the answer portion of the question “interest payments on any other debt obligations that were incurred before February 15, 2020” is included as a permissible use of the funds. However, in the section on loan forgiveness of the interim final rule only mortgage interest is included as to the portion that is forgiven.
ADDITIONAL PPP LOAN RESOURCES
New information is being released daily, and in some instances, is in direct contrast to prior guidance. The following are resources to keep you up-to-date.
U.S Department of Labor COVID-19 Resource
This page includes Fact Sheets and FAQ’s for the FFCRA credits. The FAQs have examples and documentation requirements for both employer and employee when an employee takes paid sick leave or expanded family medical leave.
IRS.gov Coronavirus Tax Relief
Find the latest news releases, FAQs issued by the IRS and much more.
Minnesota Department of Revenue – our Response to COVID-19
See the latest news releases, FAQs issued by the MN Department of Revenue and information on filing and payment deadlines.
US Department of the Treasury – Assistance for Small Businesses
More information on the paycheck protection program including applications, FAQs and more.
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