As we near the midpoint of 2021, several industries are returning to business as usual. Unfortunately, the construction industry is yet to be one of them. From employee shortages to material price increases, the construction environment continues to change. Thankfully, economic relief measures continue to be accessible through the American Rescue Plan Act of 2021.
The legislation, signed into law by President Biden in March 2021, extends many of the provisions that were originally enacted in the CARES Act. One such provision that may be particularly beneficial for contractors is the Employee Retention Credit.
Here’s what you should know about it.
What is the Employee Retention Credit?
The Employee Retention Credit, or ERC, is a refundable tax credit that eligible employers can use against certain employment taxes. For 2021, the credit is equal to 70% of qualified wages, including certain health and union benefits, paid to employees through January 1, 2022.
The ERC is capped at $10,000 per employee per quarter, which means you can claim up to $7,000 per employee per quarter.
How do you qualify for the Employee Retention Credit?
Qualifying for the ERC credit in 2021 is fairly simple: Your business must experience a 20% drop or more in quarterly gross revenue as compared to the same quarter in 2019.
If you qualify for the ERC in one quarter, you’ll automatically qualify for it in the next one. You’ll continue to qualify for the credit until the quarter after the quarter in which you record 80% (i.e., surpass the 20% reduction threshold) of its 2019 gross revenue.
It doesn’t matter if 2019 was a record year for you. You’ll still qualify for the ERC if your 2021 quarterly gross revenue meets the qualification threshold.
For instance, say your 2021 Q1 gross revenue was 25% less than those in 2019 Q1. In this case, you would qualify for the ERC in Q1 and Q2 of 2021. Now let’s say you checked your quarterly gross revenue at the end of Q2 and they totaled 85% of your 2019 Q2 gross receipts. You would still qualify for the ERC in Q2, but you would not automatically qualify for Q3.
In this example you would then want to check Q3 revenue to see if there was a 20% decline. If there was, you would qualify for Q3.
One other trick for qualifying: If you don’t qualify based on comparing Q1 2021 to Q1 2019, take a look at Q4 2020 compared to Q4 2019. If you had a 20% decline in Q4, you would automatically qualify for Q1 2021 credits.
Finally, be sure to check your revenue at the end of every quarter in 2021; don’t assume you won’t qualify. The dollars are too big to just ignore!
What happens if you received the second round of Paycheck Protection Program funding?
Receiving a Paycheck Protection Program (PPP) loan does not preclude you from the ERC. While you can’t claim PPP forgiveness and the ERC credit for the same wages, you can maximize the benefits of both. Generally speaking, if you qualify for the ERC in 2021 Q1, it makes sense to claim it for this quarter. Then, assuming you have 24 weeks to spend your PPP funds, you can be strategic about which dollars you use for forgiveness.
How do you claim the ERC?
You can claim the ERC on your timely filed quarterly or amended quarterly tax reporting. That said, you can also claim it retroactively, which may make sense for your PPP forgiveness strategy. Keep in mind that the ERC is taxable because it reduces payroll expenses. However, the credit is refundable, meaning you get cash back from the IRS.
Position your construction business for brighter days.
At a time when so much is still uncertain, the ERC can be a lifeline. If you haven’t already, be sure to check your 2021 quarterly gross receipts against those of 2019 to see if your business could qualify. A word of warning: Watch out for companies offering to do ERC calculations for a percentage of the refund. These calculations are simple and should not require that level of professional fee. If you have questions about the calculations, ERC and PPP strategies, or filing amended payroll taxes, JAK CPA is here to help. Contact us today.