The construction industry took a brutal hit when the COVID-19 pandemic drove millions of construction sites to a screeching halt. For some, projects resumed quickly — however, skyrocketing material costs and worldwide supply chain disruptions continue to affect virtually every employer across the industry.
Luckily, the IRS issued welcomed relief for employers that kept employees on their payroll despite the hardships of the pandemic. In a labor-heavy field, the Employee Retention Credit (ERC) could offer significant benefits for many employers across the construction industry.
What is the Employee Retention Credit?
The Employee Retention Credit (ERC) was created by the Coronavirus Aid, Relief and Economic Security (CARES) Act in March 2020. Between sweeping lockdowns and strict government mandates, the ERC was designed as an incentive for businesses to keep employees on their payroll during the pandemic. As COVID-19 continued to wreak havoc well into 2021, the IRS extended the ERC through the end of 2021 as part of the American Rescue Plan Act.
As an industry widely impacted by COVID-19, most construction businesses have a pretty good chance of reaping the benefits of the ERC. However, determining the extent of that benefit can get a little complicated due to varying rules based on the year in which you qualify as an eligible employer.
On the most basic level, an eligible employer must have experienced at least one of the following two scenarios:
- The business shut down operations (either entirely or partially) due to government mandates or reduced business.
- The business experienced a significant quarterly revenue decrease compared to the same quarter in 2019. For 2020, that is 50% compared to the same quarter in 2019, and for 2021 it is 20% compared to the same quarter in 2019.
It’s worth noting that the ERC did not initially allow for employers to obtain both a Payroll Protection Program (PPP) Loan in addition to claiming the ERC. While modifications to the original CARES Act now allow all eligible employers to claim the ERC regardless of receiving a PPP Loan, the same wages cannot be used for both PPP loan forgiveness and the ERC.
What’s the Benefit?
This part of the equation depends on the calendar year of eligibility and the average number of full-time employees in 2019. Keep in mind that the IRS considers a full-time employee to be one that worked at least 120 hours in a month or averaged 30 hours per week each month.
- Businesses that averaged 100 or fewer full-time employees may claim up to 50% of all wages and health insurance benefits paid to employees up to $10,000 ($5,000) per employee for 2020.
- Businesses that averaged more than 100 average full-time employees can only claim the wages and health insurance benefits paid to an employee not providing service due to pandemic-related circumstances.
2021 Credits: To reach more businesses, the employee threshold was increased from 100 to 500 average full-time employees beginning in the 2021 calendar.
- Businesses that averaged 500 or fewer full-time employees in 2021 may receive up to 70% of the first $10,000 of qualified wages paid per full-time employee per quarter. This could add up to a whopping $28,000 per employee.
The Bottom Line
Despite the lingering effects of COVID-19 in the construction world, the ERC offers a shimmer of hope to many businesses in need of a financial boost. With few restrictions, you could use this extra cash for anything from equipment updates to promotions and marketing campaigns. Talk to your accountant about how you can take advantage of this credit for your construction company.
By David Hegstrom – Harris CPAs
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