In light of the recent changes to the Employment Retention Credit (ERC) in 2021, construction companies are now re-evaluating how they can take advantage of this tax credit to keep their employees on payroll and maintain operations. In this blog post, we’ll break down these changes and provide examples specifically tailored for the construction industry.
What is the Employment Retention Credit?
The ERC is a refundable payroll tax credit designed to help businesses keep employees on the payroll during periods of economic hardship caused by the COVID-19 pandemic. Initially established under the CARES Act in 2020, it has been extended and modified several times to provide additional relief to businesses.
General ERC eligibility requirements & recent changes
The 2020 ERC offered a maximum credit of 50% on qualified wages, with a cap of $10,000 per employee for the entire year. Eligibility requirements included experiencing a 50% reduction in gross receipts in a quarter compared to the same quarter in 2019 or a full or partial suspension of business operations due to COVID-19.
The 2021 ERC, on the other hand, was expanded and extended through the Consolidated Appropriations Act and the American Rescue Plan. The credit rate increased to 70% on qualified wages, with a cap of $10,000 per employee per quarter. This meant that businesses could claim up to $28,000 per employee for the entire year of 2021. Additionally, the threshold for reduced gross receipts was lowered to a 20% decline in a quarter compared to the same quarter in 2019, allowing more businesses to qualify. Moreover, companies that began operations after February 15, 2020, became eligible for the credit under certain conditions.
How 3 key changes impact construction businesses
Given the financial challenges faced by the construction industry throughout the pandemic, the changes to the ERC can provide significant relief. These changes may positively impact construction business in a few ways.
1. Extension of ERC
The ERC has been extended through December 31, 2021. The extension of the ERC means that construction businesses can continue to claim the credit for employee wages paid during 2021. This can help offset payroll costs and provide additional cash flow to support ongoing projects.
2. Increased Credit Amount
The maximum ERC has been increased to 70% of qualified wages, up to $10,000 per employee per quarter, resulting in a maximum credit of $7,000 per employee per quarter. This is a significant increase compared to the previous maximum credit of 50% of qualified wages, up to $10,000 per employee per year.
The increased maximum credit amount can result in substantial tax savings for construction businesses. For example, a construction company with ten employees earning $10,000 per quarter can now potentially claim up to $70,000 in ERC credits per quarter, compared to the previous maximum of $50,000 per year.
3. Expansion of Eligibility Criteria
The new rules have expanded eligibility for the ERC by reducing the required reduction in gross receipts from 50% to 20% when compared to the same quarter in 2019. Furthermore, businesses that began operations after February 15, 2020, can now also qualify for the ERC.
The new eligibility criteria make it easier for construction businesses to qualify for the ERC. For instance, a construction company that experienced a 30% reduction in gross receipts during Q2 2021 compared to Q2 2019 would now be eligible for the ERC, whereas it would not have been eligible under the previous 50% reduction threshold.
Examples in the Construction Industry
Consider the following examples that demonstrate the potential benefits:
Example 1: ABC Construction experienced a 25% reduction in gross receipts during Q3 2021 compared to Q3 2019. With 15 full-time employees earning $12,000 each per quarter, ABC Construction can now claim 70% of the first $10,000 in wages for each employee, resulting in a total ERC of $105,000 for Q3 2021.
Example 2: XYZ Builders, a construction company that started operations in March 2020, has 20 employees earning an average of $9,000 per quarter. Under the new rules, XYZ Builders can now qualify for the ERC, allowing them to claim 70% of the qualified wages, totaling $126,000 in ERC credits for Q2 2021.
These examples demonstrate the potential benefits of the 2021 ERC changes for construction businesses, enabling them to retain employees and maintain operations during challenging times.
Time limits for ERC claims
Businesses who have not yet claimed the ERC for 2020 or 2021 can still do so, provided they meet the eligibility criteria. They should act promptly to ensure their claim is filed within the time limits specified by the IRS.
- Deadline to claim ERC for 2020: April 15, 2024
- Deadline to claim ERC for 2021: April 15, 2025
It’s essential to consult with a tax professional to determine the eligibility and potential credit amount for your specific situation.
For 2020, businesses generally have three years from the time they filed their employment tax return to amend and claim the ERC, starting from the due date of the original return. This means that businesses filing their 2020 employment tax returns in 2021 will typically have until 2024 to amend and claim the ERC for that year.
For 2021, the same three-year rule applies. Businesses filing their 2021 employment tax returns in 2022 will generally have until 2025 to amend and claim the ERC for 2021. However, it’s always advisable to consult with a tax professional to ensure you’re adhering to the specific deadlines applicable to your business.
Financial relief for construction companies
The 2021 changes to the Employment Retention Credit offer valuable financial relief for construction businesses impacted by the COVID-19 pandemic. By understanding these changes and taking advantage of the expanded eligibility criteria and increased credit amounts, construction businesses can secure crucial funding to support their operations and retain employees.