AGC ADVOCATES FOR EXTENDING THE EMPLOYEE RETENTION CREDIT
Contractors that have struggled over the past two years due to the pandemic shutdowns and project delays because of supply chain shortages can seek relief with the federal Employee Retention Credit. This and other federal and state tax incentives can help contractors substantially, experts say.
EMPLOYEE RETENTION CREDIT
When the pandemic began, Congress moved quickly to create two incentive programs for businesses — the Paycheck Protection Program (PPP) and the Employee Retention Credit (ERC), says Jay Woods, founder and president of Omega Accounting Solutions based in Laguna Niguel, California.
“Initially business owners could do either or, so most chose to work with bankers and get PPP loans rather than get the ERC with the IRS — because they could get money quicker,” Woods says. “As such, the ERC didn’t get any traction until last year when Congress permitted businesses to do both the PPP and the ERC. This opened the market for the ERC — businesses just can’t use wages and double dip.”
According to the IRS, an eligible employer can claim the ERC on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Any wages that could count toward eligibility for the ERC or PPP loan forgiveness can be applied to either of these two programs, but not both.
For businesses that were nominally affected either in 2020 or 2021, the credit is worth up to $26,000 per employee, Woods says.
“It’s a pretty big credit and definitely something that contractors need to look at,” he says. “Moreover, being nominally affected under the IRS’ definition doesn’t just mean that revenues had decreased during those years. It also means impacts to the bottom line due to project delays resulting from supply chain issues and having less workers on site due to social distancing requirements.”
Eligible employers can claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after Dec. 31, 2020, through Sept. 30, 2021, according to the IRS. (For the period between March 12, 2020, and Jan. 1, 2021, the credit is equal to 50% of the qualified wages.) For 2021, qualified wages are limited to $10,000 per employee per calendar quarter, up from the $5,000 limit in 2020.
“There is a three-year window to claim the ERC, as it’s retroactive,” Woods says. “Contractors need to talk to their accountant or financial advisor to see if they can qualify for the credit.”
AGC’S FIGHT TO ENHANCE THE ERC
AGC “definitely” played a role throughout the process to make the ERC program more valuable and generous, and, along with stakeholders and coalition partners, the association continues to advocate for this program, says Matthew Turkstra, AGC’s senior director, building and infrastructure finance. The association became even more involved in the summer of 2021, when the ERC expiration date was changed in the bipartisan infrastructure legislation to help pay for the spending in the bill.
“At the time that the bipartisan infrastructure bill was being negotiated, the country felt that we were coming out of the pandemic — President Biden famously had the press conference where he took his mask off and said that everyone could do the same and breathe,” Turkstra says. “We all really felt that life was getting back to some semblance of normal.”
In that environment, the bipartisan group of senators negotiating the infrastructure bill decided to roll back the expiration of the ERC from Dec. 31, 2021, to Sept. 30, 2021, to help pay for the infrastructure spending.
“It seemed reasonable at the time because it looked like the worst of the pandemic was over, and AGC very heavily supported the infrastructure legislation,” he says.
The legislation passed in the Senate in August of 2021, but then it was held up in the House for months before finally passing in November — long after the Sept. 30 ERC expiration date set forth in the new law.
“Recovery startup businesses” can still claim the credit through Jan. 1, 2022, according to the IRS. Such businesses are employers that began carrying on any trade or business after Feb. 15, 2020, had an average annual gross receipts under $1 million for the three-year period, and do not meet the other eligibility criteria. However, for all other businesses that had been claiming the ERC in the fourth quarter of 2021, their credit for that quarter was repealed retroactively “and now they could face a tax increase.”
“AGC saw this as a big problem and got together with a lot of other like-minded groups to reinstate that fourth quarter credit,” Turkstra says. “We lobbied Congress that after the provision was introduced in the infrastructure bill in the summer, the subsequent unforeseen rise of the Delta and Omicron variants had a pretty big impact on the broader economy and caused a lot of issues for companies.”
The association and other groups were “really quite aggressive” and were successful in getting bipartisan legislation introduced in Congress, he says. AGC leaders and others were hopeful that the legislation would be included in the recently passed omnibus appropriations bill, but unfortunately Congress did not include a tax title in the bill, and as such, Congress could not attach the ERC legislation or any other tax measure.
“So now we’re left with trying to find another vehicle for this,” Turkstra says. “If subsequent Covid relief legislation is introduced, the ERC proposal could be attached to that, because it is a relief measure. If there is finally a change in the law to reinstate the credit for the fourth quarter, it could be done retroactively, saving contractors money. AGC is doing everything we can to address this issue legislatively.”
ADDITIONAL TAX INCENTIVES
Contractors should also look into whether they can qualify for the federal research credit, also known as the R&D tax credit, as well as their state’s research credit if it offers one, Woods says.
“If a contractor has an estimator who is drawing blueprints, that time can qualify for the research tax credit,” he says. “And in the field, if a foreman or supervisor requesting a change order has to re-engineer something, a portion of that time can also qualify for the credit.”
To obtain the federal R&D tax credit, the qualifying research must be undertaken for discovering information that is technological in nature, and its application must be intended for use in developing a new or improved business component of the taxpayer, according to the IRS. In addition, substantially all of the activities of the research must be elements of a process of experimentation relating to a new or improved function, performance, reliability or quality.
The research credit generally isn’t allowed for research conducted after the beginning of commercial production; research adapting an existing product or process to a particular customer’s need; duplication of an existing product or process; surveys or studies; research relating to certain internal-use computer software; research conducted outside the United States, Puerto Rico, or a U.S. possession; research in the social sciences, arts or humanities; and research funded by another person or governmental entity.
“Contractors can go back three years and amend the R&D credit every single year,” Woods says. “It’s a powerful tool that contractors should take advantage of.”
Contractors should look into any additional state tax credits as well, he says. For example, California offers credits for employers using Employee Training Tax (ETT) funds to train their employees, as well as credits for hiring certain employees in Work Opportunity Zones.