The federal Coronavirus Aid, Relief, and Economic Security (CARES) Act of March 2020 included an important but often-underutilized feature: the employee retention tax credit (ERTC). The ERTC allowed eligible employers across industries to earn a refundable tax credit for wages paid to employees during periods in which the employer’s business was subject to a suspension, a shutdown or a significant decline in revenues.

While many large companies took advantage of the ERTC, the tax credit was not generally used by employers with fewer than 500 employees. A primary reason for this was quite straightforward: Employers that borrowed funds using Paycheck Protection Program (PPP) loans could not take advantage of the credit.

To expand eligibility for the ERTC, Congress included several key provisions in the Consolidated Appropriations Act (CAA) and the American Rescue Plan, both of which were recently signed into law. These provisions permitted employers with PPP loans to take advantage of the ERTC, increased the amount of the available tax credit and allowed employers to obtain the credit for qualifying wages paid from March 2020 through December 2021.

Despite the now-expanded availability of the ERTC, many otherwise-eligible employers still have not taken advantage of the credit. This is due, in no small part, to the fact that many companies—inundated as they are by reopening issues, vaccine testing and ongoing PPP administration—appear to continue to be unaware that, under the CAA, they may now qualify for the ERTC.

For the construction industry in particular, the situation is even more complex. The cyclical nature of construction activity, the closures of worksites during the COVID-19 pandemic, the relatively high use of contract or temporary labor, and other industry-specific issues make it difficult to determine whether an employer is eligible for the tax credit and, if so, what wages are covered for the purposes of claiming the credit.

Commercial and industrial construction company owners, executives and other professionals need to better understand whether they may qualify for the ERTC. They also need a sense of how much the tax credit may be worth to them, as well as how to identify issues that may need further analysis before deciding whether to use the credit at all.

Which Employers Qualify?

Under the CAA’s expanded eligibility, employers qualify for the ERTC for one of two reasons:

• The employer’s business was “fully or partially suspended” due to a government order.
• The employer experienced a significant decline in gross receipts.

A suspension of business means that an employer’s operations have been, or continue to be, partly or entirely limited because of a government order that affects commerce or travel. Activities affected by such orders span the range of the spectrum. For the construction industry, and depending on the jurisdiction and type of project, certain contractors have had no option other than to reduce the number of on-site workers—or to shut down altogether.

A significant decline in gross receipts means that an employer experienced a decline of at least 20% in gross receipts during a calendar quarter in 2021 compared with the same calendar quarter in 2019. For calendar quarters in 2021, an employer may also choose to use the immediately preceding calendar quarter and compare gross receipts with the same quarter during 2019 to determine whether the employer qualifies. For example, to determine eligibility for the tax credit during Q1 of 2021, an employer could compare Q4 of 2020 with Q4 of 2019.

For wages paid during 2020, the required decline in gross receipts is a bit more steep: The reduction in receipts must be 50% or more for a calendar quarter in 2020 compared with the same quarter in 2019. Any employer that, prior to the passage of the CAA, was not eligible to claim the credit due to having received PPP funds may now retroactively take a tax credit for calendar quarters during 2020 if it meets this standard of decline in gross receipts.

The CAA also includes additional thresholds that determine the types of wages paid for which an employer can claim the ERTC. For calendar year 2020, employers with more than 100 employees can only claim credit for wages paid to employees who were not actively providing services (e.g., were furloughed). For 2021, this threshold number was increased to 500 employees. This means that for employers with fewer than 100 or 500 employees, a credit may be claimed for all wages paid to employees, regardless of whether the employees were furloughed.

What Is the Value of the ERTC?

For quarters beginning on or after Jan. 1, 2021, the amount of the tax credit available is 70% of “qualified wages” (cash compensation plus qualified health plan expenses) paid through June 30, 2021, up to a limit of $10,000 in qualified wages for each employee (or a maximum tax credit of up to $7,000 per employee per quarter, or $14,000 per employee for the first two quarters of 2021).

This figure is more generous than the tax credit available during 2020, which was 50% of qualified wages paid per employee for all quarters (in other words, up to $5,000 per employee).

How Does an Employer Claim the Tax Credit?

Employers claim the credit by offsetting applicable employment tax withholdings to the IRS. In connection with the direct offset, an employer reports total qualified wages on IRS Form 941, Employer’s Quarterly Federal Tax Return, which has been amended to include reporting of employee retention tax credits.

Special Considerations for Construction Employers

Employers in the construction industry will need to examine their unique situations carefully before determining whether to claim the ERTC. A significant issue is the definition of a full or partial suspension of operations. The number of employees on a worksite or actively providing services in support of a project can often vary considerably from day to day, week to week and month to month, depending on the stage of construction.

Employers that believe they qualify for the ERTC due to government orders that suspended their operations must be prepared to connect such reduced employment levels to specific directives.

Likewise, the level of gross receipts—if used as the basis for claiming the ERTC—may be difficult to demonstrate if payments received in quarters for which the credit is being claimed (e.g., all of 2020 and the first half of 2021) and the comparison quarters in 2019 were somewhat variable or erratic. This may be particularly true for construction companies, where payments are often tied to completion of specific stages of a project or may be delayed—or accelerated—for reasons independent of the COVID-19 crisis.

Again, a key consideration will be tying the reduction in revenues to a reduction in activity occasioned by the onset of the pandemic.
The manner in which construction companies hire, deploy, lay off or furlough employees—before, during and as the nation moves out of the pandemic—may also pose administrative burdens that make it difficult to determine the amount of the “qualified wages” paid to employees and used as the basis for the claimed tax credit.

These issues should not necessarily discourage construction companies from investigating whether to claim the ERTC, particularly given the expansion of eligibility under the CAA. However, they do point to the importance of seeking qualified counsel to help determine whether—and to what degree—it may be financially wise to pursue this tax credit.