The Employee Retention Tax Credit (ERTC) and the Paycheck Protection Program (PPP) were created to incentivize businesses to keep workers employed through the worst parts of the coronavirus pandemic. Many in the construction industry took advantage of these programs. In fact, the construction industry has thus far taken out the second most dollar amount of PPP loans in 2021.
Accepting these incentives is easy, but accounting for them is not necessarily as simple.
Testing for ERTC Eligibility
The ERTC applies to eligible wages paid from March 13, 2020, through December 31, 2021.
- The ERTC in 2020 and 2021 can only be claimed by businesses that meet the following criteria:
Full time employees (FTE) test:
For 2020: In 2019 have 100 or fewer average FTEs
For 2021: In 2019 have 500 or fewer average FTEs - Prove their business operations were suspended due to a government order
– or –
For 2021:
Show at least a 20% decline in gross receipts compared to either (a) the comparable quarter from 2019, or (b) the immediately preceding quarter compared to corresponding quarter in 2019.
For 2020:
Show at least a 50% decline in gross receipts compared to the corresponding quarter for 2019. The immediately preceding quarter option does not apply in 2020.
Additionally, in Revenue Procedure 2021-23, the IRS has stated that the amount included in income from PPP loan forgiveness does not constitute gross receipts for purposes of calculating the decline in gross receipts test.
Because the construction industry was considered essential business, many of the government shut-down orders restricted business as usual but did not require complete shut down of their construction activities. Therefore, many construction companies must rely on the decline in gross receipts to qualify for the ERTC. When determining gross receipts for the ERTC eligibility, construction companies cannot simply look to their financial reports. The gross receipts decline requires comparison of gross receipts as calculated for tax purposes. The tax method of accounting for most contractors is either the completed contract method or the percentage of completion method.
Completed Contract Method:
A contractor using completed contract method for tax purposes generally recognizes income on the job when the job is completed. The gross receipts test for ERTC is on a quarter-by-quarter basis. Depending on the timing of jobs completed in each quarter in 2019, as compared to jobs completed in each quarter of 2020 and 2021, the company may meet the required decline in revenues to qualify for the ERTC in a given quarter.
Percentage of Completion Method:
Percentage of completion recognizes income on a job over time as work is performed. Qualifying for the credits may create additional back office work for construction companies who use percentage of completion method for tax purposes. Not all contractors prepare full work-in-process schedules each quarter.
A company should not assume that they do not qualify based on their comparative annual gross receipts. Contractors should take a closer look at quarterly gross receipts based upon their company’s tax method of accounting before dismissing eligibility.
How the ERTC Interacts with the PPP
Initially, the ERTC and the PPP loan forgiveness were mutually exclusive, which meant that taxpayers could not claim both. With the passage of the Consolidated Appropriations Act (CAA) in late 2020, businesses were permitted to apply for both programs.
The catch?
Businesses cannot calculate the ERTC using the same payroll expenses they used on their application for PPP loan forgiveness.
To qualify for PPP loan forgiveness, at least 60% of PPP funds must have been used to pay for payroll. The remaining 40% can go toward other expenses like mortgages, rent, utilities, and operational expenditures. Business owners should only include the minimum amount of payroll costs on their application to support PPP loan forgiveness. This will free up remaining payroll costs to be used for the ERTC.
Guidance on the ERTC is being updated frequently. If you have questions about the ERTC, the PPP, or how they work together, contact a member of the LaPorte Construction Industry Group today. We work with many businesses in the construction industry and can help you understand your options as it relates to both programs.