In the year 2020, the construction and real estate industries experienced a rollercoaster of ups and downs as a result of the COVID-19 pandemic, which affected diverse industries in various ways. While there has been a slowdown in commercial development, the residential construction industry is flourishing. Low mortgage rates, ongoing trends toward work-from-home arrangements, and distressed property sales all had a significant impact on the residential and commercial real estate markets in 2020, and they will continue to do so in 2021 and beyond. In the meanwhile, travel restrictions have continued to be a source of difficulty for the hotel industry.
The Employee Retention Credit provides relief for some enterprises in the construction and real estate industries (ERC). The ERC is a refundable payroll tax credit that is made available to taxpayers who choose to keep their employees on the payroll and who either had a drop in gross receipts every quarter during the years 2020 or 2021 or experienced a full or partial suspension of business operations as a result of orders issued by the government.
A Comprehensive Analysis of the Employee Retention Credit History and Its Current Status
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides relief measures such as the Paycheck Protection Program (PPP) and the ERC. Nevertheless, businesses were only able to take advantage of either the PPP or the ERC in the past; they could not take advantage of both programs at the same time. The Consolidated Appropriations Act of 2021 (CAA) retroactively ended this stipulation of the CARES Act on December 27, 2020, and it provided some enhancements to the ERC. What this means is that businesses in the construction and real estate industries now have the potential to benefit from both the PPP and the ERC. Discussion takes place over the specifics of which employers are qualified for the ERC. When calculating their income tax obligation, companies who claim the ERC are obliged to lower their qualified wage deduction by the amount of the credit. This is done to prevent the companies from receiving a “double tax advantage.” It is vital to notice this requirement. This DHG paper goes into greater detail regarding the pay adjustment that was implemented.
In the past several months, we have seen that some eligible firms have not yet received the monetary advantages of the ERC, or that they are still in the process of reviewing their eligibility and quantifying the amount of credit that they are entitled to get. The majority of pass-through business taxpayers have until May 17 to submit their income tax payments for the calendar year 2020. While it is possible to seek extensions in order to obtain further time for calculating and reporting the wage adjustment, an extension does not provide any additional time for paying the income tax amount that has been determined. Because of the salary adjustment, DHG has sent a letter to the Internal Revenue Service and the Treasury Department requesting that they grant more time for taxpayers to make payment on their 2020 income tax due. Taxpayers would have an additional year to receive their ERC-related refunds and pay the income tax without incurring any late payment penalties or associated collection procedures if the DHG request were granted. This would be in addition to the current six-month grace period. As of the time that this post was published, we have not as of yet received a reply to this letter.
DHG will continue to keep a close eye on any developments pertaining to the ERC and will keep assisting businesses in gaining a better grasp of the prospects presented by the credit. The comprehensive approach that we take can provide assistance to your business in estimating the ERC, developing an action plan, and navigating any related hurdles.
Benefits for the Technology Industry Will Increase as a Result of ERC Qualification Changes
The recently enacted Consolidated Appropriations Act 2021 (CAA) introduced changes to the eligibility criteria for the Employee Retention Credit (ERC). These changes increased eligibility and benefits for technology companies, while also providing potential synergies for those who are seeking the Research and Development (R&D) Tax Credit.
The CAA/COVID Relief Bill, also known as the Consolidated Appropriations Act of 2021
The Consolidated Appropriations Act 2021 (CAA), which made changes to the ERC that were initially presented by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, was signed into law on December 27, 2020 by the President of the United States of America.
The Payroll Protection Program (PPP) loans will be impacted and the definition of qualifying wages will be expanded according to the CAA, which includes many revisions to the ERC regarding eligibility, maximum possible credit, and impact on PPP loans. A provision that was previously disallowed by the CARES Act was made permissible by the CAA, allowing businesses to retrospectively benefit from both the ERC and the PPP. This was something that was not possible under the CARES Act. The most recent publication from DHG may be found on this page, and it contains information regarding changes to the ERC as well as synergies with the R&D tax credit.
Efficient Methods for Applying for the R&D Tax Credit as Well as the ERC
Because technology businesses who are looking to claim the ERC may also employ the same data and comparable touchpoints in an R&D tax credit study, DHG suggests that these companies pursue both credits simultaneously, if possible. A corporation is able to offset its U.S. tax due in two different ways by taking use of the R&D tax credit, which is a tax benefit that is offered to businesses in the United States that have R&D expenditures that they must bear.
- Credit Carryforward: The R&D tax credit can be carried forward for a period of up to 20 years, until it is used to offset an individual’s income tax liability.
- Reduced Payroll Taxes “Qualified small firms” are able to reduce their payroll taxes by up to $250,000 each tax year by taking advantage of the R&D tax credit.
Research and development (R&D) is most often understood to refer to any endeavor carried out in the activities of engineering, technology, biological sciences, or physical sciences with the goal of establishing or enhancing functionality, performance, dependability, or quality. This is especially true for technology organizations when the activities are intended to resolve technological uncertainty by means of design, development, and testing or experimentation.
In addition to the fact that the data for R&D and ERC are comparable, both initiatives require communication and alignment with the department heads of related departments, including legal, engineering, tax, and financial departments, among others. Taking on the two initiatives at the same time might result in increased productivity while also reducing the amount of disruption caused to technology firms.
Treasury and the Internal Revenue Service have issued guidance about the employee retention credit.
The United States Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) issued Notice 2021-20 (Notice) on March 2, 2021. This Notice provides advice on the Employee Retention Credit (ERC), which is provided under the Coronavirus Aid, Relief, and Economic Security Act. Employers whose operations were entirely or partially ceased owing to directives from the government or who experienced a considerable drop in gross receipts as a result of the COVID-19 outbreak are eligible for the ERC, which is a refundable payroll tax credit.
The tax credit is equal to fifty percent of an employee’s qualified wages earned during the period beginning on March 12, 2020 and ending on December 31, 2020. This applies to eligible quarters in 2020. The maximum credit that may be claimed for an employee is $5,000 per year, and the maximum employee of qualified wages that can be claimed is $10,000. The ERC will be equivalent to seventy percent (70%) of an employee’s qualifying wages for wages earned between January 1, 2021 and July 1, 2021. The maximum credit that may be claimed for each employee is $7,000 each quarter, but the maximum employee of qualified wages that can be claimed is $10,000 per quarter. Please refer to our BKD Thoughtware® notice for further details about the ERC for the years 2020 and 2021.
Before the publication of this Notice, the only advice provided by the IRS concerning the ERC was available on the IRS website in the form of answers to frequently asked questions (FAQ). The majority of these Frequently Asked Questions are included in the Notice, which lends it the status of authoritative guidance for taxpayers. Additionally, the Notice offers additional guidance, such as how the ERC interacts with the Paycheck Protection Program (PPP).
Communication with the PPP
Employers that have received a PPP loan are now eligible for the ERC, provided that they qualify for the program under its other criteria, as a result of the Consolidated Appropriations Act (CAA) of 2021. However, employers are not allowed to “double-dip” and utilize the same wages for the PPP loan forgiveness program as well as the ERC program. Employers that had previously applied for PPP debt forgiveness prior to the adoption of the CAA faced confusion over the extent to which their application for forgiveness reported ERC-eligible payroll expenditures in excess of the amount required to receive full loan forgiveness. Employers may have also paid nonpayroll expenditures that may have been utilized to achieve PPP forgiveness; however, they may have decided to simply submit payroll on the forgiveness form since the payroll costs alone were sufficient to receive full forgiveness. The guidance on the interaction with PPP loans may be found in Question 49 of the Notice. This section also includes various examples.
For the purposes of the ERC, an eligible employer that has received a PPP loan is deemed to have made the election to not take into account certain qualified wages for wages that were reported on its PPP loan forgiveness application, not exceeding the minimum amount of payroll costs, together with any other eligible expenses that were reported on the forgiveness application, sufficient to support the forgiven amount of the PPP loan. This applies only to wages that were reported on the application and do not exceed the minimum amount of payroll costs.
An eligible employer had a PPP loan in the amount of $200,000, but on its application for forgiveness, it reported having payroll expenditures in the amount of $250,000. (assuming no nonpayroll costs were reported). If the additional $50,000 in wages are qualified, then the eligible employer would still be able to apply them to the ERC and receive credit for them.
In the event that a qualified employer submits an application for PPP forgiveness that contains payroll and nonpayroll expenses in excess of the forgiveness amount, the nonpayroll costs are eligible to be applied to the forgiveness first (up to the 40 percent maximum eligible nonpayroll costs that can be used to receive PPP loan forgiveness).
On its application for the cancellation of a $200,000 PPP loan, an eligible company reported $200,000 of qualified wages as payroll expenditures, in addition to $70,000 of acceptable nonpayroll costs. Because of this circumstance, the employer would only consider $130,000 of the wages as having been utilized for PPP forgiveness, which would leave $70,000 of the wages available for the ERC.
If an eligible employer had the ability to include nonpayroll costs on its PPP forgiveness form but chose not to do so because it already had sufficient payroll costs to qualify for full loan forgiveness, the employer is still considered to have made the election to not take into account those wages (up to the loan forgiveness amount).
- Illustration: An eligible employer had a $200,000 PPP loan, paid $200,000 of eligible payroll costs (that also would be qualified wages for ERC), and also paid $70,000 in eligible nonpayroll costs; however, on its forgiveness application, the employer only included the $200,000 it had paid in payroll costs. Even though the employer could have used the $70,000 of nonpayroll costs for PPP purposes, the employer is deemed to have made an election not to take into account the entire $200,000 of wages because the nonpayroll costs were not reported on the employer’s forgiveness application. This is the case despite the fact that the employer could have used the $70,000 of nonpayroll costs for PPP purposes.
If an eligible firm paid both qualified and nonqualified wages for ERC purposes and reported both on its PPP forgiveness application, then the employer can apply the nonqualified wages toward forgiveness first.
- Here’s an illustration: an eligible employer received a PPP loan for $200,000, paid out $250,000 in payroll (of which $100,000 was not considered qualifying wages for ERC reasons), and had nonpayroll expenditures totaling $70,000. The business owner reported $130,000 in payroll expenditures and $70,000 in other costs associated with running the business in the application for forgiveness. If the employer can show that the $130,000 of payroll costs included the entire $100,000 of nonqualified wages, then the employer will be considered to have made a choice not to take into account the $30,000 of qualified wages. This will result in the remaining $120,000 of qualified wages being eligible for the ERC.
The Application of Government Directives to the Analysis of Eligibility
The ERC is available to any employer whose commercial or business operations have been completely or partially halted as a result of an order issued by the government. If the government order permits the employer’s activities to continue as full, the vital business is not regarded to have fully or partially suspended operations during the period of time that the order was in effect. On the other hand, an employer who runs an essential business could be considered to have a partial suspension of operations if, taking into account the facts and circumstances, more than a nominal portion of the employer’s business operations are suspended as a result of an order from the government.
Question 11 of the Notice presents a brand-new objective criterion for determining whether or not a component of an employer’s business activities will be considered to comprise more than a notional portion of those operations for the purposes of the ERC. This criterion may be found in the Notice. A component of an employer’s business operations will be considered to comprise more than a nominal portion according to this test if at least one of the following conditions is met:
- The proportion of the business’s total gross receipts attributable to the aforementioned aspect of its activities is not less than ten percent (both determined using gross receipts of the same calendar quarter in 2019).
- The number of hours of service that employees in that division of the business put in does not fall below 10 percent of the overall number of hours of service that employees in the employer’s business put in (both determined using number of hours of service performed by employees in the same calendar quarter in 2019).
The Notice also includes examples of adjustments that are needed by a government order and situations in which it may have an effect on the employer’s business operations that is more significant than a nominal one. Despite the fact that this determination is dependent on the facts and circumstances, the Notice stipulates that a governmental order will be considered to have more than a nominal effect if it reduces an employer’s ability to provide goods or services in the normal course of business by at least 10 percent. Modifications that change consumer behavior, such as requiring masks, creating one-way store lanes, and other similar changes, or requiring employees to wear masks and gloves while doing their responsibilities do not result in an effect that is much more than minimal.
This most recent guideline also includes a list of considerations that should be examined when considering whether or not an employer can continue comparable activities in a manner that would prevent the employer from being judged to have a full or partial suspension. The ability of employees to telework, the portability of their work, the degree to which an employer’s workspace is essential to the operation of its trade or business, and the question of whether or not an employer experienced a significant delay, such as more than two weeks, in transitioning operations to a remote environment are all included on this list of considerations.
Additional Important Factors
- Employers that are exempt from paying taxes report their gross receipts. The Notice modifies its previous Frequently Asked Questions (FAQ) regarding the definition of “gross receipts” for a tax-exempt employer to specifically refer to the definition of “gross receipts” as described in Internal Revenue Code Section 6033 and related Treasury regulations. In accordance with the definition offered by the United States Small Business Administration for the purposes of the PPP, this is how it should be stated. According to this definition, the cost of the assets that were sold (whether they were capital assets or other types of assets) cannot be deducted from the revenues of the sale.
- Gross receipts also include amounts received as contributions, grants, and other similar amounts (without reduction for the expenses of raising and collecting such amounts), gross amounts received as dues or assessments from members or affiliated organizations, gross sales or receipts from business activities (including unrelated business activities), and gross amounts received as investment income, such as interest, dividends, rents, and royalties. Gross receipts do not include any deductions for expenses incurred in raising and collecting such amounts.
- Claiming Credit – The Notice clarifies that an eligible employer that paid qualified wages in a preceding calendar quarter in which it may have been entitled to claim the credit but opted not to do so may file Form 941-X to claim a refund from the Internal Revenue Service (IRS). This helps to clarify that an employer is required to file an updated return for the quarter in which the eligible wages were paid even if there is no special provision under the CAA that allows the employer to claim certain wages for the 2020 Q2/Q3 tax period on the return for the 2020 Q4 tax period.
- Documentation Requirements – The Notice provides a rundown of the documentation that an eligible employer has to provide and keep in order to demonstrate that they are qualified for the ERC. Documentation to support the following is included here:
- The method by which the employer determined that it was a qualified employer that offered appropriate wages
- The method by which the employer determined at the total amount that might be allocated to eligible health plan expenditures
- Whether or if the employer is part of an aggregated group that is considered as a single employer for the purposes of ERC, and if so, how the aggregation impacts the determination and distribution of the credit if it is the case that the employer is part of such a group.
In addition, employers are required to keep copies of any completed Forms 7200 (which are necessary in order to make a request for advance payments from the ERC) and federal employment tax returns that have been submitted to the IRS.