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Employee Retention Credits in 2021 – Considerations for Contractors

Posted by Carlin Culbertson on Feb 4, 2021 8:00:00 AM

Construction manager and engineer working on building site-1

The Employee Retention Credit (“ERC”) has been a hot topic since the most recent stimulus bill was signed into law.  We detailed the ERC here and would recommend reading through it to get an overall idea of what the credit is and how to qualify. This article will focus on the 2021 version of the credit and some considerations for contractors or other entities that may have revenue driven by estimates.

A lot of contractors I’ve spoken with don’t qualify for another round of the Paycheck Protection Program (details here if you’re not sure if you qualify or not) because they didn’t meet the gross receipts decline in 2020.  In many cases, revenues for 2020 were not significantly affected because contractors had enough backlog going into the downturn that 2020 wasn’t significantly affected from a revenue standpoint, which can be typical of contractors when a downturn occurs.  The lagging impact of fewer new projects, increased competition for bids, job owner cash flow constraints delaying projects, etc. are when a lot of contractors start to feel the downturn and unfortunately that doesn’t line up exactly with the timeframe for determining eligibility for the 2nd round of the Paycheck Protection Program.  There is one option that’s based on more current activity out there in the form of the ERC available from January 1 through June 30, 2021.  The ERC is a credit for up to 70% of an employee’s wages up to $10,000 per quarter, so potentially a $14,000 credit per employee for the first six months of 2021.  The credit is taken against your payroll taxes on your form 941s.  You need to have a 20% reduction in gross receipts for Q1 2021 or Q2 2021 compared to the same quarter in 2019 (or the quarter prior – recommend reading our more in-depth ERC article for the details).

Besides possibly starting to see a slow down now so this could be of benefit, what else does this have to do with contractors?  If you’re using percentage completion accounting, your revenue (and in turn gross receipts) is driven by how many costs you’ve incurred versus your cost estimates.  What we’ve heard and seen (depending on sector and state) is that there has been downward pressure on margins because of increased COVID compliance costs depending on your jobsite requirements, delays, along with reduced margins because of bid competition, supply issues, etc.  If you have experienced these issues and expect margins to be lower in Q1 and Q2 2021 as your jobs finish up, you should make sure you update your estimated cost to complete so that the amount of revenue you recognize is accurate in these quarters.  Or, if you’re typically very conservative, make sure you aren’t pushing a lot of revenue and profit into 2021 by being too conservative based on the historical experience of how your jobs finish.  Normally you don’t want a significant pick up at the end of a job and want the profit recognition to be smoother across the life of the job (it will never be perfect but getting it as close as possible is the goal).  In this case if there is significant profit gain, it could impact your ability to qualify for the credit.  Looking at your estimates now is important because it could be too late later this year to go back and take the credit if you would have qualified.  This does not mean manipulate your earnings to qualify, as your estimates need to be reasonable and relate to historical experience, which I’m sure anyone reading this realizes, but instead means your quarterly cutoff matters more now because of this credit, so something you may only focus on at the end of the year you may want to take a harder look at each quarter.  Start by seeing what margins your completed jobs are ending up at and compare that to your in-progress margins.  That is an easy way to see if any of your in-progress jobs might be out of line with how work is actually finishing up.  Reach out if we can assist with this.

You also are likely to have change orders and other modifications to your contracts that you need to account for, which will have an impact on job profitability.  If the change order impacts the cost estimate, the profitability on the job, etc. then that will affect the amount of revenue and when you recognize it.  Also, if a change order is approved, isn’t approved, etc. will also have an impact on when you adjust the job.

Proper cutoff with expenses between quarters will also be important.  During the year you may not worry as much about cutoff between quarters because that may only matter to you at the end of the year.  However, with potential ERC eligibility on the line you’ll want to be sure you get expenses into the right period when possible in case it may make a difference between being eligible or not.

There are other items to consider with your job costing and we’d be happy to discuss them further with you if you’re unsure of what else you may want to keep an eye on each quarter.  It is well worth it to take a hard look at your job cost if you are looking at a decline in job activity and revenue.  Doing some of these clean up items could help you get the ERC one or both quarters in 2021, which could be $7,000 to $14,000 per employee.

If you need assistance or have questions, please contact us

Topics: Accounting & Auditing, Construction, Accounting and Tax Resource, COVID-19

Carlin Culbertson

Carlin Culbertson

With over 15 years in public accounting, Carlin has extensive auditing experience serving a wide variety of clients in various industries, including construction, manufacturing, mining, biotechnology and distribution.