The Employee Retention Credit for Construction Contractors: New York and New Jersey Impacts

In March 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act created the Employee Retention Credit (“ERC”). Under the recently passed Consolidated Appropriations Act, 2021 (“CAA”), companies that receive PPP loans may still qualify for the ERC (for wages that are not paid with forgiven PPP proceeds). The ERC is a fully refundable payroll tax credit for employers.

The maximum available credit for 2020 is $5,000 per employee. For 2021 the maximum credit increases to $7,000 per employee, per quarter.

In order to qualify for the ERC, a company must experience either partially or fully suspended operations due to restrictions imposed by the government or a significant decline in gross receipts. For 2020 a “significant decline” in gross receipts means an employer’s gross receipts for a given quarter are less than 50% of their gross receipts for the same calendar quarter in 2019. However, for the first two quarters of 2021 under the CAA an eligible quarter requires a gross receipts decline of more than 20% as compared to the same applicable quarter in 2019.

For 2021 an optional election is available which allows a lookback to the prior quarter if there hasn’t been a 20% decline in gross receipts in either Q1 or Q2 as compared to 2019. The election allows a lookback at gross receipts of the immediate preceding calendar quarter. For instance, in determining eligibility for Q1 2021, a taxpayer can use Q4 2020 and compare its gross receipts to Q4 2019.

While this credit is national in scope, the impact on your business depends on specific local shutdown order definitions of essential projects. Here are examples of how New Jersey and New York construction businesses may qualify.

New Jersey

In New Jersey, Governor Murphy issued executive order No. 122, which required all non-essential construction projects to cease beginning at 8:00 p.m. on April 10, 2020. The shut-down was lifted at 6:00 a.m. on May 18, 2020 when executive order No. 142 took effect. County or local government shut-down orders would also qualify as partially or fully suspending operations. If your company had a construction project that was shut down during this time period, you may qualify for the ERC.

The executive order only defined essential construction projects. If your project does not meet the criteria of being “essential” then it would qualify as non-essential.

“Essential construction projects” were defined by Governor Murphy’s executive order No. 122 as:

1. Projects necessary for the delivery of health care services, including but not limited to hospitals, other health care facilities, and pharmaceutical manufacturing facilities;
2. Transportation projects, including roads, bridges, and mass transit facilities or physical infrastructure, including work performed at airports or seaports;
3. Utility projects, including those necessary for energy and electricity production and transmission, and any decommissioning of facilities used for electricity generation;
4. Residential projects that are exclusively designated as affordable housing;
5. Projects involving pre-K-12 schools, including but not limited to projects in Schools Development Authority districts, and projects involving higher education facilities;
6. Projects already underway involving individual single-family homes, or an individual apartment unit where an individual already resides, with a construction crew of five or fewer individuals. This includes additions to single-family homes, such as solar panels;
7. Projects already underway involving a residential unit for which a tenant or buyer has already entered into a legally binding agreement to occupy the unit by a certain date, and construction is necessary to ensure the unit’s availability by that date;
8. Projects involving facilities at which any one or more of the following takes place: the manufacture, distribution, storage, or servicing of goods or products that are sold by online retail businesses or essential retail businesses, as defined by Executive Order No. 107 (2020) and subsequent administrative orders adopted pursuant to that Order;
9. Projects involving data centers or facilities that are critical to a business’s ability to function;
10. Projects necessary for the delivery of essential social services, including homeless shelters;
11. Any project necessary to support law enforcement agencies or first responder units in their response to the COVID-19 emergency;
12. Any project that is ordered or contracted for by federal, state, county, or municipal government, or any project that must be completed to meet a deadline established by the federal government;
13. Any work on a non-essential construction project that is required to physically secure the site of the project, ensure the structural integrity of any buildings on the site, abate any hazards that would exist on the site if the construction were to remain in its current condition, remediate a site, or otherwise ensure that the site and any buildings therein are appropriately protected and safe during the suspension of the project; and
14. Any emergency repairs necessary to ensure the health and safety of residents.

New York

In New York, Governor Cuomo issued executive order No. 202.6, which required all non-essential businesses to utilize, to the maximum extent possible, any telecommuting or work-from-home (“WFH”) procedures that they could safely utilize. Employers were directed to reduce the in-person workforce at any work locations by 50% no later than March 20, 2020 at 8:00 p.m. With executive order No. 202.13, on June 8, 2020 New York City was allowed to enter Phase 1 of reopening and several other regions were allowed to enter Phase 2. County, city, or local government shut-down orders would also qualify as partially or fully suspending operations. If your company had a construction project that was fully or partially shut down during this time period, you may qualify for the ERC.

The Empire State Development Corporation defined essential construction as:

• construction for, or the business provides necessary support for construction projects involving, roads, bridges, transit facilities, utilities, hospitals or health care facilities, homeless shelters, or public or private schools;
• construction for affordable housing, as defined as construction work where either (i) a minimum of 20% of the residential units are or will be deemed affordable and are or will be subject to a regulatory agreement and/or a declaration from a local, state, or federal government agency or (ii) where the project is being undertaken by, or on behalf of, a public housing authority;
• construction necessary to protect the health and safety of occupants of a structure;
• construction necessary to continue a project if allowing the project to remain undone would be unsafe, provided that the construction must be shut down when it is safe to do so;
• construction for existing (i.e., currently underway) projects of an essential business; or
• construction work that is being completed by a single worker who is the sole employee/worker on the job site.

The ERC is claimed on IRS Form 941, “Employer’s Quarterly Payroll Tax Return.” An eligible company may reduce its federal employment tax deposits by the allowable ERC amount. Previously filed Forms 941 can be amended to claim the credit when applicable. If the ERC exceeds the remaining federal unemployment tax deposits for that quarter, the company may file Form 7200 to claim an advance refund. Consult with a tax professional to determine your ERC eligibility.