September 2021 McCarthy.CPA
MCC Construction Zone
Proactive Advice for Construction and Real Estate Professionals
MCC Construction Zone
Marty McCarthy, CPA, CCIFP
In This Issue As you know, the situation with COVID is still very fluid thanks to the Delta variant. In this issue of MCC Construction Zone we focus on how the construction industry is responding to the Delta variant. While the outlook in some sectors is still promising, others are taking a hit primarily due to the inability to find enough skilled craftsmen, material and supply shortages, inflation, and fears about the continuing pandemic. Now that we are approaching Q4, it is time to review your Tax Blueprint. Included in this issue are many tax saving strategies for you to consider. One of my favorites is the Employee Retention Credit (ERC). We provide you with updated information on ERC, as well as new guidance from the IRS on how to take the credit. Many of our clients are benefiting from ERC. This tax credit can give you an infusion of cash – up to $33,000 per employee – that you may find helpful. Call us to see if you qualify at 610.828.1900.
We also introduce you to one of our senior associates – Natalie DeYoung. Learn how her passion for construction accounting combined with hands on experience working at a construction firm will benefit you. There are many other golden nuggets of information in this issue of MCC Construction Zone. Happy reading. Stay safe!
Marty McCarthy, CPA, CCIFP Managing Partner
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Contents
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The Construction Outlook ............................................................................................................................. 3 Tax Strategies to Reduce Income Tax Liability .............................................................................................. 9 The Employee Retention Credit Can Provide Much Needed Funds to Qualified Employers ..................... 14 Meet Natalie DeYoung ................................................................................................................................ 19 McCarthy & Company Named a Top 50 Construction Accounting Firm™ by Construction Executive....... 21
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MCC Construction Zone The Construction Outlook Rich Higgins, CPA
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o many economists are weighing in with their predictions for the construction industry, and rightfully so. What happens in the construction industry is often the prelude to what will happen to the rest of the economy. According to Oxford Economics, a leader in global forecasting and quantitative analysis, the construction market will rise by 3.5% by the end of 2023.
Oxford Economics’ baseline forecast calls for 7.3% Gross Domestic Product (GDP) growth in 2022. Its forecasts are based on Biden’s infrastructure plan becoming law. According to the updated White House Fact Sheet on the American Jobs Plan (AJP), $2 trillion is earmarked to be spent on America’s infrastructure over the next decade. Even so, a lot of things could happen. AJP might not become law in its current form. If vaccines have limited effectiveness against COVID variants, Oxford Economics projects that growth maybe just under 3%. If inflation persists, growth might be just under 6%. But if everything goes right and the “consumer boom” ensues, growth could jump to nearly 10%. Economists at Morgan Stanley say that the second-half growth slowdown will occur in the third quarter. Gross domestic product growth in the July-September period is projected to be 2.9%, down sharply from the previous figure of 6.5%. Even so, Morgan Stanley maintains its fourth quarter growth projection of 6.7%.
The bottom line is that we are in a very fluid situation. We must look at many other scenarios based on current fact and future possibilities before deciding on the direction to take. What happens in one period may be very different from what will happen in the next. It is therefore important to keep up with the economic data from numerous trusted sources. 3 | Page
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Overall U.S. Labor and Wages The U.S. Bureau of Labor Statistics reported on September 3, 2021, that the economy added 235,000 positions in August. Economists surveyed by Dow Jones had hoped for 720,000 new hires. Even so, the unemployment rate dropped to 5.2% from 5.4%, in line with estimates.
Overall wages continued to accelerate in August, rising 4.3% on a year-over-year basis and 0.6% on a monthly basis. Estimates had been for 4% and 0.3% respectively.
Construction Labor Statistics The construction industry lost 3,000 jobs on net in August, according to an Associated Builders and Contractors (ABC) analysis of data from the U.S. Bureau of Labor Statistics. Despite the monthly setback, the industry has recovered 881,000 (79.2%) of the jobs lost during earlier stages of the pandemic. ABC reported that nonresidential construction employment declined by 20,300 positions on net. Nonresidential specialty trade contractors lost 9,200 jobs, heavy and civil engineering lost 8,300 and nonresidential building employment dipped by 2,800 positions.
The construction unemployment rate fell sharply to 4.6% in August. Unemployment across all industry sectors declined from 5.4% in July to 5.2% last month. “Many observers will simply attribute the extraordinarily disappointing employment report to the malicious impacts of the Delta variant,” said ABC Chief Economist Anirban Basu. “While the ongoing pandemic clearly had an impact on employment in segments such as retail, lodging, and restaurants in August by suppressing demand for additional workers, construction employment dynamics were more affected by ongoing supply-side bottlenecks. “Collectively, nonresidential contractors exhibited significant confidence in the past few months,” said Basu. “In general, positive expectations have gone unmet, at least thus far. Industry participants had anticipated rising employment during the back half of 2021, according to ABC’s Construction Confidence Index, but nonresidential employment declined by more than 20,000 positions in August. Anecdotal evidence suggests that many projects have been put on hold. This is due to lofty construction costs, which is the result of global supply chains in disarray and growing difficulty hiring skilled construction workers.
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MCC Construction Zone “What is truly unnerving is that despite the loss of industry jobs in August, the construction unemployment rate actually declined from 6.1% in July to 4.6% last month,” said Basu. “The implication is that the construction workforce is not expanding. This opens up the possibility that labor costs could continue to rise rapidly even if industry momentum softens. Furthermore, with the Delta variant causing additional supply chain disruptions in Asia and elsewhere, materials prices may not decline as rapidly as had been hoped. This potentially sets the stage for waning industry momentum as 2022 approaches. The good news is that weak employment numbers will likely help keep interest rates lower for a lengthier period.”
Construction Backlog Indicator ABC reported on September 14 that its Construction Backlog Indicator fell sharply to 7.7 months in August, according to an ABC member survey conducted August 19 to September 1. The reading is down 0.8 months from July 2021 and down 0.3 months from August 2020.
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MCC Construction Zone Construction Confidence Index on Sales, Profit Margins, and Staffing ABC’s Construction Confidence Index readings for sales, profit margins and staffing levels all fell modestly in August but remain above the threshold of 50, indicating expectations of growth over the next six months.
“Both contractor backlog and confidence have begun to fade,” said Basu. “Higher materials prices and labor costs have conspired to put more projects on hold. In many instances, expanding costs have rendered projects infeasible.
“That said, it is still the case that contractors collectively anticipate sales, staffing levels and margins to rise over the next six months,” said Basu. “The expected pace of improvement has softened, however. With so much liquidity continuing to be injected into financial systems, investors have considerable sums to deploy in new investments. Real estate valuations and construction volumes benefit from such dynamics. Recent dips in commodity prices and more normal labor market functioning should help translate into slower cost escalations and rebounding backlog during the months ahead, ultimately reversing the backlog decline sustained in August.”
“There is at least one other factor that has helped to stimulate contractor confidence,” said Basu. “A number of survey respondents indicated that they are observing less competition for projects. Many firms appear to have reached their capacity limits, and therefore are not able to bid on significant numbers of projects. At the individual firm level, the lack of substantial competition is consistent with stable or rising backlog. At the industry level, it is consistent with a lack of nonresidential construction spending growth as supply constraints make their mark. With firms racing to bolster delivery capacity, wages are predictably rising as contractors compete vigorously for talent. More than 75% of respondents expect to raise wages over the next six months.” McCarthy.CPA
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MCC Construction Zone Construction Input Prices Construction input prices declined 0.6% in August compared to the previous month, according to ABC’s analysis of U.S. Bureau of Labor Statistics’ Producer Price Index data released on September 10. Nonresidential construction input prices fell 0.4% for the month.
ABC reported that despite the monthly decline, construction input prices are still 20.8% higher relative to a year ago. Nonresidential construction input prices expanded 21.6% during that period. The price of natural gas has experienced the largest year-over-year increase, rising 132.2%, followed by the aggregate price of steel mill products, which increased 123.1%. Iron and steel prices have nearly doubled over the past year, increasing 95.2%. The prices of unprocessed energy materials and crude petroleum were also up, rising 79.2% and 74.8%, respectively. “Though the headline number characterizing the direction of construction input prices appears favorable, many materials prices rose last month,” said Basu. “The overall decline in materials prices, which was small, was driven by two categories in which prices declined significantly: softwood lumber (-27%) and crude petroleum (-10%). But those were exceptions. Among the categories registering monthly price increases of 3% or more were prepared asphalt, steel mill products, natural gas, and fabricated structural metal products.”
“Some of the recent setbacks in global supply chain recovery relate to the dislocating impacts of the Delta variant, but there are other forces at work, including government policy and geopolitics,” said Basu. “As a growing number of nations around the world increase vaccination rates, the global economic recovery should continue. That will put even more upward pressure on input prices, all things remaining equal. Passage of a meaningful American infrastructure plan would further catalyze price increases.”
“Hopefully, currently elevated prices will induce suppliers to increase output in the short term and capacity over the longer term,” said Basu. “While supply chain disruptions, input shortages and high prices, which many contractors mentioned as factors affecting their backlog—according to ABC’s Construction Backlog Indicator—are likely to persist into 2022, the laws of economics suggest that project owners and the contractors who work on their behalf will benefit from some price relief at some point next year.”
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MCC Construction Zone About the Author Richard P. Higgins, CPA is the managing partner – New Jersey office of McCarthy & Company. Contractors trust Rich to assist them with a strategy to achieve their goals by looking at key indicators such as productivity, job costing, profit margins and cash flow. Rich helps contractors to establish realistic benchmarks to assess how well they are doing or to alert them to issues that need to be addressed. He can be contacted at 732.341.3893 or Richard.Higgins@McCarthy.CPA. Sources: Oxford Economics, Association of Equipment Manufacturers (AEM), Morgan Stanley, Associated Builders and Contractors (ABC). Disclaimer: This article is for informational purposes only and does not constitute professional advice. We strongly advise you to seek professional assistance with respect to your specific issue(s).
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Rich Higgins, CPA
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MCC Construction Zone Tax Strategies to Reduce Income Tax Liability Martin C. McCarthy, CPA, CCIFP
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ontractors need to invest in tax planning throughout the year to gain the maximum impact. While most tax strategies strive to accelerate income in the current tax year and defer expenses to the next year, strategic tax planning takes into consideration many other factors such as how reducing income for tax purposes will affect a contractor's financial statements, cash position, working capital, and financial ratios. Lenders and sureties rely on the strength of a contractor’s financial statements along with the company’s character, capacity, and capital when deciding on a lending and bonding program. Customers also review these metrics to ensure that the contractor is financially strong and able to meet their performance obligations. Therefore, it is important to take a holistic approach to tax planning. Here are strategies to consider: Take advantage of COVID-related tax credits. Many tax provisions were implemented under legislation aimed to help businesses and individuals deal with the COVID-19 pandemic and its ongoing economic disruption. These include the Employer Retention Credit (ERC) and numerous other tax credits for businesses and individuals. We will address ERC in a separate article.
Qualify for a R&D tax credit. Contractors may qualify for a research and development (R&D) tax credit if new processes to improve efficiencies or reduce/eliminate uncertainty in the business are developed in the U.S. A R&D tax credit is generally taken on a dollar-for-dollar basis on either the entire qualified project or the portion of the project that meets the criteria of the IRS. If the R&D tax
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MCC Construction Zone credit is not fully utilized, it may be carried back to the previous year, and carried forward for 20 years. Qualified start-up and small businesses that may not have an income tax liability can offset payroll taxes with the credit.
Assess NOL carryback vs. carryforward. Recent legislation permits net operating losses (NOLs) to be carried back to obtain refunds of prior year taxes. While this may sound appealing, contractors should assess the implications of this tax provision before deciding to take a NOL Determine if it is more advantageous to take carryback or carryforward. President a NOL carryback and refund in a year with a Biden has stated that he intends to raise income taxes. Therefore, it is important lower tax rate or have the NOL available for to determine if it is more advantageous future years when income tax rates are to take a carryback and refund in a year expected to be higher. with a lower tax rate or have the NOL available for future years when income tax rates are expected to be higher. Evaluate current working capital needs along with the company’s long term financial stability before making a decision. Use the right accounting method. Contractors should ensure that the tax reporting method for each contract is appropriate by determining which projects are not considered long-term (more than one year). Most contractors use the percentage-of-completion method (PCM) for long-term contracts. However, many exceptions exist. Residential builders (homebuilders and contractors who build apartments, dormitories, assisted living facilities and prisons) generally qualify to use a different tax reporting method. Other elections should be considered for having paid if paid language in contracts, unit price contracts, Guaranteed Maximum Price (GMP) contracts and retainage receivable. Under the Tax Cuts & Jobs Act of 2017 (TCJA), tax accounting methods previously available only to smaller contractors can generally be used by contractors with average annual gross receipts of up to $26 million (as adjusted for inflation). Choosing the appropriate method for each contract to reduce taxes is an overlooked tool.
Assess opportunities for deductions on pass-through entities. Contractors that own or invest in pass-through entities (sole proprietorships, partnerships, most LLCs, and S corporations), can deduct their allocated share of losses to the extent of their basis (debt and equity). Contractors should have a sufficient basis to deduct allocable losses instead of carrying losses to a future year when their income may be lower. In addition, contractors should look for ways to reduce taxable income such as making retirement plan contributions and developing an exit strategy. There are several factors that affect basis and knowing those items could reduce your tax obligation or change the entity structure. Take advantage of bonus depreciation changes. The CARES Act includes a technical correction to TCJA that permits 100% bonus depreciation for eligible Qualified Improvement Property (QIP) placed in service after December 31, 2017, and before January 1, 2023. Taxpayers who placed eligible QIP in service during 2018 and 2019 may be eligible to claim 100% bonus depreciation. REITs, manufacturers, and other businesses that own certain types of nonresidential real estate improvements on leased land may also be eligible. This can help businesses, especially in the retail, restaurant, and hospitality industries, improve cash flow.
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MCC Construction Zone Conduct a Cost Segregation Study. Contractors and real estate investors that acquired, renovated, or built a building should consider conducting a cost segregation study to determine if the property qualifies for accelerated depreciation. Qualified assets are reclassified from real property to personal property for federal income tax purposes and therefore have a shorter depreciable tax life. A 39-year or 27.5-year property could qualify as a 5-, 7- or 15-year property. Generally, 20% to 40% of the property can be reclassified as personal property. Flooring, signage, landscaping, and parking lots are examples of building components that can be reclassified. Typically, the building should have been placed in service within the last five years, and the cost of the building, remodel, expansion, or build-out needs to be at least several hundred thousand dollars. A good threshold is $750,000.
Qualify as a real estate professional. Rental activities and income are generally considered passive income unless the investor qualifies as real estate professional for tax purposes. Then it is treated as non-passive income. Losses can be deducted if the real estate professional materially participates in the rental activity. More than 50% of the person’s time and 750 hours must be spent on real estate activities. Holding a real estate license is not required. Other rules apply. However, generally contractors qualify for this provision under the Internal Revenue Code. It is important to assess this as it becomes a valuable tax planning tool.
Take the Section 179 election. Section 179 allows businesses to deduct the full cost of qualifying equipment in the year of purchase rather than depreciating the cost over time. Eligible property may be new or used and leased or purchased. To utilize a deduction under Section 179 an eligible property must be: tangible (physical property like computers, software, equipment, furniture, machinery, and vehicles), placed into service in the year the deduction is claimed, cannot be purchased from a relative or related organization, and must be used more than 50% of the time for business purposes. There are caps to the total amount written off ($1,040,000 for 2020), and limits to the total amount of the equipment purchased ($2,590,000 in 2020). The deduction begins to phase out on a dollar-for-dollar basis after $2,590,000 is spent by a given business. The entire deduction goes away once $3,630,000 in purchases is reached.
Take the Energy Efficient Building Deduction. The Consolidated Appropriations Act (CAA) of 2021 made the Energy Efficient Building Deduction (Section 179D) permanent. Business owners and government contractors can take a deduction for energy-efficient improvements to commercial and government buildings. A tax deduction of $1.80 per square foot is available to owners of new or existing buildings who install interior lighting, building envelope, or heating, cooling, ventilation, or hot water systems that reduce the energy and power costs by 50% or more. Any accrued tax deductions from these buildings can be carried-back two tax years or can be carried-forward for up to 20 years. Eligible designers and builders (such as architects, engineers, contractors, environmental consultants, and energy service providers) can also qualify for 179D under a special rule for public property. 11 | Page
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MCC Construction Zone Invest in a Qualified Opportunity Zone. Another TCJA provision established Qualified Opportunity Zones to provide a tax incentive for private, long-term investment in economically distressed communities. Investors in these programs generally can defer and potentially reduce tax on recognized capital gains. If a capital gain is invested in a Qualified Opportunity Fund within 180 days of realizing the gain, the gain is not included in income until the investment is sold, or on December 31, 2026, whichever is sooner. Potential tax benefits can come from a temporary deferral, permanent exclusion of either 10% or 15%, or permanent exclusion of post‐ acquisition appreciation.
Other Simple, Yet Effective Planning Strategies to Consider Change your corporate structure. Contractors that retain earnings in the company instead of distributing profits to shareholders may benefit from changing their corporate structure to a C corporation. Under TCJA the highest effective tax rates of C corporation net income is 21% (plus 15% or 23.8% on dividend distributions). For S‐Corp, the highest rate 37% (29.6% with full section 199A deduction). Contractors electing to make this change must remain a C corporation for five years. Defer taxes with a like-kind-exchange. Section 1031 allows investors to defer paying taxes on the gain from the sale of a property if the proceeds are reinvested in a similar property. There is no limit on the number of times or frequency of doing a 1031 exchange. Business or investment properties generally qualify.
Hold properties for more than a year. Real estate investors who own properties for more than a year are taxed at the capital gains rate instead of their ordinary income tax rate. The capital gain tax rate is 0%, 15%, or 20%, depending on the investors’ tax bracket. If the investor lives in the property for at least two years, the first $250,000 of capital gains is tax-free for singles and $500,000 for married couples. Holding property for more than a year reduces the chance that the IRS will classify the investor as a “dealer.” Earnings for dealers are generally subject to double FICA taxes because they are considered self-employed. The investor would pay 15.3% towards social security and Medicare taxes instead of 7.25%.
Take the Qualified Business Income Deduction. The Qualified Business Income (QBI) Deduction (Section 199A) allows noncorporate taxpayers to deduct up to 20% of QBI, plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. QBI is the net amount of qualified income, gains, deductions, and losses included in taxable income from any qualified U.S. trade or business. Individuals, including owners of sole proprietorships, partnerships, and S corporations, may qualify, as well as certain trusts and estates. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction. Items such as capital gains and losses, certain dividends, and interest income are excluded. W-2 income, amounts received as reasonable compensation from an S corporation, McCarthy.CPA
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MCC Construction Zone amounts received as guaranteed payments from a partnership, and payments received by a partner for services under section 707(a) are also not QBI. The deduction is available for taxable years beginning after December 31, 2017, and ending before December 31, 2025. Take the 20% pass-through deduction. A TCJA provision allows small business owners to deduct 20% of domestic qualified business income (QBI) from a pass-through entity. The deduction is taken on the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. The deduction cannot exceed taxable income. Rules apply.
Establish a self-directed IRA account. Holders of a self-directed IRA may fund real estate purchases from their IRA. There is no penalty for being under age 65. The non-financed portion of the purchase is sheltered from taxes by the IRA. A custodian or trust company must administer the selfdirected IRA. Other rules apply. There are many other opportunities to discuss as year-end approaches to complete your Tax Blueprint. Taking a strategic yet holistic approach to tax planning can provide many benefits. There is a fine balance in what makes sense for any company. Implementing one strategy may offset the benefits of another. Contractors should weigh the costs versus the benefits before implementing any tax planning strategy. About the Author Marty McCarthy, CPA, CCIFP, is the managing partner of McCarthy & Company. He is well respected by sureties and bankers for the high quality of his work and profound understanding of the construction industry. Marty helps clients by providing them with the insight needed to grow their business. He can be contacted at 610.828.1900 or Marty.McCarthy@McCarthy.CPA. A version of this article was originally in Construction Today (5 Tax Strategies Contractors Should Consider to Reduce Their Income Tax Liability. Marty McCarthy, CPA, CCIFP. Issue 2. 2021) published by the General Building Contractors Association.
Marty McCarthy, CPA, CCIFP
Disclaimer: This article is for informational purposes only and does not constitute professional advice. We strongly advise you to seek professional assistance with respect to your specific issue(s).
Call us to design your tax blueprint. 610.828.1900 13 | Page
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MCC Construction Zone The Employee Retention Credit Can Provide Much Needed Funds to Qualified Employers David Gibbs, CPA, CCIFP, CRE, MBA
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he Employee Retention Credit (ERC) is a refundable tax credit against certain employment taxes. Federal income tax withholdings, the employees' share of Social Security and Medicare taxes, and the employer's share of Social Security and Medicare taxes up to the amount of the credit can be claimed. Employer-paid health insurance costs may also be eligible, even if the employer has furloughed workers and is not otherwise paying wages.
ERC was introduced in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Congress amended and expanded the tax credit to increase the number of companies that qualify. Most employers who have had a significant decline in business due to the pandemic now qualify for the credit.
Among other things, recent legislation extended the expiration date and increased the amount of the credit. ERC under the CARES Act was equal to 50% of up to $10,000 in wages paid between March 12, 2020, and January 1, 2021. The American Rescue Plan Act (ARPA) of 2021 increased the credit to 70% of qualified wages up to a $10,000 limit per quarter. McCarthy.CPA
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MCC Construction Zone A maximum of $7,000 per employee per quarter for a total of $28,000 can be claimed by qualified employers in 2021 and $5,000 for the third and fourth quarters of 2020. Added together, the potential amount of the credit is $33,000 per full time employee.
Eligible Employers Most employers who have had a significant decline in business due to the pandemic qualify for the credit. ARPA allows colleges, universities, hospitals and 501(c) organizations, as well as eligible recovery startup businesses to take the credit under special rules.
Employers can qualify for ERC if they meet one of two conditions in a factor test: 1. A trade or business that was fully or partially suspended or had to reduce business hours due to a government order. The credit applies only for the portion of the quarter the business is suspended, not the entire quarter. 2. An employer that has a significant decline in gross receipts during the quarter compared to the same quarter in 2019.
The IRS says that a significant decline in gross receipts begins on the first day of the first calendar quarter of 2020 for which an employer’s gross receipts are less than 50% of its gross receipts for the same calendar quarter in 2019. A significant decline in gross receipts ends on the first day of the first calendar quarter following the calendar quarter in which gross receipts are more than of 80% of the gross receipts for the same calendar quarter in 2019. Employers qualify in 2021 if their gross receipts fell by more than 20% in a quarter relative to the same period in 2019. The Consolidated Appropriations Act (CAA) allows businesses to determine eligibility based on gross receipts in the immediately preceding calendar quarter instead of the corresponding quarter in 2019. CAA also expanded ERC eligibility to include businesses who took a loan under the Paycheck Protection Program (PPP). This includes borrowers from the initial round of PPP who originally were ineligible. However, the same wages cannot be counted both for forgiveness of the PPP loan and calculating the ERC.
New entities, also known as Startup Recovery Businesses, that began business activities after February 15, 2020, and, have average annual gross receipts of $1 million or less may qualify. The IRS allows the use of gross receipts for the quarter in which the business started for any quarter in which 2019 figures are not available. Startup recovery businesses may use all qualified employee wages for purposes of the credit, regardless of the number of employee and subject to a quarterly ERC cap of $50,000.
Startup recovery businesses do not have to meet the standard eligibility requirements mentioned above (partial/full suspension of operations or decline in gross receipts). If one of the two circumstances applies in one quarter but not the other, they may still qualify as a startup recovery business in the other quarter. For example, if the business experiences a significant decline in gross receipts in 3Q, they would not be a recovery startup business in 3Q but may still qualify in 4Q.
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MCC Construction Zone Generally, essential businesses or shuttered businesses that were able to continue operations remotely cannot meet the first test unless a disruption of the supply of critical materials or goods had a significant impact on their ability to continue to operate. However, any business can qualify for ERC if they meet the significant decline in gross receipts test.
Qualified Wages There is no size limit for ERC eligibility. Qualifying wages are based on the average number of employees in 2019. Under the CARES Act, for employers with 100 or fewer employees (on average in 2019), the credit is based on wages paid to all employees whether they worked or not. Employers can take the credit for employees who were paid for full-time work. For employers with more than 100 employees (on average in 2019), the credit is allowed only for wages paid to employees who did not work during the calendar quarter. A CAA provision increased the employee limit to 500 for determining which wages are applicable.
For ERC purposes a full-time equivalent under ACA is an employee who worked at least 30 hours per week or 130 hours per month in 2019. Employers can use the following calculations to determine the amount of the credit. An employer who: •
• •
Was in business the entire calendar year in 2019 or 2020 would take the sum of the number of full-time employees in each calendar month divided by 12. Started a business during 2019 or 2020 would take the sum of the number of full-time employees in each full calendar month in 2019 or 2020 in which the business operated divided by that number of months. Started a business in 2021 would take the sum of the number of full-time employees in each full calendar month in 2021 that the business operated divided by that number of months.
Only wages up to the amount that the employee would have otherwise been paid during the 30 days prior to the COVID-19-related hardship can be included.
The employee FTE calculation used for the PPP forgiveness is not calculated the same way. ERC eligible wages depend on how the qualified wages were reflected on the PPP loan forgiveness application. Qualified wages included in reported payroll costs on the forgiveness application may be eligible in certain circumstance where more expenses than necessary were used to justify the loan forgiveness. All eligible expenses, including non-payroll costs (utilities, rent and operations expenses), must be included on the PPP loan forgiveness application.
ARPA allows certain severely financially distressed employers to claim the credit against all employee’s qualified wages instead of just those who are not providing services. These businesses are defined as employers whose gross receipts in the quarter are less than 10% of what they were in a comparable quarter in 2019 or 2020. This only applies to the 3Q and 4Q 2021.
IRS guidance generally says that wages paid to related individuals do not qualify if these individuals are a majority owner in the business. Other rules apply which may disqualify a related party from being eligible for the ERC. Related individuals are: • • • •
Child or a descendant of a child Brother, sister, stepbrother, or stepsister Father or mother, or an ancestor of either Stepfather or stepmother
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MCC Construction Zone • • •
Niece or nephew Aunt or uncle Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
Other Considerations An eligible employer's ability to claim ERC is impacted by other credit and relief provisions as follows: • Wages for this credit do not include wages for which the employer received a tax credit for paid sick and family leave under the FFCRA. • Wages counted for this credit cannot be counted for the credit for paid family and medical leave under section 45S of the Internal Revenue Code. • Employees are not counted for ERC if the employer is allowed a Work Opportunity Tax Credit. The IRS released a revenue procedure on August 10, 2021, that provides a safe harbor. Employers may exclude the amount of a forgiven PPP loan and the amount of a Shuttered Venue Operators grant or a Restaurant Revitalization Fund grant from the definition of gross receipts solely for the purpose of determining eligibility to claim an ERC. Employers must apply the safe harbor consistently across all entities.
Claiming the Credit A safe harbor allows employers to exclude the Eligible employers can report amount of a forgiven PPP loan and the amount of a their total qualified wages and Shuttered Venue Operators grant or a Restaurant certain health insurance costs for each quarter on their Revitalization Fund grant. employment tax returns (generally, Form 941, Employer's Quarterly Federal Tax Return) for the applicable period. ERC is taken against the employer's share of social security tax. If a reduction in the employer's employment tax deposits is not sufficient to cover the credit, certain employers may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
ARPA stipulates that the nonrefundable pieces of ERC will be claimed against Medicare taxes instead of against Social Security taxes as they were in 2020. However, this change only applies to wages paid after June 30, 2021, and will not change the total credit amount. If the credit exceeds the
employer’s total liability of the portion of Social Security or Medicare, depending on if it is before June 30, 2021, or after, the excess is refunded to the employer in any calendar quarter. At the end of the quarter, the amounts of these credits can be reconciled on the employer’s Form 941. The IRS has multiple ways of calculating qualified health expenses. Depending on the circumstances, the employer and employee pretax portion and not any after-tax amounts are included.
Eligible businesses can file retroactive ERC claims for wages paid in prior tax quarters if the statute of limitations remains open, generally three years from the date of filing. To claim the credit for past quarters, employers must file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. 17 | Page
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MCC Construction Zone The proposed infrastructure bill would end ERC on September 30, 2021, instead of December 31, 2021. Startup recovery businesses would remain eligible for the credit through the end of 2021, under the bill.
The potential ERC a company could take would be reduced under the infrastructure bill to $21,000 per employee. Even so, taking advantage of ERC could make a sizable difference in the cash available to operate a business and help to improve cash flow. For many contractors, this could mean the difference between staying in business or not.
About the Author David Gibbs, CPA, CCIFP, CRE, MBA is McCarthy & Company’s tax partner and the partner-in-charge of the firm’s Real Estate Services Group. David was recently awarded the Counselor of Real Estate® (CRE®) designation. Among the most respected real estate specialists in the industry, a CRE® provides intelligent, unbiased real estate advice that achieves the best results for a client. David can be contacted at 610.828.1900 or David.Gibbs@MCC-CPAs.com.
David Gibbs, CPA, CCIFP, CRE, MBA
Disclaimer: This article is for informational purposes only and does not constitute professional advice. We strongly advise you to seek professional assistance with respect to your specific issue(s).
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MCC Construction Zone Meet Natalie DeYoung Kerrianne Brady
From Left to Right Sisters: Valerie, Lindsay, Lilianna (niece), Natalie, and Courtney
N
atalie A. DeYoung is a senior associate with the firm. She has a unique background which makes her a valuable member of McCarthy & Company’s construction team. Natalie brings more than 10 years of experience and knowledge of internal construction accounting and risk management to the firm.
Natalie developed her knowledge of construction accounting when she joined her family’s marine construction company in high school. She has experience that cannot be gained by studying construction accounting. Natalie can intuitively see beyond the big picture and she fully understands the day-to-day challenges contractors encounter including the reporting of certified payroll, conducting insurance audits, and complying with DEP, EDA, and HUD regulations.
As a member of the accounting and assurance team in McCarthy’s office in Tinton Falls, NJ, Natalie prepares compiled, reviewed, and audited financial statements, as well as corporate and personal tax returns for contractors.
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MCC Construction Zone She prides herself on understanding client needs and helping them achieve their goals. Natalie is always looking for ways to save clients money. When changes are made to the tax law, she immediately considers who will benefit or who will be impacted. For example, Natalie assisted a client with a cost segregation study which allowed them to accelerate depreciation (15 years instead of 39 years) on a property. She assisted clients elect new accounting methods for IRS reporting under the Tax Cuts and Jobs Act (TCJA) which were previously only available to small contractors.
Natalie DeYoung
Natalie has also helped clients get through the pandemic. She has assisted qualified clients calculate the employee retention credit (ERC), PPP loan forgiveness and net operating losses (NOLs). As a result of being able to carryback NOLs, the client received an additional refund of $25,000.
A 2014 graduate of the Rutgers Business School with a Bachelor of Science degree in accounting, Natalie was a member of Beta Alpha Psi, an international honor society for accounting and finance majors.
She joined the firm in July 2015 and is a member of the American Institute of Certified Public Accountants (AICPA), South Jersey Chapter of Construction Financial Management Association (CFMA), and the Philadelphia Chapter of Professional Women in Construction (PWC). An avid supporter of veterans, Natalie participates in fundraising events for the Wounded Warrior Project, Disabled American Veterans, Veterans of Foreign Wars, as well as the American Cancer Society and Ronald McDonald House. Natalie is a middle child with 3 brothers and 3 sisters. She works with her twin brother, Zachary in the family business on Saturdays. Natalie spends most of her free time with her family. A favorite game of theirs is Giant Jenga (4’ tall).
Passionate about sports, Natalie completed three Tough Mudders and the Philadelphia half-marathon. In her spare time, Natalie can be found boating in the Barnegat Bay or on one of the many beautiful beaches on Long Beach Island with her two German shepherds, Mate and Xando.
Mate and Xando
Natalie’s favorite quote is from Thomas Edison: “Our greatest weakness is giving up. The most certain way to succeed is to try one more time.” About the Author
Kerrianne Brady is the firm administrator at McCarthy & Company. She takes care of everything at the firm under the guidance of managing partner Marty McCarthy. Kerrianne can be contacted at (610) 828-1900 or Kerrianne.Brady@McCarthy.CPA.
Disclaimer: This article is for informational purposes only and does not constitute professional advice. We strongly advise you to seek professional assistance with respect to your specific issue(s).
Kerrianne Brady
McCarthy.CPA
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MCC Construction Zone McCarthy & Company Named a Top 50 Construction Accounting Firm™ by Construction Executive
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cCarthy & Company, PC, is pleased to announce that Construction Executive, the leading publication for the business of construction, has included the firm on its list of Top 50 Construction Accounting Firms™ for the third consecutive year.
“We are honored to be included on this revered list of construction accountants,” says Martin C. McCarthy, CPA, CCIFP, and the firm’s managing partner. “The foundation of our practice is built on working with construction contractors. Clients benefit from our extensive knowledge of the tax elections and credits that are unique to the construction industry. We develop a Tax Blueprint for clients to ensure that they take advantage of every legitimate opportunity to save money on their taxes. McCarthy & Company is focused on helping contractors strengthen their financial positions, grow their businesses, and become more profitable.” The data collected to determine the Top 50 Construction Accounting Firms™ included: 1) 2020 revenues from construction practice; 2) number of CPAs in construction practice; 3) percentage of firm’s total revenues from construction practice; 4) number of construction clients in 2020; 5) number of office locations with a construction accounting practice; 6) number of employees with CCIFP certification; and 7) year construction accounting practice was established. The ranking was determined by an algorithm that weighted these factors in descending order of importance. McCarthy & Company ranked the fourth highest in the percentage of firm’s total revenues from its construction practice at 71%. Construction Executive is published by Associated Builders and Contractors (ABC) Services Corp. It is a leading source for news, market developments, and business issues impacting the construction industry. 21 | Page
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Pro�it Enhancement
Our Construction Services Team is well-recognized as a construction industry leader, especially in heavy construction. We have proven experience helping our construction clients strengthen their financial positions, grow their businesses, and become more profitable.
Specialty Tax Incentives As new laws are introduced these credits may change, expire and/or have new stipulations added. Examples include: • Research & Development Credits • Employee Retention Credits • Net Operating Loss Carrybacks / Carryforwards • 20% Pass-Through Deductions
Our Tax Blueprint This is an essential part of any business plan. Taxes significantly impact profitability, and every business should have a Tax Blueprint to understand how their specific tax considerations may need to be altered. • How steps to reduce income impact
Advisory Needs
financial statements, cash flow,
Assisting owners with complex decisions related to where they are in the lifecycle of their business and how regulatory or economic changes may impact their decisions. Examples include:
working capital and financial ratios. • How a change in accounting methods can impact financial results.
• Cash Flow Forecasting & Planning
• Integrating business tax decisions
• Profit Enhancement & Financial Modeling
with an owner’s personal financial
• Assistance With Mergers or Acquisitions
decisions.
• Sale of a Business • Constructing a Family Succession Strategy
We Help Build Company Value (610) 828-1900
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www.McCarthy.CPA
• Trust, estate, and gifting strategies.
454 Germantown Pike ● Lafayette Hill, PA 19444 610.828.1900 (PA) ● 732.341.3893 (NJ) www.McCarthy.CPA
